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Analysis & Opinion
05.08.10 Gone With The Heat
By Tai Adelaja

The Russian government on Thursday slapped a temporary ban on the export of grain and related agriculture products as sizzling heat and stifling humidity across Russia continue to destroy crops and jeopardize winter grain planting. "I think it is advisable to introduce a temporary ban on the export from Russia of grain and other agriculture products made from grain," Prime Minister Vladimir Putin told a televised government meeting. The ban is expected to last from August 15 to December 1 2010. Experts say the move would enable Russian wheat exporters to renege on their supply contracts as it provides them with the possibility of pleading force majeure.

As the drought grows in intensity and impacts harder, the sowing of winter grains, due to start this month, is also expected to be worse than usual in some northeastern regions as the record heat wave has sapped moisture from the soil, the national weather center said.

Last year, Russia harvested 97 million tons of grain but this year experts predict that harvests will be 25 million tons less. So severe has the drought been that the Russia Grain Union has cut its forecast to between 72 and 78 million tons, compared to nearly 100 million tons last year and a bumper harvest of nearly 110 million tons in 2008. The drought has forced the government to declare a state of emergency in 27 crop-producing regions as more than 10.3 million hectares of crops were destroyed this year alone, the Agriculture Ministry said Tuesday.

The consequences of this year’s reduced harvest are already being felt at the global level, particularly with wheat, Russia’s biggest cereal crop. Russia supplied eight percent of the world’s wheat last year, becoming in effect the planet’s third largest exporter. This year however, exports are expected to be nowhere near as big, as the drought has led to a serious dip in production.

The sudden shortfall in grain production prompted calls for the government to ban grain exports temporarily to allow suppliers to cancel contracts. “The government should set a temporary ban on grain exports immediately,” Nikolai Demyanov, deputy chief executive of the Russia division of the Glencore International Grain Company, said, Bloomberg reported. “[Government] should set a ban rather than an export duty because a duty doesn’t qualify as force majeure for exporters,” he said, referring to a legal clause that allows a company to cancel contracts because of circumstances beyond its control. He suggested that such bans can be introduced by presidential decree with immediate effect.

Demyanov told Russia Profile on Wednesday that his company “is taking a pause to allow state officials to sort things out by themselves,” based on the situation on the ground. “This would enable them to come up with a decision on whether or not to allow grain exports,” he said. Alexander Belyayev, Deputy Agriculture Minister said on Tuesday that the government had no immediate plans to reduce exports due to the drought. Earlier, the state grain trader United Grain Company said that it still planned to export no less than 1 million tons of grain this year. Metropol analyst Nadezhda Timokhova said she had expected the government to impose some export duties in September or October after the Siberian grain harvest, when there is a clearer indication of what domestic demand will be.

Putin said Thursday that grain from the government intervention fund will be distributed to regions without auctions, following a suggestion last week by First Deputy Prime Minister Viktor Zubkov that the grain should be distributed among regions worst-hit by the drought using a quota system. The intervention auctions, initially scheduled to begin on August 4, were pushed back as the state-run United Grain Company continues to receive applications from companies that want to participate. The government earlier announced plans to sell some three million tons of grain, mainly feed grain, to domestic animal breeders and flour millers. In the past intervention auctions have enabled the government to utilize grain reserves to forestall significant rises in domestic food prices, by buying up grains in times of plenty for resale when harvests are bad. The grain intervention fund currently has 9.64 million tons in storage, according to figures published in Rossiiskaya Gazeta on Wednesday.

Belyayev said Tuesday that the Ministry has revised its grain production forecasts downward by more than 20 percent to between 70 million and 75 million metric tons, from an original forecast of 90 million tons. “There are enough resources in the country to keep everything smooth and steady,” Belyayev said. “We already have 21.5 million tons of grain in carry-over inventories, and we have already threshed 35.5 million tons.” Timokhova added that while approximately 20 percent of crops have been destroyed by the drought, the situation is not yet catastrophic. “Grain collection is currently at the level of domestic consumption,” she said. “Prices of wheat and wheat products are expected to go down as soon as the government intervention program kicks off.” The government on Thursday pledged 10 billion rubles ($335 million) in subsidies and another 25 billion rubles ($837 million) in loans to the agricultural sector.

But despite such glimmers of hope, media reports showed that flour and milk prices have gone up in several regions, prompting the Federal Anti-Monopoly Service (FAS) to wade in to tighten control over the food market to ensure that there is no price gouging because of the drought. Flour prices soared 41 percent to 9500 rubles ($319) from 6720 rubles ($225) a month earlier, the Vedomosti business daily reported Wednesday, citing the top manager of a bakery. Some grain producers are hoarding wheat in expectation of further price increases, the paper wrote, citing the same source. The higher-than-expected demand for grain has led to price hikes for flour in Nizhny Novgorod, Tver, Bashkortostan, Chuvashia, Moscow and Orel regions, according to FAS. The agency also alleged that some companies, including Unimilk, Vamin-Tatarstan and dairy enterprises of Nizhniy Novgorod region have raised prices on their products. Igor Artemyev, the director of the Federal Anti-Monopoly Service, ordered the service’s local offices to intensify their oversight of wholesalers at the latest by next Tuesday.

Analysts have said that increases in domestic prices of grain and related agricultural products are not caused by drought alone. “The current heat wave will continue to affect the prices of grain and flour in Russia,” Andrei Sizov Jr., Managing Director at SovEcon, said, “but the price increases are not only due to natural disasters. They are also rising due to growing prices on the world market.” Sizov said if the futures on the Chicago Board of Trade hold at a level above $6.50 per bushel, prices could spiral up to $7.50. He added that the risk of export restrictions in Russia this season is very high due to the continued drought.

Other experts are predicting Russia grain exports will drop by a massive 50 percent, fears that have already translated into international markets. The price of wheat has soared, reaching its highest level in two years earlier this week. Wheat futures for September delivery rose 53 percent on the Chicago Board of Trade, peaking at $6.93 per bushel on Monday, before settling down slightly at $6.90 on Tuesday. Franciscus Welirang, chairman of the Flour Mills Association in Indonesia, Asia’s biggest buyer, said Wednesday that wheat exports from Ukraine and Russia have started to dry up, Bloomberg reported. He said Indonesia has decided to turn to the U.S. and Australia for its wheat imports, which could reach 4.3 million metric tons this year.

With the heat wave showing no signs of abating, grain farmers in the Volga region have been bracing themselves for tough times as the winter planting campaign kicks off in the coming weeks. “The whole Volga region remains dry and substantially moistureless, and this will undoubtedly affect both the quantity and quality of the winter crops,” Sizov said. But despite fears that wheat production shortages could push up food prices around the world, many experts say the supply of wheat remains plentiful after two years of unprecedentedly high global production.
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