The governments of Russia and Ukraine, the two main Black Sea wheat exporters, seem to have some difficulty grasping the concept of truly open grain markets. After imposing prohibitive export taxes, licensing requirements or outright export bans in three of the last five years, their leaders have promised this year that they will not impose export curbs. Numerous press stories give them credit for exercising “restraint” in avoiding their market meddling tendencies in spite of a drought that reduced their wheat production to below that of 2010. Russia banned grain exports that year and Ukraine stopped exports with licensing requirements. On the surface, their current stances look more enlightened. But, let us take a closer look at how the market has reacted this year to the slightly more subtle signals Ukrainian and Russian leaders have sent.

Ukraine's government has announced it expects to export 4.0 MMT of wheat in 2012/13 and major Ukrainian exporters have agreed with the Agriculture Ministry not to exceed that limit. One has to assume that if the limit ever does get exceeded, the government would step in to enforce it. What is the difference between an export embargo and the threat of one if the limit is not voluntarily kept? From a practical standpoint, there is no difference at all.

Russia has been less obviously inconsistent with both the Deputy Prime Minister and the Agriculture Minister proclaiming for months that the government will not need to impose an export embargo. The Minister of the Economy, however, recently said that export curbs are still “quite possible.” The Institute for Agricultural Market Studies (IKAR) currently estimates Russian wheat exports at 9.5 MMT this year, and even as they proclaimed that restraints would not be needed, their leaders carefully reserved the right to change their minds if grain exports should exceed projections. While the threat of export restrictions has not been as explicit as in Ukraine, the message to the exporters in both countries was loud and clear. Sell more than the government thinks you should export, or contract for more than a couple of months ahead, and you just might not be able to deliver. Buyers, too, must take that risk into account.

As a result, the trade has been scrambling to get as much grain as possible out the door as soon as possible, lest the door slam shut. The result has been to sell too soon, too cheaply, driving prices down not only for Russian and Ukrainian farmers but also for other exporting nations. With drought in the Black Sea region, the United States and Australia this year, world grain prices are well above last year's levels, but they have nonetheless been depressed from what they would have been. It is a temporary buying opportunity, perhaps, but also a more unstable market for buyers.

Everyone in the grain trade expects Russian and Ukrainian exports to come to a halt quite soon and that world prices will have to rise to draw supplies out of Europe and North America (see Wheat Letter, Sept. 13, 2012) Russia and Ukraine's approach has served to push their grain sales at post-harvest lows and to be out of the market if and when prices are higher later. That is not a strategy designed to maximize returns to the Black Sea wheat supply chain. If, however, Black Sea area farmers and exporters could have been certain that no export restraints would be imposed, they could have held some grain back from the market in the hope of higher prices, and their cadence of export would have more efficiently spread their grain movement out through the rest of the year.

Every time governments meddle in the marketplace, or even if the trade just thinks that such meddling is likely, the wrong price signals go to every player in that market. Trade flows differently than it would have – a clear trade distortion – and even worse, faulty investments are made. The promise of open trade is to maximize resources for everyone, but when governments interfere, some part of those resources is inevitably wasted. This is as true of import curbs and trade distorting domestic support as it is of export restraints. Perhaps if the World Trade Organization (WTO) members ever get serious about concluding the Doha round, proposed measures in the latest negotiating text to discipline export restrictions and prohibitions will result in a better trade environment. In the meantime, the uncertainty created by the potential of further Russian and Ukrainian meddling in the grain market is distorting those markets and adding volatility to world prices.