The recent announcement by Russia allowing a ban on wheat exports to end as planned effective June 30 will not end government policy uncertainties related to wheat markets. Efficient markets depend on the free flows of information and physical commodities. This year’s market should be more “normal”, but the long shadow of the past 12 months will continue to hang over the market.

 

 Russia imposed the export ban last August as the country experienced its worst drought in 50 years. Exports are estimated at only 4.0 million metric tons (MMT) for the marketing year ending June 30, 2011, down from 18 MMT in each of the previous two years when Russia was tied with Canada as the third largest wheat exporter after the U.S. and the EU. Prior to the two large export years, Russian exports had been 10-12 MMT per year. The early projections for exports for the marketing year starting July 1 are 10 MMT. The Russian Grain Union and others believe carryover stocks at the end of this marketing year, June 30, may be as high as 15 MMT, record large, due to underreporting of production of 3-6 MMT. More conservative estimates of stocks are 8-10 MMT. Some analysts have talked of exports near 15 MMT, but it’s is too early in the season to talk of large export supplies. Dry weather and other conditions could still reduce the Russian crop.

The markets had not digested these numbers when the Chairman of the Central Bank of Russia said that resuming wheat exports posed the single greatest inflationary threat to the Russian economy. The overall price level increased by almost 10 percent in the year ending in late May. Broad price increases are a monetary policy issue, not a supply driven market issue. The Chairman was trying to divert attention away from failed monetary policy by supporting a flexible set of export tariffs that would increase as world wheat prices increase to hold down internal market prices. This would discourage exports and also discourage Russian wheat farmers from making investments to grow more wheat. Domestic Russian politics will likely continue to drive wheat availability to the export market.

The government of Ukraine already has an export tariff of 9 percent of the export value, but not less than 17 Euros per metric ton, about $0.65 per bushel. Ukraine wheat exports for this year are estimated at 3.5 MMT compared to an average of 11.2 MMT for the two previous years. Projections for exports the year beginning July 1 are in a broad range from 8 MMT to 18 MMT. Wheat export availability will likely also be driven by domestic politics and the need to remain price competitive.

Russia, Ukraine and Kazakhstan are known for low-priced wheat for human consumption and livestock feed when supplies are large. Egypt, the world largest wheat importer in recent years at 7-10 MMT per year, has inquired about purchases. According to the U.S. Agricultural Attaché in Egypt, new wheat varieties have increased yields and the government hopes to purchase 4 MMT from farmers, but will still need to import about 9 MMT of wheat. Prices for wheat will be critical this year due to Egypt’s large budget deficit and political uncertainties. According to a DowJones Newswire report, Russia failed to deliver on 690,000 MT of wheat to Egypt contracted from the 2010 crop.

Egypt is not alone as a major wheat importer in North Africa and the Middle East. According to estimates from the Foreign Agricultural Service of USDA, in the current marketing year countries in the two regions will import about 39 MMT of wheat, 32 percent of world wheat trade. These countries are again looking to investments in African crop production to assure long-term supplies of food.

A recovery of wheat production and trade in the Black Sea region is especially important this year due to weather problems in the EU and the U.S. EU carryover stocks on June 30 are expected to be about 12 MMT, down a third from two years ago, and about the same low level as June 2008. They have received rains in recent days and more is expected to relieve some of the dry weather stress. Lower yield expectations in the EU caused the International Grains Council to recently lower their world wheat production for the year beginning July 1 to 663 MMT, 4 MMT less than projected consumption for the year.

This year’s U.S. crop will be smaller due to dry weather for hard red winter wheat in the central and southern plains and wet weather delaying planting of hard red spring wheat in the northern plains. Canadian wheat production is also likely to be impacted by late planting. Australia and Argentina have had above average crops that have helped to fill current needs and have favorable weather for new plantings.

Wheat production is naturally variable because it is often grown in drier climates, on lighter soils more prone to drought and in northern areas with shorter growing seasons. Since over 80 percent of wheat produced is used for human consumption, year-to-year changes in demand are relatively small and weather related reductions in output can lead to large changes in market prices. Internal political unrest in some countries this year makes adequate supplies more critical as a food issue. About 19 percent of wheat consumption moves through international trade.

Wheat markets can move supplies to consumers if governments do not restrict market activity and information is gathered and allowed to flow between buyers and sellers. The uncertainty of the carryover supplies in Russia is an indication that data collection and flows have been ineffective. A 6 MMT difference in estimates of carryover stocks in Russia is almost 5 percent of expected international trade and could have a significant impact on market prices.

The WTO should strengthen efforts to get members to collect production, use and stocks information and share it in a real time format. The President of France, Nicolas Sarkozy, as head of the G20 group of countries, has proposed a new system of information gathering on world food production. There is no need to create another institution. Existing one like USDA, the FAO and the International Grains Council are already doing good work. What is needed are efforts by the WTO to have greater information sharing by Ukraine, China and other members, and Russia if it becomes a WTO member.