The Van Trump Report

Could Russia’s Wheat Interventions Backfire?

As the world continues to battle the coronavirus pandemic, food inflation has risen to its highest levels in over a decade. The United Nation’s Food and Agriculture Organization’s (FAO) gauge of food prices for December reached a six-year high, even as global grain supplies remain at comfortable levels. For many countries experiencing sharp food inflation, the issue is exacerbated by coronavirus-related impacts such as widespread unemployment and steep government revenue declines. Some governments are directly intervening to control domestic inflation but there are worries those efforts are just fanning the flames.

Russia in particular stands out with the country now planning new wheat export tariffs and grain quotas in an effort to drive down domestic food prices. Bread prices in Russia were up +20% in 2020 despite a near-record wheat harvest. Russian agency IKAR recently lowered its estimates for the country’s 2020-21 wheat exports by 1 million metric tons (mmt) to 37.5 mmt, citing the impact of the export duty. The USDA’s current estimate is 39 mmt, also 1 million lower than its previous estimate. That compares to exports of 34.49 mmt in 19/20 and 35.8 mmt in 18/19. The USDA estimates Russia will end the 20/21 crop year with wheat ending stocks of over 12 million metric tons, nearly double what they’ve been the last two marketing seasons (7.78 mmt in 18/19 and 7.23 mmt in 19/20).

The numbers clearly show that Russia is not facing a domestic wheat shortage and analysts doubt curbing exports will help curb the country’s food inflation. In fact, analysts say Russia itself is at least partially responsible for the wheat market’s moves higher as a result of the planned export tax and quotas. Russia is also contending with a very weak currency, with the rouble hit hard by low global oil prices as well as geopolitical concerns. That’s on top of the economic fallout from the coronavirus pandemic, including elevated unemployment and falling incomes. It’s the perfect cocktail for food inflation and one that hoarding is not likely to cure.

The recent price moves in wheat markets has some recalling the disastrous results of previous Russian interventions designed to curb rising food costs. In particular, 2007-08 during the global food crisis brought on by severe drought in major production countries. Russia aimed to reduce wheat exports to secure sufficient supplies. That market rally was driven by actual grain shortages, though.  

The USDA projects 20/21 global wheat ending stocks at a record 313 mmt, compared to the previous record of just over 300 mmt set in 2019-20. If you strip out China, which has been on a massive grain buying spree, global wheat ending stocks are estimated at around 154 mmt, also higher than last year at 148 mmt and 143 mmt in 18/19. Strip out Russia and 20/21 ending stocks are still around 142 mmt.

Keep in mind, Australia, a major competitor of Russian and other Black Sea region wheat, is expected to nearly double its production this marketing year, reaching +30 MMTs compared with 15.2 MMTs during 19/20, according to the USDA. Wheat exports from Australia are also expected to double in the 20/21 season to 20 mmt, which in turn is seen filling any supply gaps left by Russia reining in its available exports. (Sources: Bloomberg, S&PGlobal, USDA)

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