Russian ban goes against grain

Wheat prices high, producers' stock falls and fears of food inflation provoke response from world markets after exports are called off.

Wheat prices climbed to a two-year high yesterday and food producers' shares fell as inflation fears stalked world markets and grain traders cancelled contracts into Asia after Russia's ban on exports. Vladimir Putin, the Russian prime minister, moved on Thursday to halt exports of grain and flour from August 15 to the end of the year amid the country's worst drought in more than a century.

The country's railroad monopoly said yesterday it would stop loading grain for export as of today. The speed of the move shocked Russia's Grain Union, the country's main industry lobby group, which pleaded with the government yesterday to delay the ban until September 1. Russia was the world's third-largest wheat exporter last year but is set to slide down the table. Kazakhstan, Ukraine and the EU are also hurting from poorer crops due to adverse weather, the International Grains Council said.

"Effectively, a big chunk of the global market is offline," said Matthew Kaleel, a commodities specialist at fund manager H3 Global in Sydney. "There's going to be something like 5 million tonnes that aren't going to be available for export." Wheat for December delivery rose 1 per cent to US$8.2325 a bushel on the Chicago Board of Trade after climbing as high as $8.68, the most since August 26, 2008. The contract rose 7.9 per cent on Thursday after Russia announced the export ban.

Wheat has surged 65 per cent in Chicago since the start of last month. Planting of winter wheat harvested next year may increase because of the higher prices, said Doug Whitehead, a commodity analyst at Rabobank in London. The rise has revived memories of the price surge in early 2008, when US wheat rose above $13 a bushel, helping to fuel food inflation and leading to riots in many countries. Food companies such as Nestle and Danone saw their shares decline in value yesterday.

But analysts played down the link saying global stocks had grown steeply in the past couple of years with the two biggest ever crops. "Stocks are close to 50 per cent higher today [than early 2008]. You had a completely different scenario then," said the Barclays Capital analyst Sudakshina Unnikrishnan. Persistent high prices could, however, drive fear of food inflation in key buyers such as Indonesia and the Philippines, analysts said.

"If prices remain elevated for a sustained period, the probability of upward adjustment in retail price of wheat and its derivatives goes up," Barclays Capital said. "However, food prices tend to be politically sensitive so we can expect some action from Asian governments." The top consumers China and India are largely protected from rising prices by their wheat reserves. Trading companies that have sold Russian wheat to millers in Asia are considering declaring force majeure on supply contracts that could involve up to 1 million tonnes.

"If the contract says Russian wheat, it is straight away force majeure," said one trader with an international company in Singapore, referring to terms in commodity deals that remove liability for unforeseen events that hinder trade. * with Reuters and Bloomberg