Wheat Prices Rise on Fear of Russian Exports Ban

By: Anthony Broadfoot
Anthony Broadfoot
Anthony worked for a number of years as head of sales and marketing for stock broker companies with extensive… read more.
on Sep 25, 2012

Amidst global concerns of food inflation, on 21 September the Russian economic development minister Andrei Belousov announced that grain export restrictions were possible if domestic wheat prices rose any further. Last week there was a 4 percent increase in Russian grain prices as farmers held back their stock in anticipation of a government intervention.

This wouldn’t be the first time that Russia has employed drastic measures to secure the stability of its domestic market. In 2010 the country imposed a ban on overseas sales for almost a whole year because of the severe drought, which decimated grain harvests. With the ban in place, exports tumbled to 3.98 million tons from 18.56 million a year earlier. According to analysts, the policy proved counter-productive and resulted in large stockpiles, which later had to be sold at discount to regain buyers’ trust.

!m[](/uploads/story/460/thumbs/pic1_inline.png)According to the Financial Times, traders were left perplexed as only hours after Mr Belousov’s announcement, Arkady Dvorkovich, the deputy prime minister responsible for the farming policy, insisted Russia will not impose restrictions on its grain exports. But analysts and wheat market participants alike believe Russian officials to be tiptoeing around the issue and fear that the country might not impose direct bans but still limit exports via informal tools such as reducing access to railways or increasing red tape.

Ukraine also tried to battle its rising wheat prices in 2010 by using a set of alternative strategies rather than an outright embargo. The country tried to slow the outgoing flow of grain through methods such as cutting back railway wagons carrying goods to port and customs agents purposefully delaying and not processing export authorisations. As quoted by the FT, Michael Swangard, partner at London law firm Clyde & Co, said that these measures “only worked to the disadvantage of the country’s grain exporters”.

Ukrainian grain sellers couldn’t keep their contracts and subsequently faced claims for substantial damages. This year the Ukrainian officials have said that grain restrictions are unlikely: “The corn crop has increased by an additional 1m tonnes. We can calmly export a minimum of 20m tonnes [of grain].” said Mykola Prysyazhnyuk, the agriculture minister.

Mr Belousov’s statement immediately resonated within the wheat market with the price of wheat for December delivery rising to $8.9925 a bushel on the Chicago Board of Trade on Friday 21 September. In Paris, European milling wheat for January delivery rose 0.5 percent to €261.25 a tonne.
Bloomberg reported that the US Department of Agriculture has estimated Russia’s wheat shipments to approximately 8 million tons for the 2012-2013 season, ranking the nation fifth globally after the US, Australia, Canada and the European Union.
According to Mr Swangard, from a legal standpoint “brutal is best” and Russia should impose an outright ban on its grain exports to protect domestic sellers and buyers. This is because most grain produced in Russia and Eastern Europe is traded under the Grain and Feed Trade Association’s standard contract, which contains a “prohibition clause” stating that the seller is excused of his obligations if his exports are banned by an act of government.

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