Russia 110308 Basic Political Developments

Wheat Prices

Russian policies may mean no reversal in the 89 percent rally that began in June after drought and flooding from Canada to Russia ruined crops. The surge contributed to what the United Nations says were record-high global food prices last month. The S&P GSCI Index of 24 commodities rose 47 percent since June, the MSCI World Index of equities climbed 28 percent and Treasuries returned 0.8 percent, a Bank of America Merrill Lynch index shows.

Wheat will average $8.98 a bushel in the next quarter, 11 percent more than the $8.09 traded by 4:35 p.m. in London, Barclays estimates. Societe Generale SA, the second most- accurate forecaster tracked by Bloomberg in 2010, is predicting $9.10, the highest quarterly average in more than three years.

Ukrainian Curbs

Ukraine imposed grain export quotas last year and India banned shipments of lentils, onions and edible oils. China and Japan are selling from state food stockpiles. Egypt, Iraq, Bangladesh and Saudi Arabia tendered for grains.

Cyclones and flooding damaged crops in Australia this year and drought is threatening wheat in northern China. Costs may keep rising in coming months, with only rice keeping the world from a repeat of the previous crisis, the UN said March 3. More than 60 food riots occurred worldwide from 2007 to 2009, the U.S. State Department estimates.

Russian farmers are already behind after planting 12 percent less winter wheat, a crop that normally accounts for 66 percent of the annual total, according to estimates of the International Grains Council, whose membership exceeds 50 countries. The country’s grain stockpiles will probably drop to 5.4 million tons by June 30, 75 percent less than a year earlier, the IGC estimates. Global inventory of wheat will decline 10 percent to 177.8 million tons, according to the USDA.

Spring plantings could be bigger if the government provides loans to farmers, according to Pavel Skurikhin, president of the Moscow-based Grain Producers’ Union, which represents about 3,000 companies. Prime Minister Vladimir Putin said March 2 the government gave farmers another 1 billion rubles ($35.5 million) to buy seeds and the same amount for fertilizers. Spring grain plantings in Russia usually start by April and the harvests are usually completed in October.

Growing Conditions

“The early indications are that the crop is going to be more or less normal,” said Abdolreza Abbassian, a senior economist at the UN’s Food and Agriculture Organization in Rome. “At this time last year we expected the record for Russia, and look what happened. So it still has to be seen in the context of assuming normal weather during the growing season.”

The surge in wheat prices may slow as demand weakens. North African and Middle Eastern nations accelerated grain purchases to boost stockpiles and curb domestic prices as unrest spread.

Grain Shipments

Grain shipments from the French port of Rouen, Europe’s biggest cereal hub, to Algeria were the highest in more than six months in the week to March 2, to fill contracts concluded in past months, port data show. Egypt, the largest wheat importer, is “running on fear” and will likely buy less in coming months, said Mehdi Chaouky, a London-based analyst at Diapason Commodities Management SA, which has about $8.5 billion invested in commodities.

Relief may also come from outside Russia. Combined global production of wheat, soybeans and corn will be 1.81 billion tons in 2011-2012, 16 million tons more than demand, Societe Generale estimates. That compares with a 40 million-ton shortfall in the current season. The bank is predicting higher prices in every quarter this year.

While Russian wheat plantings are forecast to drop, production will rise 25 percent to 52 million tons, from last year, when about 37 percent of the crop was wiped out by drought, according to the median in the Bloomberg survey. Excluding 2010, this year’s harvest would be the smallest since 2007.

Predicted Drop

Production gains also disguise a predicted drop in yields. Russia’s most efficient farms will probably reap 3 tons a hectare (2.47 acres), 25 percent less than before the drought, said Mikhail Orlov, the founder of Moscow-based Ambika Group, which advises planters and agricultural investors. Yields will drop as farmers use less fertilizer, he said.

Government officials will consider “the necessary measures to restrain prices” for fertilizers, Putin said March 2.

Some farmers already pledged their land and equipment as collateral for loans last year after production declined in 2009-10, Orlov said. They may leave land fallow if no government loans are available by the spring plantings, he said.

“We have survived, but we are not ready for the spring planting,” Alexey Sedov, a farmer from the south-central Saratov region, told Putin at an agricultural meeting in the central city of Tambov on March 2. “Seeds are a sore spot, especially since we under-planted winter grains, so there is a big pressure on the spring sowing.”

U.S. farmers, the biggest exporters, will increase combined winter- and spring-wheat acreage by 6.3 percent to 57 million acres, the USDA said Feb. 14. It is scheduled to issue wheat harvest estimates March 10.

Export Ban

Some Russian farmers may switch to sunflowers and soybeans, said Alexander Korbut, vice president of Russia’s Grain Union. The Moscow-based group represents about 1,000 producers and traders.

With parliamentary elections this year and a presidential vote in 2012, the Russian government may make fighting inflation a higher priority than allowing farmers to obtain international prices, said Jenia Ustinova, an associate in Washington at Eurasia Group, a New York-based consulting company.

Russian consumer prices will rise 9 percent this year, compared with almost 6.9 percent in 2010, according to the median estimate in a Bloomberg survey of 12 economists. That’s almost five times the anticipated pace in the U.S. and more than four times the predicted gain in the euro region.