January 6, 2004

Russian Wheat Prices Up

Wheat prices in Russia are increasing following a relatively poorer 2003 harvest. As supplies tighten on the internal market, grain prices continue to increase. This increase is led by milling quality wheat, which has reached about 5,500 rubles (US$188) per metric ton in some regions. This short supply in general has not only affected bread consumers, but also the livestock industry, as wheat is often a component of animal rations, the press release said. In fact, greater demand for all wheat types has bid up feed wheat prices to nearly those for food quality.

Local administrations have attempted to curb the bread price increase with limited success, and the Federal government has taken an increased role through a temporary wheat and rye export duty of 25 Euros per metric ton to be implemented in January.

Grain prices in all regions have been increasing during the fall and into the beginning of December. According to Russian Grain Union data, milling quality wheat prices have increased from about 15% in the Volga Valley to almost 24% in the North Caucasus region. Dollar-denominated prices have been increasing even faster, making Russian wheat and rye less competitive on world markets.

High current domestic prices for wheat and rye, plus significant transportation and freight expenses, have already created disincentives to export grains. When the 25 Euro export duty takes effect in January, trade will in all likelihood be prohibitively expensive, as the ruble cost of exported milling quality wheat will increase by 15%-19%, feed wheat by 17%- 19%, and rye by 17%-19%.

However, the export tariff's ability to stabilize the market is not certain, as a number of other economic factors will influence prices. Among these factors are the structure of stocks next spring (milling quality vs. feed quality), Kazakhstan's grain export policies, and demand by the livestock and poultry sectors. Some specialists estimate that by next March, feed quality wheat reserves will be exhausted, and more milling quality wheat will be fed to poultry. This could push wheat prices past 6,000 rubles per metric

ton.

Wheat flour prices in the Black Earth Region (Belgorod, Voronezh, and Lipetsk) increased by 28%-44% from September 2002 to September 2003, and increased by another 7%-11% from September 2003 to November 2003.

Only millet prices decreased in most oblasts after the sharp rise from September 2002 to September 2003.

In the current marketing year, the major policies affecting grain and grain product prices have been implemented by local, not federal, officials. In Omsk oblast, bread prices decreased when the authorities allocated five million rubles from the oblast budget to create a regional grain fund. In Altay Kray, the major grain producer in West Siberia, 5,000 tons of grain from the regional fund was allocated to a flourmill. This additional supply helped to hold down growth in bread prices. In general, supplying extra wheat from the regional funds to the market did dampen the rise in bread prices. However, by spring many regional grain funds will be empty, limiting the ability of regional authorities to manage prices.