Fears Growing Over Global Food Supply‏

CNBC

Russia announced a 12-month extension of its grain export ban on Thursday, raising fears about a return to the food shortages and riots of 2007-08. The FT reports.

 

Russia announced a 12-month extension of its grain export ban on Thursday, raising fears about a return to the food shortages and riots of 2007-08 which spread through developing countries dependent on imports.

The announcement by Vladimir Putin came as the UN’s Food and Agriculture Organization called an emergency meeting to discuss the wheat shortage, and riots in Mozambique left seven dead.

The unrest in Maputo, in which 280 people were also injured, followed the government’s decision to raise bread prices by 30 per cent. Police opened fire on demonstrators after thousands turned out to protest against the price hikes, burning tyres and looting food warehouses.

Although agricultural officials and traders insist that wheat and other crop supplies are more abundant than in 2007-08, officials fear the deadly Mozambique riots could be replicated.

The 2007-08 food shortages, the most severe in 30 years, set off riots in countries from Bangladesh to Mexico, and helped to trigger the collapse of governments in Haiti and Madagascar.

The Russian announcement extended an export ban first announced last month until late December 2011, sending wheat and other cereals prices to near a two-year high.

The FAO said that “the concern about a possible repeat of the 2007-08 food crisis” had resulted in “an enormous number” of inquiries from member countries. “The purpose of holding this meeting is for exporting and importing countries to engage.”

Russia is traditionally the world’s fourth-largest wheat exporter, and the export ban has already forced importers in the Middle East and North Africa, the biggest buyers, to seek supplies in Europe and the US.

Mr Putin said Moscow could “only consider lifting the export ban after next year’s crop has been harvested and we have clarity on the grain balances”. He added that the decision to extend the ban was intended to “end unnecessary anxiety and to ensure a stable and predict-able business environment for market participants”.

“This is quite serious,” said Abdolreza Abbassian, of the FAO in Rome. “Two years in a row without Russian exports creates quite a disturbance.” Dan Manternach, chief wheat economist at Doane Agricultural Services in St Louis, added: “This is a wake-up call for importing nations about the reliability of Russia.”

Jakkie Cilliers, director of South Africa’s Institute of Security Studies, said there was concern over a repeat of the protests of 2008: “That certainly strengthened a return of the military in politics in Africa.”

European wheat prices on Thursday hit €231.5 a ton, just shy of last month’s two-year high of €236. Wheat prices have surged nearly 70 percent since January, and analysts forecast further rises after Russia’s decision and concerns about weather damage to Australia’s crop.

Archer Daniels, Potash, Eagle Bulk May Reap Rewards of Russia's Wheat Ban

Bloomberg

 

Archer Daniels Midland Co., Potash Corp. of Saskatchewan Inc. and Eagle Bulk Shipping Inc. stand to benefit after Russia, the fifth-largest wheat grower, banned exports of the grain because of its worst drought in 50 years.

ADM, the world’s biggest grain processor, can step in to ease the shortage in Russia, Credit Suisse Group AG said. Fertilizer producers will gain from higher sales of crop nutrients to farmers, said Joe Needham, a vice president at grains processor The Andersons Inc. Cereal producers Kellogg Co. and General Mills Inc. may raise prices to pass on higher costs.

“This is good for U.S. farmers and U.S. agribusiness,” Needham said in a telephone interview. “If you ramp up production, they will have to buy seed, they will use more fertilizer and elevators will handle the grain.”

Wheat futures in Chicago surged to a 23-month high as a record heat wave in Russia is predicted to cut the country’s grain output by 28 percent from a year ago. Flooding has ruined wheat in Canada while dry weather has damaged crops in Kazakhstan, Ukraine and the European Union.

The U.S., the world’s fourth-biggest grower and largest exporter of wheat, will produce 2.2 billion bushels in the year that started June 1, the Department of Agriculture forecast July 9. That compared with a June estimate of 2.1 billion bushels.

“You have a situation unlike anything that I’ve seen in the 35 years I’ve been trading in the grain markets,” said Dennis Gartman, an economist and editor of the Gartman Letter. “This is going to be one of the great years for American agriculture probably in history. Let’s not mince words here.”

Corn Gains

Wheat for December delivery rose 9.75 cents, or 1.2 percent, to $8.25 a bushel at 9:14 a.m. on the Chicago Board of Trade. Earlier it reached $8.68, the highest intraday price since August 2008. Corn and soybeans both headed for their second straight weekly gain.

“Strength in wheat futures is already spilling over into the other commodity pits,” said Mark Gulley, a New York-based analyst with Soleil Securities who covers Potash Corp. “As corn and other crop prices go up, affordability improves, and that’s a direct benefit to fertilizer producers.”

Shares of Saskatoon, Saskatchewan-based Potash Corp., the biggest maker of the mineral used in fertilizer, climbed $1.89, or 1.7 percent, to $116.13 at 10 a.m. in New York. Competing potash suppliers Mosaic Co. and Agrium Inc., also advanced.

Arbitrage Opportunities

Eagle Bulk Chief Executive Officer Sophocles Zoullas said in a conference call yesterday that the New York-based shipper is seeing a stronger market for moving grains. Decatur, Illinois-based ADM’s shares will rise because of “outsized arbitrage opportunities” in the wheat market, Credit Suisse Group analyst Rob Moskow said in an Aug. 3 note.

ADM rose 1.6 percent to $30.74 after gaining the most since May 2009 yesterday. Eagle Bulk climbed 2 cents to $4.99 on the Nasdaq Stock Market.

“Any industry that touches on grains, especially from a production standpoint, and from an input supply standpoint for instance, are going to benefit,” said Kenrick Jordan, chief economist at BMO Financial Group in Toronto. He said Deere & Co., the largest farm equipment maker, will gain from the increase in production spurred by the price rally.

U.S. wheat exports may be as much as 4 percent above the 1 billion bushels forecast for the year that started in June by the USDA after Russia banned grain exports from Aug. 15 to Dec. 31, said CHS Inc., the largest U.S. cooperative grain marketer.

‘Sad Situation’

Saudi Arabia and Turkey generally buy wheat from Russia and Canada, where production is expected to drop because of wet weather, said Roger Baker, head of CHS’s North America wheat- trading desk in St. Paul, Minnesota. Both countries will now switch to the U.S., increasing the company’s exports, he said.

“In order for farmers to capitalize, another farmer has to take a loss,” said Ron Suppes, a farmer who grows wheat on 3,000 acres in Kansas. “It’s a sad situation.”

The European Union is the world’s largest wheat producer followed by China and India in the 2010-2011 crop year, according to the USDA.

“If there is a poor wheat crop, the world will have to come back to the U.S. for wheat exports” as it did in 2007 and 2008, Steven R. Mills, ADM’s chief financial officer, said in a conference call Aug. 3. ADM spokeswoman Beth Chandler declined to comment.

Still, the rally in wheat prices will be limited as farmers globally likely will ramp up production, Needham said.

Bread, Cookies

“It’s the only crop in the world that’s planted somewhere in world every day and a new crop is harvested somewhere in the world every day,” Needham said. “In wheat, it’s generally a temporary shortfall.”

Food companies may raise retail prices on surging wheat costs. Wheat is a “big factor” for companies such as Kellogg, where wheat makes up about 8 percent of its total costs, said Christopher Growe, an analyst at Stifel Nicolaus in St. Louis.

“If wheat prices stay up around $7, it would likely prompt price increases in categories such as bread, cookies, and crackers,” Growe said.

Kirstie Foster, a General Mills spokeswoman, said the company doesn’t comment on commodities or pricing. Kris Charles, a Kellogg spokeswoman, said the company doesn’t address how it manages specific commodities.

“The question is how long wheat prices will stay where they are,” Bob Lindon, executive vice president at Connell Commodities, a Naperville, Illinois-based advisory firm for food companies, said in an interview. “Food companies may wait this out and see how the market settles before they have price increases.”

No Shortage of Wheat, But Prices may Rise

NY Times

 

The price of wheat had been falling since the last great spike in 2008, but in April, Guy Lapointe seeded 2,200 acres of hard red spring wheat anyway on his rolling land in Alberta.

Now, as prices jump skyward, he is about to send his two John Deere combines into his fields and relishes the higher price he will reap.

“It is looking up,” said Mr. Lapointe, 46. “One farmer’s misfortune is another’s fortune.”

The drought afflicting Russia’s plains and the Kremlin’s sudden decision Thursday to halt exports of wheat will undoubtedly have unexpected consequences across the globe. Farmers from the Midwest to France will fill the void left by Russian exporters, but food processors could get caught by rising costs. The higher prices could be passed to consumers of foods including pizzas, bread and bagels.

If prices rise further, the situation could resemble 2008, when drought in Australia and embargoes across Asia in foodstuffs like rice disrupted the global food supply and prompted some rioting.

But there is an important difference between the current situation and that last price spike: the Russian drought and ban on wheat exports, in contrast to the global shock in 2008 that drove wheat prices up to nearly $13 a bushel and created tensions in Indonesia and Pakistan, are occurring when global wheat production is plentiful and stocks in the United States are at a 23-year high, analysts said.

“This is still going to be the third-largest wheat crop in world history, even with the Russian shortfall,” said Daniel W. Basse, president of AgResource, an agricultural consultant firm in Chicago. “The question becomes, Will the drought persist, and will there be problems elsewhere, in other big producers like Argentina or Australia?”

Wheat prices have risen by about 90 percent since June because of the Russian drought and other factors like floods during the planting season in parts of Canada. As the price shock ripples through the supply chain, small food producers may be unprotected because they tend to buy flour on the spot market.

Larger companies, like Piantedosi Baking Company of suburban Boston, have hedged against cost inflation.

“Now that we are hitting the storm here, we are locked down fairly far, to the end of the year practically,” said Joseph A. Piantedosi Jr., who runs the company with two cousins.

Papa John’s Pizza said it had locked in its wheat purchases through the first quarter of 2011, and Domino’s Pizza said it had also hedged.

The drought this summer had already pushed the price of wheat futures to their highest level since 2008. Amid growing nervousness on Monday, the number of wheat futures and options contracts traded on the Chicago Board of Trade reached record highs, beating the previous record set in 2008, and more than double the daily average so far this year.

Then on Thursday, the announcement of the embargo by Prime Minister Vladimir V. Putin caused a further sharp swing — prices hit their upper limits on all three of the exchanges where wheat futures are traded in the United States, in Chicago, Kansas City and Minneapolis.

“It was a really crazy day,” said Frank Stone, 55, of the Kansas City Trading Group.

On Friday, the futures prices fell again, this time hitting the lower limits on all three exchanges, on tentative reports that Russia might honor some of its export contracts after all or at least postpone the embargo until after its wheat harvest.

According to Interfax, First Deputy Prime Minister Igor Shuvalov said on the Ekho Moskvy radio station, “The decision to ban exports could be adjusted, depending on the harvest.”

By close of trading on Friday, wheat futures for September delivery on the Chicago Board of Trade had dropped 60 cents, to $7.25 a bushel, still sharply higher than a few weeks ago.

Cash prices for wheat have risen less significantly than futures prices, traders and analysts said, reflecting the fact that wheat is in healthy supply around the world.

“We do have a lot of wheat in the U.S.,” said Erica Olson, marketing specialist at the North Dakota Wheat Commission, a trade group. “We have wheat left over from last year and a good harvest this year.”

This is in contrast to the big supply shock in 2007 and 2008. In 2007, for example, worldwide stocks had already fallen sharply. By 2008 they had fallen to the lowest level in 30 years because of falling production and higher consumption, Ms. Olsen said, quoting Department of Agriculture data. Stocks had recovered by May 2010, she said.

Maximo Torero, at the International Food Policy Research Institute, said the market reaction was overdone. Russia represents only 11 percent of the world’s wheat exports, he said, and any shortfall could be met by major wheat exporters like the United States, Australia or Canada.

The real concern, he said, was that other countries would follow Russia’s lead and stop exporting, a domino reaction around the world similar to the one in 2008 that could cause a sharper increase in prices.

Jack Scoville, vice president of Price Futures Group, a futures brokerage in Chicago, said importers around the world who had agreed to buy wheat from Russia and now faced the prospect of broken contracts would have to look for more expensive supplies elsewhere.

“There will be higher prices for them,” he said.