Thursday, August 5, 2010

Economics 5/8/10: Russia and wheat prices

Following the worst drought in 130 years, the unprecedented heat wave and subsequent wild fires, Russia stopped exports of wheat, corn, rye, barley and flower from August 15 through December 31, 2010. Russia is the third largest exporter of wheat in the world. It expects 2010 harvest to come at 65-75mln tonnes, a 25% shortfall on 2009. Prior to the latest disasters, which started in April this year and is expected to continue at least through August, Russia expected to post second record breaking export years in wheat in 2010.

Despite the shortfall, Russian Government does not expect significant shortages of wheat for domestic markets. Government holds estimated 9.5 million tonnes of wheat in reserves and has ordered fixed price deliveries of wheat to regions impacted by the fires and drought.

The implications of the Russian exports ban are multiple:
  1. There is a direct impact on wheat prices, with short term futures rallying today 8%, while longer term deliveries contracts being on an exponential uplift curve (see chart below for December deliveries contracts);
  2. There is indirect impact on other commodities and food products, such as milk, etc, as wheat and its by-products are used across almost entire production and breeding chain.
Wheat prices on the CBOT were up 42% in July, the biggest monthly gain since at least 1959. Monday prices were up 5%, and are now the highest for 22 months.

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