Price spike

As Russia continues to suffer through its worst drought in 130 years, officials said Tuesday that the extreme heat and wildfires had by the end of July scorched grain crops on 10 million hectares (24.7 million acres), an area roughly the size of Portugal.

Expectations that Russia will slash exports, in addition to low yields expected in the equally drought-stricken Ukraine and Kazakhstan and a low harvest in Canada, have led to a spike in global wheat prices and could, down the line, result in an increase in the cost of bread worldwide, especially in the Middle East, Africa and parts of Asia.

"Wheat prices have seen the largest one-month jump in more than three decades on the back of a severe drought in Russia, prompting warnings by the food industry of rising prices for flour-related products," analysts at Barclays Capital said in a note.

"There are fears that Russia, Ukraine and Kazakhstan's export production could drop by as much as 27 percent for 2010 and 2011," said Michael Hewson, an analyst at financial derivatives dealer CMC Markets. He added that the drought and wildfires in Russia had "prompted speculative buying" in the wheat market.

Russia's Agriculture Ministry on Tuesday cut its 2010 grain crop forecast to 70-75 million tons, down from a previous forecast of just under 85 million tons. The Russian Grain Union was also less than optimistic, dropping its projection by about 10 million to 72-78 million tons.

According to some analysts, the world's number three wheat exporter may harvest less than 70 million tons in 2010, which could halve grain exports to 12 million tons. In 2009, Russia harvested a healthy 97 million tons and exported 21.4 million.

Exporters risk defaulting

Russia's International Grain Company on Tuesday went even further, saying that the 2010 crop could fall to as little as 65 million tons, adding that if the government doesn't impose an outright ban on grain exports for about a month from September, wheat exports could fall to 5-8 million tons. Exporters also risk defaulting on shipments of up to 1 million tons.

In May and June, Black Sea feed wheat was going for around $190-$200 (144-151 euros) a ton, including cost and freight. That price has now soared to as much as $260.

Agricultural analysts from SovEcon told the Reuters news agency on Monday that traders were having trouble finding grain to ship, as farmers become unwilling to sell at previously agreed prices.

"It appears that traders who had actively signed supply contracts at the start of the season are now honoring them at a loss or with a minimal margin," said Andrei Sizov Jr., SovEcon's executive director.

On Tuesday, traders in Singapore said exporters had delayed up to 200,000 tons of Black Sea wheat shipments to Asia. Deliveries originally scheduled for July had been pushed back to August and September. The United Grain Company, Russia's state grain trader, on Monday denied defaulting on a 60,000-ton shipment to Egypt, one of the world's leading importers of wheat.

Russia insisted Tuesday it did not plan to curb exports and tighten the global supply, fears of which sent wheat prices in the US to a two-year high on Monday.

"At present [export restrictions] will not be introduced," Deputy Agriculture Minister Alexander Belyayev told the RIA Novosti news agency. "The government takes such decisions, but as of today there is no need for that.

"Exports are very easy to lose and very hard to win," he added. "We will try to balance things and preserve our market as much as possible."

No end in sight

Meanwhile, states of emergencies due to the drought and wildfires have been declared in 27 regions in central and southern Russia, up from 23 last week.

The country's Hydrometeorological Center said Tuesday that it expected temperatures of 36-42 degrees Celsius (96.8-107.6 Fahrenheit) to continue until at least Sunday.

The drought, which has ravaged the wheat harvest in a region stretching from Romania to Siberia, has also put sowing for next year's crop at risk.

Author: Martin Kuebler (AFP/AP/Reuters)
Editor: Nancy Isenson