Wheat prices in Russia are set to rise on the back of the grain crisis in the country

Wheat prices in Russia are set to rise on the back of the grain crisis in the country

Russian commodity experts tell just-food they expect grain prices to rise significantly within Russia, despite the announcement by Prime Minister Vladimir Putin that all exports of grain from the country would be halted from 15 August to contain domestic prices.

The ban was initially due to last until the end of the year but Putin today (9 August) indicated it may be extended into 2011.

The move follows deadly fires raging across Russia, which, significant human costs aside, have devastated as much as one-third of the country's projected grain harvest for the year.

Russia is the world's third-largest grain producer, with a 13% share of the global wheat trade. News of the widespread fires, which have targeted the capital city as well as the central grain-producing Black Earth region, have sent Russian wheat prices sky-rocketing. Since early July, prices have soared nearly 70%, before beginning to decline on Friday. Analysts say the massive price rise has resulted largely from market uncertainty and speculation.

Looking ahead, "prices are going to be higher year-on-year," says Konstantin Fastovets, an analyst at Renaissance Capital, a leading Russian investment bank. He predicts an 8% overall rise. "It's not a drastic price rise, but it is a price rise nonetheless."

And while this will be difficult for Russian food manufacturers, European manufacturers who use Russian grain imports will face significant short-term difficulties sorting out alternative supplies.

Indeed, Russia's Grain Union has proposed the government postpones the export ban's start date until 1 September and then discuss the measure on 14 September, says union spokesman Anton Shaparin.

"They did this without warning, and too quickly," he tells just-food. He says Russia's main port at Novorossiysk was already loaded with 240,000 tons of wheat, with a further 300,000 tons en route.

"It's a logistical nightmare," he says. The government should consider allowing those shipments to export as planned, Shaparin adds.

He also says the export ban end date - December 31, 2010 - is not set in stone. "Only in November will we know how much grain has been produced, and then the end date can be re-examined."

In the medium term - these national problems could become global challenges. "Should the drought in the Russian Federation continue, it could pose problems for winter plantings in that country with potentially serious implications for world wheat supplies in 2011/12," the UN Food and Agriculture Organisation warned last week.

That said - a supply crisis is not expected this year. In the short term, grain stocks worldwide remain strong following two years of better-than-expected pulls, and alternate producers like the United States and Argentina have pledged hearty harvests this year. Analysts say this should mediate the global gap left by the Russian food ban.

"Even taking into account Russian, Ukrainian and Kazakh losses, there is going to be enough grain this year," says Fastovets. An expected increase in the global harvest of wheat substitutes like corn and millet, as well as confidently high stockpiles, should mean we can avoid severe crisis this year, he adds.

As a result, he did not expect European food producers to be too adversely affected by the ban, due to fodder substitutes and boosted harvests in other regions.

Yet, going forward, question marks do remain. Putin has reportedly proposed that Belarus and Kazakhstan, part of a Russia-led Customs Union, should also implement a grain export ban. Kazakhstan in particular supplies 4% of the world wheat trade.

Before the ban was announced, the Russian agriculture ministry said the fire and drought ravaging the country had prompted it to lower its grain harvest forecast for 2010 by around 25% to 70-75 million tons, roughly its domestic consumption. However, today Putin indicated the harvest would not exceed 60-65 million tons.

"Should the harvest fall short of 70 million tons, we would still not expect it to come in at less than 60 million, given that 55 million tons should be harvested from regions that have not suffered from the drought," says Victoria Sokolova, a senior analyst at Troika Dialog, the Russian investment bank. Russia's grain reserves are estimated to stand at 24 million tons, including 9.6 million in state reserves.

Even though the crisis is likely to drive prices upwards, it seems that for the next year, at least, the country will have enough wheat to fulfil its domestic needs.