Complete reversal in global grain influences

by Morton Sosland
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Much is to be learned from the consequences of the weather-induced collapse of grain crops in Russia this summer. Hardly anything comes through more clearly than the fundamental lesson, which is too often neglected, that Mother Nature can and does play havoc with whatever grand plans are made about grain. It was only a little more than a year ago that President Dmitry Medvedev of Russia, based on a second year of all-grain production near 100 million tonnes, declared his country’s intention to overtake the United States as the leading supplier of wheat to world markets. To achieve that end, he announced investments of nearly $4 billion to modernize his country’s grain exporting infrastructure on top of the billions that investors in Russia and from other countries were spending to modernize the nation’s farms.

How weird it is that a little more than a year later Medvedev’s cohort in Moscow, Vladimir Putin, dramatically announced a ban on Russian grain exports starting Aug. 15 and continuing at least through the end of 2010. Of course, the Putin announcement was meant to win the favor of Russian consumers who faced dramatic food cost increases as market prices reacted to this genuine crop disaster. Three months without rain and unusually high temperatures devastated the Russian crop across the western part of the country. The most immediate damage was to wheat, but it is obvious that production of barley, other feed grains and hay were also sharply curtailed.

For a country aspiring to lead grain exporting to ban exports, in effect cutting off supplies from major import customers like Egypt, reflects a cynicism about export markets that deserves analysis. One may only assume that Putin’s advisers assured him that stopping exports was essential to preventing food price inflation and that import customers could easily be won back by resuming price cutting when crops are normal. This view of a market governed only by price and not by quality or supply assurances does not gibe with the United States’ experience many years ago of serious long-term market losses in reaction to an embargo on soybean exports to dampen domestic price inflation.

Particularly disturbing about Russia’s action is the lack of sharp reaction from other countries. The immediate surge in prices should have been warning enough that this sort of move aimed at protecting domestic supplies is totally selfish. When a country that claims global leadership like Russia undertakes such action, it almost invites other countries to do the same. Several analysts have warned that Russia’s grain export ban could lead to a sharp curtailment in shipments of commodities where domestic shortages might have happened but where the world supply-demand situation does not justify such dire steps.

That grain-based foods companies have a huge stake here is obvious. Not only does Russia’s export ban create severe problems for millers and others in countries that were relying on its imports, but trading patterns become distorted in ways that are frightful, for both exporters and importers. Ocean shipping faces chaos. If a company, like a country, may no longer rely on grain from nations that gyrate like Russia between being aggressive sellers and non-shippers, supply assurances — an essential of grain-based foods — become the overriding influence.

Trade policy negotiations involving grain historically have been aimed at opening markets to stimulate production where crops are grown most efficiently and where internal and export infrastructure best serve global needs. Much has been achieved, and the benefits have been great. Suddenly, within only a couple of years, the focus has changed from gaining access to somehow assuring that exporting countries would continue exporting and fulfill supply commitments, regardless of temporary crop shortfalls. This brings front and center the totally new issue of markets buffeted mainly by shifts in exporter supplies rather than the variations in import requirements. The latter moved markets for a long time, but something new has taken its place.