Russian wheat export ban hurts prices further

The fear about supplies ravaging the wheat market last week drove prices in Chicago up by 80 per cent to a 23-month high and it gained further momentum last Thursday as news broke about the Russian export ban.

This has left the market exposed to high prices for a while as wheat importing nations from North Africa to the Middle East will have to look elsewhere for their supplies.

The Russian export ban was implemented amid the worst drought for half a century which has hurt the wheat growing region around the Black Sea also effecting Ukraine and Kazakhstan. The ban caught the market by surprise as many would have thought that Russia would have used government inventories to complete export sales.

The ban will run until December at which point they will have a good idea about the output from the all important winter wheat.

The current crop being hurt is the spring wheat which counts for less than 20 per cent of total wheat production in the most affected areas.

The all-important winter planting period begins mid August and runs into September. If the dry weather conditions persist planting could be delayed or worst case not going ahead at all.

This uncertainty will be keep prices supported until a change in weather occurs around the region.

On a positive note it is worth mentioning that the US inventories of wheat remains large relative to the time of the last price spike in 2008. Production this year also expected to be good giving US farmers the opportunity to benefit from the Russian ban.

However, given existing trade barriers with some of the countries left short from the Russian export ban it is not as easy as it might seem to plug the hole.

USDA Thursday cut its August forecasts of global wheat stocks by 13 per cent to 952 million bushels.

The news initially drove prices higher after four days of selling from the highs last week, but for now the elevated price level is discounting supply disruptions and barring problems with the planting of winter wheat prices should stabilize soon.

Trade volumes both in Paris for Milling Wheat and for Wheat in Chicago has been unusually high with producers being busy locking in wheat prices which are now 60 per cent higher than just a couple of months ago. Hedge funds and funds looking for momentum have also been active, primarily on the buy side.

In conclusion, global stocks are much higher than in 2008 when we had the latest worries about a food crisis. This leaves the global farming community much better positioned to avoid another run on stocks.

There will, however, be a spillover effect to other grain products as farmers may switch to wheat at the expense of others and elsewhere consumption may switch to other stables such as rice.

The writer is Commodity analyst, Team Lead for CFD & Listed Products, Saxo Bank

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