Russian wheat ban pushes futures prices higher

by World Grain Staff
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KANSAS CITY, MISSOURI, U.S. — Wheat futures prices surged Aug. 5 on the three exchanges of Chicago, Illinois, U.S.; Kansas City, Missouri, U.S.; and Minneapolis, Minnesota, U.S.; in response to Russian President Vladimir Putin’s announcement Russia would halt grain exports from Aug. 15 through the end of the year because drought-reduced crops raised fears of domestic food price inflation. Prices of several wheat futures contracts opened up the 60¢ daily limit before pulling back, which allowed trading to resume. The Chicago September future was locked limit up throughout the session.

The Russian announcement was not unexpected. For several days there were rumors the country would embargo grain sales as it became clearer the most severe drought in decades was exacting a heavy toll on the nation’s grain production.

The International Grains Council on July 29 forecast Russian wheat production this year at 50 million tonnes, down 7 million tonnes from its June projection and compared with the U.S. Department of Agriculture’s (USDA) July projection at 53 million tonnes and the 2009 outturn of 61.7 million tonnes. The private U.S. and world crop analyst Informa Economics on Aug. 5 estimated the 2010 Russian crop at 49 million tonnes. The USDA will issue revised world wheat supply-and-demand estimates on Aug. 12, which will include adjusted numbers for Russia and other drought-stressed nations including Kazakhstan and Ukraine.

Export bans work against wheat buyers and users and force the rest of the market to restore the supply/demand balance and absorb the price shock, said U.S. Wheat Associates (USW) on Aug. 5. Restrictions distort trade and artificially drive up global wheat prices to the detriment of all importers and consumers. To make matters worse, the latest Russian government intervention likely brings force majeure into play and some importers counting on their purchases may find themselves short of supply, the group said.

"In the genuinely open market we have in the U.S. today there is always wheat available at some price, both to domestic and international buyers," said USW President Alan Tracy. "Supplies can be plentiful or tight, but the system finds a price that rationalizes the supply and demand balance. As we have said many times before, the U.S. wheat store is always open."

Egypt, the world’s largest wheat buyer, this week purchased 360,000 tonnes of wheat from Russian exporters, and the country’s buying agency said it hoped the transactions would be honored.

Shorter crops in the former Soviet Union and certainly the Russian export ban were expected to shift more world wheat demand to the U.S., which made for potent fuel for the futures rally. At the same time, the current rally in wheat futures predated confirmation the Russian wheat crop might be in trouble. Prices began to rally in mid-June. By market close on Aug. 5, the September wheat futures contracts at $7.85¾ in Chicago, $7.80 in Kansas City and $7.83 in Minneapolis were up 77%, 66% and 57%, respectively, from their June 9 values.

"Our industry is committed to sound commercial practice in the best interest of all stakeholders in the grain supply and demand chain," said Gary Martin, president and chief executive officer of the North American Export Grain Association (NAEGA). "The pressure has never been greater on agriculture to provide for global food security, food defense and energy security while providing for available, high quality, safe products throughout the value chain. The role of international trade in grain, oilseeds and other agri-bulks is expanding, increasingly complex and dependent upon sound, reliable, predictable and practical official and commercial measures."

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