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© RIA Novosti. Egor Eryomov

Food crisis looms

by Natasha Doff at 30/07/2012 21:25

As the worst drought in over half a century ravages crops in the United States, all eyes are on Russia, the world’s second-biggest grain exporter, to prevent a food crisis similar to that seen in 2007-2008.

But if early forecasts are anything to go by, importers should look elsewhere for their desired bumper crop. Last week, west Siberia’s Altai and Orenburg joined a handful of regions in declaring states of emergency in some districts due to extreme hot and dry weather.

“It looks like the harvest will be lower than last year, although we won’t know for sure until all the harvests have been collected in late August,” Mikhail Krasnoperov, a consumer analyst at Troika Dialog investment bank, told The Moscow News. “The cold winter affected around 6 percent of the crop and now the drought in the south and Siberia is causing further problems.”

The southern Krasnodar region, one of the few to have completed its harvest, collected just 5 million tons of grain, about a third of last year’s total, according to the Agriculture Ministry’s website.

Now the Urals and west Siberian regions are also being hit, with temperatures in some places failing to dip lower than 30 degrees Celsius for over a month, sparking great swathes of wildfires.

While nowhere near as severe as the U.S. drought that has wiped out much of the country’s corn crop, Russia’s extreme hot weather caused the Agriculture Ministry to lower its forecast for grain to a minimum of 80 million tons earlier this month, 15 percent lower than last year.

On Monday, the Federal Metereorological and Environmental Monitoring Service reduced its forecast even lower, to 77 million to 80 million tons. The Agriculture Ministry is widely expected to follow suit, the Prime news agency reported.

Wheat has also been affected, with the International Grains Council downgrading its forecasts for Russia’s wheat harvest to 45 million tons last week, down from 49 million at the start of the month and some 11 million tons less than was gathered in last year’s harvest.

Prices rising

Primarily as a result of the U.S. drought, cereal prices have skyrocketed in the past month, causing many importing countries, including top wheat buyer Egypt, to hold off on purchases in the hope of good crops from elsewhere in the world.

Andrei Sizov, who heads the SovEcon agricultural consulting firm and sits on a newly formed governmental Food Security Commission, compared the situation to 2007-08, when droughts in grain-producing countries coupled with high oil prices to push up global food prices.

“The main driver for food prices at the moment is the U.S. market, but the global market is also watching Russia and how it will restrict its grain exports,” Sizov told The Moscow News.

SovEcon will release its forecast for this year’s harvest within the next few weeks, but Sizov said preliminarily that he does not expect it to exceed 80 million tons. Russia needs around 72 million tons of grain to satisfy its domestic needs, and generally exports anything left over.

Export ban feared

But for global markets a bigger fear than a lower-than-average harvest in Russia is that the country will impose export restrictions, like it did in 2010, when a drought and wildfires wiped out most of the crops in Central Russia.

Then major wheat importers that had relied on contracts from Russia were left in the cold, having received little warning of Russia’s plans. Eager to win back the trust of Russia’s customers, the authorities have staunchly denied rumors that they are planning similar tactics this year, claiming the situation is not that bad and that Russia will still be able to export up to 20 million tons.

“I think there is no need to impose any limits. The market will regulate itself,” head of Russia’s Grain Union, Arkady Zlochevsky, told Reuters last week.

However, investment bank Goldman Sachs described “a new Russian export ban” as the “biggest risk” to a forecast that wheat prices will underperform those of corn in a report released on July 16.

WTO restrictions

Imposing export restrictions may be trickier for Russia this time around due to the country’s entry to the World Trade Organization next month. The rules of the global trade body restrict the implementation of export duties, while export bans are severely frowned upon.

But SovEcon’s Sizov said that if the members of the Food Security Commission, chaired by Deputy Prime Minister Arkady Dvorkovich, decide that export restrictions are necessary when they next meet on Aug. 8, they will implement the limits despite WTO rules.

“If the government decides that Russia needs to restrict its exports, they will find measures to do that,” Sizov said. “It could say, for example, that it is a matter of food security. Ukraine has restricted its exports and it is a WTO member.”

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