Political and economic turmoil, including export taxes, expected to influence global grain supply
Political and economic instability in Russia should prop up the wheat market for the next several months, says a CWB markets expert.
The effect could persist into the 2015-16 crop year.
Russia followed up months of speculation by imposing export duties on wheat in late December to help lower domestic bread prices and minimize the risk of public unrest.
The Russian economy, which is highly dependent on petroleum exports, approached or reached a crisis near the end of 2014. Oil prices dropped $50 per barrel since the summer and the ruble lost about 40 percent of its value.
Read Also
USDA’s August corn yield estimates are bearish
The yield estimates for wheat and soybeans were neutral to bullish, but these were largely a sideshow when compared with corn.
Wheat futures climbed more than 20 percent in fall — from less than $5 per bushel to more than $6 per bu. in Chicago — partly because traders expected Russia to curb grain exports.
Russia, the world’s fourth largest wheat exporter, officially took action after Christmas.
Moscow will impose a 15 percent tax on the value of a wheat export shipment, with an additional duty of $10.50 per tonne, Reuters reported. The tax will take effect Feb. 1 and possibly end in June.
Because prices had risen on speculation of Russian restrictions, wheat futures in Chicago dropped in response to the news, but some market analysts believe the Russian story and its impact on wheat prices is not over.
“There’s a lot of uncertainty there,” said Neil Townsend, CWB director of market research.
“There are a lot of concerns about the economy in Russia right now. That’s probably going to heighten the uncertainty…. What makes the market really nervous is the Russian government … What’s to stop them, five months from now, just deciding it’s going to be an outright ban (on wheat exports)?”
Cereals Canada president Cam Dahl said Russian turmoil could affect the global wheat market for years.
“Not just this year but for years to come as well,” he said.
The uncertainty over wheat production extends into Ukraine and other parts of the region, he added.
“If the countries in the former Soviet Union are not allowed to produce and export up to their capabilities, that will reduce overall world stock. That will have an impact on prices.”
Townsend said Moscow’s policy is contradictory because the country’s grain industry is expanding. Domestic businesses now control a larger share of the wheat trade and are making money exporting Russian grain.
“The people in Russia with money have realized the grain industry is a great business,” he said.
“And gradually the proportion (of Russian grain) sold by multinationals has declined, and the proportion sold by Russian based companies has increased.”
Those companies could exert pressure on Moscow to loosen trade restrictions, but it’s complicated because people with close ties to the Kremlin are the ones who typically own the grain companies, Townsend said.
Steve Mercer, vice-president of communications for U.S. Wheat Associates, isn’t as convinced the Russian uncertainty has staying power.
Global stocks of wheat are sufficiently large to absorb Russian export restrictions, and the newly harvested crops in Australia and Argentina are now available.
“Barring any political situation, we do see this as short term,” Mercer said.
Nonetheless, recent history indicates that Russian policies can have a considerable influence on wheat prices, he added.
“We certainly remind our customers, when you look at all of the price spikes … almost all of them in the last five to eight years have been related to what Russia’s government has been doing, to intervene in their (domestic) grain market.”
For example, Egypt is one of the largest buyers of Russian wheat. Townsend said the Egyptians would have to buy wheat from elsewhere if Russian supplies were unavailable.
“Say they (the Russians) can’t do three or four million tonnes to Egypt … and the Egyptians have to go and get that from (someone else), that would kind of make a sustained increase to the f.o.b. (free on board) prices for a period of time.”
Meanwhile, cold weather and a lack of moisture are hurting Russia’s winter wheat crop.
“Probably about 30 to 40 percent of the coming Russian crop has been suffering quite a bad drought,” Townsend said.
“They’re expecting production in ’15 to be much smaller than it was in 2014.”
robert.arnason@producer.com
