Markets React to Russia’s Wheat Export Ban

Russia’s ban on exporting wheat as a measure to help the domestic market cope with the country’s ongoing draught has had an immediate effect, driving up wheat prices around the world. Putin announced the ban today, in an apparent sudden change of plan from last week, when Russia rejected taking such measures. The New York Times compares this ban to “other decisive actions” taken by Putin, namely, his sudden cancellation of Russia’s bid to join the WTO last year and his decisions to halt the natural gas supply to Europe on two occasions. More from the New York Times:

“We need to prevent a rise in domestic food prices, we need to preserve the number of cattle and build up reserves for next year,” [Putin] said in a meeting broadcast on television. “As the saying goes: reserves don’t make your pocket heavy.”

Large, multinational grain trading companies that operate in Russia had lobbied for the ban as a means to claim a legal exemption from futures contracts struck before the drought, when prices were far lower. A Russian subsidiary of Glencore, the Swiss-based commodities trading company that has close ties to the Russian government, pressed hard as the scope of the drought’s devastation became clear. This company, International Grain Company, is the largest wheat exporter in Russia.

Mr. Putin said that the government could consider extending the ban ifthe harvest yields less even than the current grim forecasts. TheRussian harvest is now projected to yield about 70 million tons ofgrain, according to the Russian Grain Union, a lobbying group forfarmers, about equal to the country’s internal demand including foranimal fodder of about 71 million tons per year.

The group was sharply critical of the decision. “First of all, you cancongratulate American farmers who are going to take the niche thatRussian farmers are leaving,” in global markets because of the ban,said Anton V. Shaparin, the spokesman He added that Russia’s reservescould cover the shortages from this year.

Update: The Wall Street Journal speculates about the possible role of the commodities supplier Glencore in Russia’s decision to ban wheat exports:

When Russia halted wheat exports two days after GlencoreInternational AG’s top executive in the country urged them to do so, itput the spotlight on the commodities trading firm long known for itsconnections and deep market intelligence.

The Switzerland-basedcompany quickly distanced itself from the comments, with a spokespersonsaying they “do not in any way reflect the views of Glencore.”

Butbased on its role in the market, Glencore and other commodities traderscould be suffering from rising wheat prices and could benefit fromRussia’s decision, which would allow it to void its money-losingcontracts.

Rising wheat prices hurt suppliers such as Glencore because theylikely had signed contracts to supply wheat at much lower prices. Sincethe beginning of July, wheat prices jumped nearly 70%, including an 8%rise on Thursday.

Dan Manternach, director of agriculturalservices at Doane Advisory Services in St. Louis, Mo. said that therising prices meant that Glencore and other suppliers, “would eithersell it too cheap or they might not be able to meet the obligations,”which would hurt companies’ reputation or even lead to lawsuits asbuyers demanded that their contracts be fulfilled, he said.

Agovernment-imposed ban on exports is considered as a “force majeure,”which effectively voids the contract and frees both parties fromliability in the event of circumstances beyond their control.