Dry weather that has slashed world grain crops this year has taken a particularly heavy toll in Russia, where wheat production has fallen by almost one third. Russian flour prices are already more than twice as high as a year ago and are driving a rise in the price of bread.
A severe drought in eastern Europe and central Asia accounted for most of the decline in world grain production, down 5.5 per cent this year to 661m tonnes, according to the United Nations Food and Agriculture Organization.
In Russia, wheat production fell by an estimated 30.6 per cent to 39m tonnes in 2012 from 56.2m tonnes in 2011, the FAO said in its latest Food Outlook report. That’s even less than in 2010 when the Russian government imposed a blanket ban on grain exports after a record-breaking drought and heatwave devastated the country’s crops.
Other CIS countries that export grain from the Black Sea have suffered bad harvests this year. Wheat production has fallen by 33.5 per cent to 15.5m tonnes in Ukraine and by 52.4 per cent to 10.8m tonnes in Kazakhstan.
As Russian farmers gather the last of this year’s crops, independent analysts in Moscow are even more pessimistic than the FAO about the prospects for the 2012 harvest.
SovEcon, a Russian agricultural consultancy, estimates that grain production will total 38m tonnes this year, 3m tonnes less than in drought-stricken 2010.
And Dmitry Rylko, director of the Moscow-based Institute for Agricultural Market Studies, says Russia will be lucky if wheat production reaches 38m tonnes this year.
Traders fret that Russia will impose a ban on grain exports, although officials have ruled out export restrictions either this year or in the years ahead. That’s good news, says Andrey Sizov Jnr, managing director of SovEcon. The 2010 ban had a bad affect on Russia, discouraging much-needed investment in agriculture.
However, Russia, traditionally the world’s third biggest wheat exporter, will have no choice but to reduce grain exports in the coming months. Wheat exports are expected to fall to about 9.5m tonnes in the 2012-2013 crop year from a record 20m to 21m tonnes in the previous year, says Rylko.
In a sign that domestic grain supplies are tightening, the Russian government has begun releasing stocks in a bid to contain rising prices.
Russia’s millers union warned this week that the country could face grain shortages by early 2013 and urged the government to ease conditions for imports of wheat from Kazakhstan and rye from Germany next spring if supplies run short.
Rylko is less worried about domestic grain shortages saying a good Russian corn harvest this year would help save the day. Corn can be substituted for wheat as an animal feed to conserve supplies for human consumption.
Rising domestic grain prices are a blow to livestock producers already braced for stiffer competition from foreign meat suppliers as Russia moves to comply with World Trade Organisation regulations that came into force following its entry to the world trading club in August.
Russian consumers have already seen bread prices rise by about 7 per cent this year to reflect the rising cost of flour. However, wheat accounts for only about one fifth of the cost of bread so the impact of price increases should not be severe.
Rising living standards and a more varied range of foods available have reduced the importance of bread in many Russians’ diet, says Rylko. “Bread is not as sacred as it used to be, whatever politicians say. There should be no need for hysteria.”
Although the bad harvest was a setback, high prices are helping compensate Russian farmers for their losses, says Sizov. Farmers are planting more winter wheat than before and investing in agricultural technology. “We might see a bigger winter wheat crop next year. I look at this positively.”
High temperatures scorch Balkans economies, FT
Russia opens door to grain export limits, FT
Russia hopes for WTO boost, FT
Traders weigh Russian grain restrictions, FT Commodities Note