By Ross Korves, Truth About

The worst drought in years in Russia has caused a sharp rise in the price of wheat and is the first short crop among major wheat exporters since the high market prices of 2007 and 2008. International trade accounts for 18-19 percent of world wheat consumption and weather problems are felt throughout the market. Recent decisions by the Russian and Ukrainian governments to intervene in export contracts are a step backward in keeping trade flowing during production shortfalls.

Russia had two large wheat crops in a row according to statistics from the Foreign Agricultural Service of USDA. Their 2008/09 crop was 63.7 million metric tons (MMT), 9.3 percent of world production, and the 2009/10 crop was 61.7 MMT, 9.1 percent of world production. In 2009/10 Russia was the world's fourth largest producer after the EU at 138.2 MMT, China 115.0 MMT and India 80.7 MMT and just ahead of the U.S. at 60.3 MMT. Russia exported 18.4 MMT in 2008/09 and 17.5 MMT in 2009/10, respectively, 12.9 percent and 13.5 percent of world exports. They were the fourth largest exporter in 2009/10 after the U.S. at 23.6 MMT, the EU at 21.0 MMT and Canada at 18.5 MMT. In late July, the U.S. agricultural attache in Russia projected production for this year at 50.0 MMT and exports of 14.0 MMT.

Small wheat crops are nothing new for Russia. It had a crop of 44.9 MMT in 2006/07 and 49.4 MMT in 2007/08, when exports were, respectively, 10.6 MMT and 12.6 MMT. From 1990/91 through 2005/06, yearly production ranged from 27.0 MMT to 50.6 MMT and exports ranged from 0.5 MMT to 10.5 MMT. Production swings from one year to the next were as much as 16 MMT. Until this year, wheat production and exports have been trending upward over the last decade.

Russia is not the only country with wheat production challenges this year. Canada's wheat crop is projected by USDA to be down 6 MMT from 2009/10 to 20.5 MMT due to wet weather at planting time that reduced acreage planted. Kazakhstan, a neighbor of Russia, is expected to produce at least 3 MMT less wheat this year than last at 14.0 MMT, which will likely be reduced further as the harvest continues. Ukraine, another Russian neighbor, may have a small cut in production. Reports from Western Australia indicate that winter weather has been dry for the crop that is normally harvested in November/December and will be smaller than expected earlier. The Food and Agriculture Organization (FAO) of the UN reported that this year's world production will likely be 651 MMT crop, still the third largest crop.

World carryover supplies at the end of the 2009/10 marketing year are estimated at a record of 193.0 MMT compared to 165.1 MMT in 2008/09, 124.4 MMT in 2007/08 and 130.6 MMT in 2006/07. Before the wet weather in Canada and dry weather in Russia and other countries in the region, carryover supplies at the end of the 2010/11 year were expected to be unchanged from a year earlier at 193.0 MMT. With world consumption projected at 667.0 MMT for 2010/11, a crop of 651.0 MMT as estimated by the FAO would reduce carryover to 177.0 MMT, the second largest after the carryover for the 2009/10 crop.

Not all of this carryover would be available to the international market for export. China's carryover stocks at the end of the 2010/11 marketing year are projected at 64.9 MMT, up from 56.1 MMT at the end of 2009/10. China usually exports only 1-3 MMT per year. India's carryover for the 2010/11 marketing year is expected to be 15.0 MMT and the country normally limits exports to a few neighbors. News reports indicate India has trouble finding storage for excess wheat held last year in response to a domestic drought. The government may be open to moving some of those supplies. Excluding these two countries, carryover supplies at the end of 2010/11 would still be larger than any year except for 2009/10.

The wheat problems in Russia and neighboring countries immediately raised the issue of restricting exports to maintain domestic supplies, which has been a recurring issue in world grain trade. Ukraine joined the WTO in May of 2008 after it had limited exports in 2007 to protect the domestic market. News reports indicate that Ukraine has canceled feed wheat contracts with Asian buyers. This has set off a scramble to source wheat from other suppliers at substantially higher prices.

Russia is not a member of the WTO but has tried for 17 years to join the group. It most recently talked of joining as a customs union with Belarus and Kazakhstan. Russia had initially ruled out restricting wheat exports. About half of the wheat used domestically is for livestock and poultry feed, and with other grains in short supply, pastures for livestock hurt by the drought and an ongoing effort to increase livestock and poultry output, domestic pressures overruled international contracts. Restrictions will include existing contracts and cover August 15 to December 31.

The market situation in wheat is similar to the rice market conditions in late 2007 and early 2008. Rice supplies were totally adequate, but decisions by some exporters to limit shipments as all commodities prices were increasing led a surge in rice prices as importers scrambled for the few remaining supplies accessible to the market. Wheat price and supply adjustments are being forced onto a few market participants who believed they had firm contract commitments.

This summer's weather problems are a reminder of the uncertainty of wheat production in any particularly year. Two years of record large crops had led to more concerns about low market prices than short supplies. With almost one ton out of every five tons of consumption involved in international trade, open trade is the best way to match up supply with demand in both large and short crop years.

Wheat importers need to accept the fact that wheat supply contracts have performance risk factors that vary by country. Low priced wheat from less reliable suppliers has an additional cost factor that is not fully recognized in the market. Perhaps an insurance market will develop so buyers can protect against that risk and seller will understand the money they are losing by being unreliable suppliers. This issue is worthy of discussions at the WTO, but there is no reason to expect a solution that is not at least partially driven by market requirements.