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Fires in Russia, Wheat Production, and Volatile Markets: Reasons to Panic?

Recent events in Russia, one of the largest suppliers of wheat in the world, have raised concern about the current and future price of wheat and wheat-based products. This article briefly examines the issue and determines if there is in fact cause for serious alarm.

Summary of Facts

In Russia, one of the worst droughts in decades has already destroyed 20 percent of the country’s wheat crop, and there are fears that more fields will be lost due to recent wildfires in the western part of the country. Considering that Russia accounts for roughly 8 percent of the world’s wheat production, the current loss is equivalent to a 1.6-percent decrease in the global wheat supply.

Because of the drought, some specialists and grain unions expect Russia’s wheat exports to decrease between 30 and 40 percent this year, relative to 2009. Since Russia exported 21 million metric tons (mt) of wheat last year, this decrease is equivalent to 6–8 million mt.

On August 3, 2010, The Financial Times reported that traders at Glencore, the world’s largest commodity trader, asked Moscow to impose an export ban on grain to allow companies to renegotiate their contracts (Blas and Gorst 2010). Press reports indicate that the temporary ban on Russian grain exports will take effect from August 15 until December 31.

Recent reports also point toward a powerful rally in wheat prices, which began during the second week of June. Some specialists maintain that the fastest wheat-price increase in decades is currently taking place. According to official statistics from the Food and Agriculture Organization of the United Nations (FAOSTAT), spot prices for wheat increased by more than 24 percent in July. On August 2, 2010, September Chicago Board of Trade (CBOT) wheat contracts rose for the fifth straight trading session—by 5.6 percent; on August 4, they rose by 6.6 percent, which is the highest increase since September 2008. Current futures prices are above $US 7 per bushel, also for the first time since September 2008.

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