Agflation fears grow as Russia halts grain exports

Section:

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, August 5, 2010

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/792913...

Russian premier Vladimir Putin has ordered a halt to all exports of wheat and other grains from August 15, raising the stakes dramatically in the crisis over wheat supplies.

"This is very serious," said Abdolreza Abbassanian, chief grain economist at the UN Food and Agriculture Organization. "It's a desperate situation because it has caught everybody off guard. We're not facing the situation of two years ago but there is a risk of destabilising panic."

The shortage may trigger a bout of "agflation," posing a quandary for central banks. Professor Charles Goodhart from the London School of Economics fears that rising food prices will add 0.5 percent to Britain's sticky inflation, already testing market tolerance.

... Dispatch continues below ...



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Wheat prices surged by their maximum daily limit of 60 cents to $7.86 a bushel on Chicago's exchange, with knock-on effects across the nexus of tradable grains.

Mr Putin said it was a temporary ban on wheat, corn, barley, rye, and grain products until the end of the year due to "abnormally high temperatures," adding that Russia needs to cap domestic food prices and build its own reserves.

Wheat has surged 69 percent since June but is still far below its $13 peak in 2008. The spike guarantees a sharp rise in bread prices this Autumn. Premier Foods said a loaf of bread may go up to 10p.

Mr Putin pressured Kazhakstan and Belarus to impose similar curbs as the worst drought in a century threatens to drag into late August. "It is unprecedented to ask neighbouring countries to do the same," said Mr Abbassanian.

Ukraine insists that exports are safe, but analysts fear it may follow suit. The Black Sea belt and Eurasia's Steppes produce a quarter of global wheat exports. The saving grace is that stocks are 187 million tonnes against 124 million in 2008.

Corn futures rose 5.8 percent, oats rose 4 percent, and rice rose 2.8 percent on the news. "Food markets are linked. This is going to put further strains on corn. Animal feed prices will go up, affecting meat," said Mr Abbassanian.

Commodity spikes can be inflationary but also deflationary, depending on context. Central banks in Europe and the US misjudged events two years ago, mistaking oil and food rises for the start of a 1970s price spiral. In fact, it drained demand from economies already tipping into recession.

"This is more deflationary than it looks," said Albert Edwards from Societe Generale. "The risk is that central banks will hold off from further easing that I think is needed, increasing the risk of a hard landing."

Mr Putin acted after meteorological experts issued further drought warnings, raising fears that the ground would be too hard to seed the winter crop next month. The loss of both crops would force Russia to withdraw from export markets for two years. Rabobank expects Russia's wheat output this year to fall from 58 million to 45 million tonnes.

Kirill Podolsky, head of Russia's grain group Valars, told Bloomberg that the ban had created havoc. "We have ships lined up for grain and no idea what to do. This will be a catastrophe for farmers and exporters alike," he said.

The move will be welcomed by grain firms that fixed supply contracts in advance and are now caught short. Some may declare "force majeure," suspending contracts for reasons beyond their control.

The FAO said low-income countries such as Egypt or Pakistan that depend on imports will be worst hit. The concern is that some countries will take emergency action to secure vital supplies.

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