Russian Wheat Embargo Likely to Raise Global Food Costs
Business + Economy

Russian Wheat Embargo Likely to Raise Global Food Costs

It was a wild summer in the wheat and corn “pits” at the Chicago Mercantile Exchange— bad news for a global economy that had been counting on stable food prices to help it ease out of recession.

Prices started to rise in July as the full extent of a drought-induced Russian harvest disaster became known. Then, on Aug. 5, Russian President Vladimir Putin announced an embargo on grain exports and prices soared. Russia’s action, along with subpar harvests in Ukraine, Kazakhstan and Canada, left a significant hole in the world’s wheat market. The U.S. Department of Agriculture predicts Russia will export 500 million bushels less this year than in 2009.

The U.S. has had a run of good wheat crops and its stocks are sufficient to prevent shortages for the time being, according to USDA. In August, it predicted an increase of less than 1.5 percent in the Consumer Price Index for food in 2010. But the sudden spike in grain prices has begun to bite. Ethanol refineries, which buy about a third of the U.S. corn crop, felt the pinch as corn prices rose above $5 a bushel — up from $3.25 in early June — partly on concerns that the harvest will fall short of expectations.

USDA recently cut its projections for the 2010 U.S. corn crop — the world’s single largest crop — by 200 million bushels, a 1.5 percent decline. Going into the harvest, supplies of corn in storage are at their lowest levels in several years. Next year’s Russian wheat crop, now being planted, could suffer from continuing dry conditions across the Black Sea region.

“This is going to hit people hard in a world suffering from recession,” said Frank Orzechowski, senior commodity adviser for Catholic Relief Services, which distributes U.S. food aid abroad. He estimates higher prices will strain the government’s food aid budget, which pays for emergency deliveries to such destinations as sub-Sahara Africa and flood-ravaged Pakistan.

A Volatile Grain

Food prices rose 5 percent worldwide from July to August, according to the United Nations Food and Agriculture Organization. During recent food riots in Mozambique, 13 died and hundreds were injured before the government rescinded a 30 percent increase in bread prices.

The uncertainty in the grain markets highlights the inability of major food-producing nations to agree on ways to limit volatility caused by bad weather and the kind of unilateral action recently taken by Russia. The success of the global economy depends on smoothly functioning markets. But an analysis last year for the International Trade and Agricultural Policy Council made clear that markets in wheat and other food commodities have not always been working well.

The report noted that in early 2008, when the world experienced weather-related shortages of major staples, India, Vietnam, China and 11 other countries limited or banned rice exports. Fifteen countries, including Argentina, Kazakhstan, and briefly, Russia, capped or halted wheat exports. USDA economists estimated wheat prices increased 20 percent as a result.

U.S. consumers are uniquely vulnerable to the stop-and-start nature of the grain markets. When harvests fail, most major food producers temporarily block exports to keep ample supplies at home and cushion consumers and the livestock industry from shortages or high prices. But the United States keeps its “wheat window” open to outside buyers even when prices rise. That’s because the powerful U.S. farm bloc exerts enormous leverage over agricultural policy, so blocking exports is politically self-destructive.

Global trade rules in effect now prohibit export restrictions (other than duties or taxes) on most products. But they make a major exception for foodstuffs deemed necessary to “relieve critical shortages” — a term that exporting countries define as they see fit. Russia is not a member of the World Trade Organization, but this loophole would probably have allowed it to block shipments even if it were.

The Soviet Way

In Russia, the urban consumer is king and Russians officials defended their action as necessary to insulate them from shortages and high food prices. No country has disrupted grain markets over the years more dramatically than Russia — perpetrator of the infamous “great grain robbery,” when the Soviet Union secretly bought up a quarter of U.S. wheat stocks after a poor harvest in 1971.

It will take time for Russia to rebuild its reputation as a reliable supplier. Putin, analysts say, had few good options as he faced a 750 million bushel shortfall in Black Sea region wheat production. Other measures, such as culling cattle, hogs and poultry flocks that now gobble up 850 million bushels of wheat a year posed substantial political and economic risks. Even with the embargo, USDA estimates food prices will rise 15 percent in Russia over the next year. United Nations delegates met in Rome over the weekend to discuss the impact of Russian's grain cutoff on world prices, and an official from Russia's agriculture ministry said the goal was grain markets that are "stable and predictable for all participants," according to the Associated Press.

But Charlotte Hebebrand, chief executive of the International Food and Agricultural Trade Policy Council, said Putin should at least have considered alternatives short of a total embargo. Russia, she notes, had substantial wheat stocks going into the crisis and might have substituted more imported feed grains for domestic wheat now going to livestock. One factor in the Russian decision may have been the need to protect private grain companies and cooperatives facing losses on unhedged sales of Russian wheat to foreign buyers as grain prices rose.

Clayton Yeutter, who served as secretary of agriculture in the first Bush administration, calls the embargo “singularly unhelpful” in a period of economic uncertainty.

More openness and cooperation between the handful of big food producers — the United States, European Union, Russia, India, China, Argentina, Brazil and a few others — has been elusive. Russia didn’t advise the United States before its Aug. 5 action, according to sources. China doesn’t publish estimates of its wheat stocks, in effect treating the information as a state secret.

Even as prices rise, China and India are sitting on very large wheat stocks — a reflection of policies heavily tilted toward protecting domestic consumers. India’s surplus stocks are twice the government’s desired level and China’s amount to 43 percent of its total yearly grain production, according to USDA estimates. China has discouraged exports since 2008 and imported some wheat this year. Indian exports are negligible because the government has been supporting the price of wheat paid to farmers at above the world price.

Were China and India to announce their readiness to release some of these stocks if grain supplies deteriorate further, that could help stabilize prices.