Grain ban could spike food prices

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Prime Minister Vladimir Putin has sparked worries over a spike in the cost of basic foodstuffs after his shock ban on Russian grain exports over a record drought sent wheat prices to new highs.

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Wheat prices increased by around 10 per cent on global commodities markets following the announcement that the world’s third wheat exporter was banning grain exports until December 31 to prevent inflation on the domestic market.

Russia has seen 10 million hectares of arable land destroyed amid the heatwave and the government has warned production this year will be lower than annual domestic demand at 70-75 million tonnes of grain.

“It is going to interrupt trade and create instability in the market… a situation which was not serious has now become serious,” Abdolreza Abbassian, economist and secretary of the Intergovernmental Group on Grains at the UN Food and Agricultural Organisation (FAO).

“It was a very quick and unexpected decision,” he told AFP in Rome.

Putin’s powerful deputy Igor Shuvalov told Russian radio on Friday that the decision “could be revised depending on the harvest” but he did not give further details.

Crucially, the government decree signed by Putin also stated that the decision should be matched by its partners in a regional customs union, Belarus and Kazakhstan.

Kazakhstan is also a major player on global grain markets and officials in Astana said its position could be made clear next week.

Shares in brewers slumped on Friday on the news, with Carslberg down over four per cent in Copenhagen and Diageo, which owns the Guinness brand, falling over two per cent in London.

Russia’s state railways (RZhD) meanwhile announced it would halt all transport of Russian grain exports from August 7.

In Russia, reactions have ranged from surprise at the length of the ban to sheer shock that such a drastic move has been made just as Russia was looking to ramp up its global market share.

Analysts said exporters would likely profit as they would no longer have to fulfill unprofitable contracts but the losers would likely be the producers whose export markets would now be cut off.

“The government has supported a dozen speculators and it has spat at the losses of millions of peasants,” Boris Yankovsky, chief executive of the Maksima agricultural firm of the Rostov region of southern Russia, told Vedomosti.

Analysts Alexandra Evtifyeva and Dmitry Fedotkin of VTB Capital predicted that as a result of the step Russia’s export of wheat this year could now be 6-7 million tonnes lower that the planned 10 million to 14 million tonnes.

“The duration of the ban seems sufficiently long to make producers put a part of their grain into the domestic market and partly stabilise prices,” they added.

But other analysts cast doubt on whether the ban would even help keep down domestic prices.

“We are not convinced that this move will have a positive impact on the local grain market,” said Natalya Orlova, chief economist at Alfa Bank in Moscow.

“We doubt the move will compel (Russian exporters) to sell this grain domestically. Only if the government buys the grain from exporting companies and intervenes on the domestic market will the move help stabilise prices.”

Wheat prices stabilised on Friday after the dramatic rises the day earlier, with the November future trading 215 euros per metric tonne on the Euronext exchange, down three per cent on opening.

The FAO said this week that should the Russian drought continue “it could pose problems for winter plantings (in Russia) with potentially serious implications for world wheat supplies in 2011-12.”

But it said world inventories can cover the shortfall and fears of a new global food crisis similar to that of 2007 and 2008 “are not justified at this point”.