August 4, 2010

Russian wheat prices ease over seen stable exports

European wheat prices fell on Tuesday (August 3) from a two-year high after Russia announced its grain exports would be stable despite the severe drought that has decimated crops.

High temperatures and a prolonged drought have destroyed at least one fifth of Russia's grain crop this year, sparking fears of wheat shortages. The Russian agriculture ministry said the country's grain crop would drop to 70 million-75 million tonnes this year, but insisted cereals exports would remain stable because the use of bountiful stocks.

Alexander Belyaev, deputy agriculture minister, said Russia held 21.5 million tonnes of grain stocks, enough to buoy the country's exports this year and cover the nation's needs. "The country has sufficient resources to ensure that everything is favourable and reliable," he said.

Mr Belyaev added that the drought that set in last month had mainly destroyed crops used for animal feed and promised extra state support for livestock farmers.

In Chicago, CBOT September wheat fell 1.7% to US$6.81 a bushel, after touching a 22-month high of US$7.11 a bushel on Monday (August 2) following the rally in Europe. The rally in wheat prices has revived memories of the 2007-08 global food crisis, which saw the cost of agricultural commodities from corn to rise surge to record highs and food riots in countries from Haiti to Bangladesh.

In spite of the recent price drop, the market remains concerned about the true size of the losses in Russia. Analysts and brokers said that prices could rise again if new forecasts of losses emerged. The main focus is now the next forecast update by the USDA, expected late next week. Russian meteorological forecasts say unprecedented hot weather and drought will continue until at least the middle of August.

The full extent of the damage caused to Russia's grain crop will not be clear until the end of the month, when farmers have gathered the Siberian harvest. Siberian farms usually account for around one-fifth of Russian grain production and have been less severely hit this year by drought than European regions of the country.

The drought marks a major setback for Russia, which set a target to challenge US supremacy of global wheat markets as favourable weather and increased investment boosted grain production in the past few years. The revival of grain farming has begun to stimulate development of meat and food processing industries, boosting economic development in Russian regions.