By Tom Polansek of DOW JONES NEWSWIRES
Wheat futures prices soared Thursday to their highest levels in two years after Russia said it would ban grain exports due to a severe drought, a move that heightens concerns about global supplies of the grain and the possible impact on food prices.
In early trading at the Chicago Board of Trade, September wheat futures were up 51 cents, or 7.1{4d08edaf359bc2115b18a651716ebd427a137946ddca2143fa23b3ea721061e4}, at $7.77 a bushel, after rising the exchange-imposed limit of 60 cents to $7.85 3/4 a bushel, the highest level since August 29, 2008. U.S. wheat futures have gained nearly 85{4d08edaf359bc2115b18a651716ebd427a137946ddca2143fa23b3ea721061e4} from a nine-month low in June amid expectations that demand for U.S. wheat will increase. In Europe, Paris November milling wheat gained more than 10{4d08edaf359bc2115b18a651716ebd427a137946ddca2143fa23b3ea721061e4} to hit a fresh 28-month high of EUR233 a metric ton.
The export ban by Russia, a major producer and supplier to other countries, comes after several weeks of deteriorating prospects for the Russian wheat crop. Market participants had speculated in recent days that an export ban was likely, but the full effect of such a possibility clearly hadn’t been priced in. While most market participants don’t foresee the kinds of problems that sparked food riots in 2008, the dramatic increase in prices and the uncertainty over future supplies of the grain have forced buyers and sellers to recalibrate their plans.
The ban, which affects wheat, corn, barley, rye and flour, is set to run from Aug. 15 until the end of the year, according to a spokesman for Russian Prime Minister Vladimir Putin. Traders with existing contracts may ship only through Aug. 15.
“Due to the abnormally high temperatures and drought, I consider it expedient to introduce a temporary ban on the export from Russia of grain and other agricultural products produced from grain,” Putin said at a government meeting. Putin said that government grain reserves won’t be auctioned off as usual but will instead go to Russian regional governments to help grain users.
The ban is “a big deal” because the former Soviet Union has emerged as a major exporter on the world market, said Jerry Gidel, analyst at North America Risk Management Services, a brokerage in Chicago. Russia was the major supplier to Egypt, the world’s largest importer, in the crop year that ended in May.
“The key thing is that people were assuming there’d be some kind of exports out of Russia, and now there might not be any for some period of time,” Gidel said.
The chairman of Egypt’s Grain Chamber, Ali Sharaf El Din, said Thursday that Egypt has six months worth of wheat supplies should shipments of Russian wheat be disrupted. “We hope (Russia) will be able to deliver, but if they do default, we have other supplies,” he told Dow Jones Newswires.
Nonetheless, Egypt remains “vulnerable” to problems in Russia due to its heavy reliance on Russian wheat and it is attempting to diversify its sourcing in response, a person at the Ministry of Trade said.
“The Russia drought may put Egypt, and other importers of Russian wheat, in a vulnerable situation, given that Russia has been one of our biggest suppliers, but it is not our only source and the situation is not unrecoverable,” the person said.
Ukraine, another major exporter, also has canceled several wheat export contracts due to lack of supply from farmers and other issues, trading executives said. The news heightened fears about tightening supplies because export restrictions in the former Soviet Union helped shove prices to record high prices in early 2008.
The former Soviet Union has been struggling with scorching heat and dryness for weeks, and no significant relief is in sight. The outlook for continued dryness sparked worries that conditions will still be unfavorable when farmers plant their next crop this autumn.
The wheat supply concerns are spurring price increases for other grains too. September corn futures in Chicago hit a seven-month high, rising 6.2{4d08edaf359bc2115b18a651716ebd427a137946ddca2143fa23b3ea721061e4} to $4.25 a bushel. Corn and wheat are linked because both grains are used for animal feed. When wheat locks up at the exchange-imposed limit, traders who want to buy grain futures will likely look to CBOT corn and soybeans.
The Food and Agriculture Organization confirmed the tightening supply situation this week, cutting its 2010 global wheat production forecast. It pegged production at 651 million metric tons, down 3.7{4d08edaf359bc2115b18a651716ebd427a137946ddca2143fa23b3ea721061e4} from its previous estimate, but said that figure represented an adequate supply of the food staple.
However, the situation doesn’t appear to be as dire at it was in 2008, when crops failed worldwide. In early July, the U.S. government estimated world supplies at a comfortable 187 million metric tons, well above the 124 million tons produced back in 2007-08, when food riots hit several nations. The U.S. Department of Agriculture estimates there will be almost 30 million tons of wheat in U.S. stockpiles at the end of next May, a 23-year high. By comparison, in 2007-08, U.S. inventories dropped to an all-time low of 8.3 million tons.
Source: Wall Street Journal
Posted by Kaci Switzer
