The Full Story Behind The Increase In The Price Of Wheat
Russian Officials said on Thursday that the ban period of wheat exports has increased by 12 months. This decision has increased fears about a possible resumption of restrictions related food riots in the 2007-2008 period, riots which have spread in developing countries, dependent on imports.
The announcement, made by Vladimir Putin came given that the United Nations Food and Agriculture Organization convened an emergency meeting to discuss the decrease in the production of wheat and the riots in Mozambique, resulting in seven dead, informs Financial Times.
The social disorder in Maputo, where 280 people were injured, occurred as a result of the government’s decision to raise bread prices by 30 percent. Police opened fire on demonstrators after thousands of protestants began to rob food stores and set fire to tires.
While agriculture officials insist that wheat and other cereals are more abundant than in 2007-2008, officials fear that events could resume Mozambique and elsewhere.
The food crisis of 2007-2008, the most severe in 30 years, has led to riots and Bangladesh and Mexico and helped the fall of governments in Haiti and Madagascar.
Russia’s announcement extends a ban imposed for the first time last month, until December 2011, sending the price of wheat and other grains to skyrocket.
Western Russia, where most of the country’s crops of wheat are located, was faced with more than a month’s worth of unusually high temperatures and drought. Forests burn, people die, and harvest collapse. Estimates for wheat this year have been lowered to 70-75 million tons against 90 tons which are commonly produced there. Consequently, the world price of wheat has already risen by almost 40 percent in July on the European and American markets, Russia being one of the major world exporters of grain.
The United Nations Food and Agriculture Organization said that the “concerns about a possible repeat of the 2007-2008 food crisis” caused “an enormous number of requests” from member countries. The purpose of this meeting is to get both exporting and importing countries to talk.
Russia is traditionally the fourth largest exporter of wheat worldwide and the banning of exports already forced the importers in the Middle East and North Africa – the biggest buyers – to turn to alternative sources in Eastern Europe and the United States.
Putin said Moscow would take into account ban after harvest next year when we have a clear picture of the situation. “He added that the decision to extend the ban is meant to “remove an unnecessary fear and to ensure stability and predictability in the business environment for market participants.”
“It’s a pretty serious thing,” said Abdolreza Abbassian, UN representative in Rome. “Two consecutive years without Russian exports cause a serious disturbance.” Dan Manternach, wheat price analyst at Doane Agricultural Services, added that “This is a warning to all importing countries on Russia’s stability.”
Jakkie Cilliers, director of South Africa’s Institute of Security Studies, said there was concern about the potential resumption of protests from 2008: “This encourages a resumption of a military policy in Africa.”
European wheat prices on Wednesday hit a high of 231.5 euros per ton, slightly below the maximum of 236 euros per ton, reached last month. Wheat prices rose by almost 70 percent since January, and analysts predict further growth after Russia’s decision has raised concerns in Australian importers after weather conditions have strongly affected the wheat crop.
External trade ban aimed at keeping wheat food prices in Russia. Ministry of Agriculture data show, however, that the harvest this year will not cover, probably no domestic demand.
Central Russia was hit by hundreds of fires in the last three weeks. Authorities said the area affected is about 25% lower than last week.
Wheat harvest this year is at least one third lower than in 2009.
Temporary prohibition of grain exports by Russia probably will affect European producers of beer and food, but Russian companies, including major Black Sea port operator, said.
The shares of leading European manufacturers of beer have dropped in as the price of barley has increased in tandem with that of wheat.
The titles of Danish company Carlsberg fell by 4%, Heineken (Netherlands) 3.6%, Anheuser-Busch InBev (Belgium) with 2.9% and SABMiller (listed in London) with 1.8%.
“In Western Europe, where the population is still cautious about spending, an immediate and significant price increase can cause trouble makers,” said Morten Imsgard, an analyst at Sydbank.
Premier Foods, the British major food producer, known for its bakery specialties, expects the significant increase in wheat prices to be transferred to retailers and this to have a serious impact on the consumer.
“Price increases for other goods are inevitable due to the significant increase in wheat prices,” said Robert Schofield, CEO of Premier Foods.
The shares of Nestlé, DANONE, and Unilever and bread maker Associated British Foods fell by 0.9% -1.6%.
And on the other hand, higher prices will increase feed costs for poultry and livestock. This means, food will cost more. All food, that is.
“The price of feed represents about 40% of the cost of breeding birds and 50% of the pig,” reads a review of Troika Dialog.
The Black Sea port of Novorossiysk, largest Russian port for grain exports could record losses after the ban, given that shipments abroad have contributed 17% of revenue, according to Renaissance Capital.
Russian authorities have announced that they will extend restrictions on wheat exports by the end of the year of 2011. Wheat prices rose by 0.8% following the announcement, amid fears that global production will be below expectations. Thus, the price of wheat is 60% higher than it was three months ago.
Since August 15, Russia halted wheat exports, amid a 30% lower yields than that obtained in the same period of 2009. Initially, the ban on foreign supplies was due to expire at the end of this month, Russian officials indicating that the measure will be reviewed over time, depending on the amount of wheat harvested. Now, Prime Minister Vladimir Putin said the resumption of export variant will be considered after the harvested production in 2011.
Although Russia has justified its decision by the need to stabilize the domestic market and the desire to remove “unnecessary fear” of producers and traders, there argue that the 2010 harvest will fail to cover domestic demand state estimated at 77 million tons, Russia is thus forced to rely on imports. But officials have rejected this hypothesis. “This rumor is spread by rogue traders to grill markets,” said a spokesman for the Ministry of Agriculture of Russia, said.
Increasing wheat prices led, in August, an increase in food prices worldwide by 5%, the highest growth rate since November, 2009, according to UN data.
Yet, there are alternatives to the Russian wheat.
The main importers of Russian wheat, Egypt, Jordan and Lebanon were directed to producers such as France, Germany and USA. When Russia will be able to resume exports, it will probably reduce its wheat prices to regain the top place among world’s exporters.
Russia’s traditional customers in the Middle East have been hardest hit by the ban on exports, but quickly found alternatives. Egypt, the world’s largest wheat importer, bought from the entry into force of the restriction, 360,000 tons of wheat from France. Jordan has shifted to Germany, where he imported only 200,000 tons of wheat this month, and Lebanon has bought 50,000 tons from the U.S.
Thus, the third held by Russia among world exporters has been compromised. On the contrary, to ensure that domestic demand, estimated at 77 million tons will be covered, the Moscow government has banned exports from August 15 until the end.
Moreover, the State could rely on imports, but officials have denied those rumors. “This rumor is spread by rogue traders to grill markets,” said a spokesman for the Ministry of Agriculture of Russia, said.
But what’s tough on Russia, is a source of good luck for Europe.
Russia’s grain harvest is 31% lower than same period last year. By the end, it could fall to 60 million tons, while in 2009 produced 97 million tons, informs Bloomberg.
But Russia is already preparing to return among exporters. To regain the best result, the state plans to offer low prices, to exploit new markets and invest in modernizing the industry. “A temporary suspension of exports does not mean that Russia has lost all those markets,” said Andrei Sizov, executive director of SovEcon, specialized in agricultural analysis, quoted by The Moscow Times.
“Russian wheat will be required in those markets, because it is cheap and quality,” he added. In addition to traditional customers in the Middle East and North America, Russia will move to new markets, the main project aimed at China and Japan. State China may increase imports, amid a small crop, according to The Financial Times.
Ukraine exports continue.
Last month, Ukraine announced it would suspend or reduce wheat exports. Now, the Government of Kiev informs that this will happen, despite announcing that it expected a harvest of only 17 million tons, three million tons less than last year. “There is no reason to limit exports,” said Deputy of Ukraine Viktor Slauta, according bbc.co.uk.
Also, Bulgaria benefits from this temporary ban, too.
Harvest this year has enabled Bulgaria to double exports of wheat and barley. The advantage is the Bulgarians, the context in which Russia and Ukraine were halted grain. Agriculture of both countries was affected by drought.
The situation led to an increase in the price, Black Sea, about 50% and Bulgaria now take advantage of this context.
Thus, Radoslav Hristov, president of grain producers in Bulgaria, said, according to Bloomberg, that Bulgaria has exported 600,000 tons of new crop wheat. The amount is double that sold in 2009.
Of unprecedented drought and fire powerful Russian agriculture has been compromised. For this reason, Moscow has banned grain exports. Russian embargo will last until the end of this year.
The moment Russia announced it would seize its exports, the price in wheat increased by 50%, which is one of the largest increases in the past 30 years, as estimated by the economic journalists from The Times.
Neither Ukraine the situation is better for the country’s authorities had decided to limit exports. Last year, Ukraine ranked in the top five countries that exported wheat.
This year, drought has undermined crop in Ukraine. And after Russia announced it stopped wheat exports, and Ukraine took the decision to protect its domestic market. Thus, the pressure on wheat prices, especially in Europe, is even greater.
The negative effects of the increase in wheat prices are already starting to be seen, especially in poor countries. The population is unhappy that the price of bread rose by 30%. It is an extremely difficult situation for this country, one of the poorest in Africa.
Following clashes between security forces and protesters 10 people died. Another 27 were seriously injured and 170 people are arrested. Were burned tires were direct confrontation between the two camps. The authorities have admitted that security forces in some areas have resorted to war munitions, the real bullets after rubber bullets reserve is exhausted.11