Russia’s New Strategic Industry

A decade ago, the public perception of the agriculture industry was one of subsidies, trade distortions and rigged markets. More recently, public awareness has focused on concerns over food security, price inflation and even shortages.

The demand factors are easily identifiable — population growth, urbanization, rising incomes, changing diets and fuel requirements. With the exception of biofuels, these factors combined present a picture of unrelenting demand for grains — gradual, paced and persistent.

Supply remains variable and volatile. The loss of 50 percent of the Australian winter wheat harvest during the drought in 2007 had a dramatic impact on wheat prices. Yet, Australia’s losses only accounted for some 3 percent of global wheat output in a normal year, while wheat prices rose by 30 percent between September and November. This was a clear indication that prices had become highly sensitive not to the factors driving demand, but to historically low inventories.

Inventories have halved in seven years. To an extent, lower inventories can be attributed to fewer distortions in the agriculture system as well as improved supply-chain management. But as some price distortions disappear, others appear. Export restrictions have been implemented in Australia, Russia, Ukraine, Argentina and Kazakhstan. Therefore, the price hike of wheat from $8 per bushel to more than $12 per bushel in the first two months of this year can be largely attributed to political decisions as grain-exporting countries seek to protect their own food supplies.

Ukraine’s decision to lift its export restrictions hopefully negates the possibility that these short-term panaceas might become permanent fixtures. Recent price declines that take the price of wheat back to $8 per bushel can be largely attributed not only to the possibility of a half-decent harvest, but also to the perception that the grain-exporting nations will remove trading restrictions as fast as they imposed them. … more>>