World wheat consumption set a new record in 2013/14 of 713 MMT, the sixth new high in the last 10 years. The only way to meet this demand is for more of the world’s surplus wheat to move from its origin to deficit destinations. In fact, world wheat trade has increased some 50 MMT per year in the past 10 years. USW has estimated that in the next 35 years, by the year 2050, global wheat trade may need to reach or even exceed 225 MMT in order to supply a growing population with improving economic opportunity.
Countries that depend on imports to provide food security to their people need reliability in that supply. The last thing they need is market disruptions and their inevitable price swings. Sadly, the government of Russia has once again fallen back into a troublesome pattern of disruption that has consistently imposed unnecessary economic hardships both on Russian farmers and on many of the world’s most vulnerable buyers and consumers.
In December, the Russian government announced that beginning Feb. 1, 2015, all wheat exports would be levied an export tax at the rate of 15 percent plus €7.50 per MT (with a minimum tax imposition of €35.00). Together with coincidental concern over the Russian winter weather, the announcement of these new taxes helped push global wheat prices rapidly through a 30 percent increase. At today's export values of approximately $260 FOB, the tax calculation would imply an export tax of nearly $48 per MT added to the price of any wheat exported from Russia.
The inescapable fact is that Russia and other countries in the Black Sea region have become critical wheat suppliers to many logistically close markets in the Mediterranean, Middle East, and East Africa. Lower prices (partly reflecting lower quality), small size vessels in some cases and increasing export capacity have drawn nearby wheat importers to the Black Sea. Normally, this would be a positive story of how increasing regional supplies are meeting increased world demand.
However, looking back through the headlines of recent history, a darker story emerges. Five times in just the past seven years, the Russian government has restricted or threatened to limit access to exportable wheat supplies, sometimes even cutting across existing contracts. Each time, the markets responded with a correspondingly sharp price rally (see chart).
These are not just isolated, sensational headlines. Governmental intervention has unexpected, real-life consequences. While repeated interference by the Russian government has not been the only stimulant, intervention greatly magnified temporary supply shortages into full-blown price and supply crises. The result, of course, has forced buyers to seek alternative supplies at artificially high prices.
Yet, drawn in by cheaper prices that Russian exporters must offer to rebuild demand, importers have been relatively forgiving, opting to quickly return each time to Black Sea supply sources after the export restrictions were lifted. However, Egyptian Minister of Supply, Khaled Hanafi may have revealed a crack in that tolerance on Dec. 29 in public remarks about the latest Russian export taxes.
"Egypt has alternatives and would accept offers based upon dependability as well as cost, quality and timing," he said.
Food security is clearly among the top priorities for Minister Hanafi and he must have reliable supply partners to deliver it. We take the Minister's words seriously and believe that he expressed a sense of frustration shared by many importers.
The U.S. government long ago learned from experience that disrupting export grain trade only brings logistical problems and potential economic catastrophe for every segment of the market, including farmers. Fortunately, we said ‘no more.’ Short of a massive, and highly unlikely, crop failure, by law the only way to block U.S. grain exports is through a presidential declaration of national emergency. Importantly, a national emergency does NOT include short-term, fundamental rises in wheat prices. Further, export taxes are expressly forbidden by the U.S. Constitution.
Russia need not be an island unto itself, continually throwing up walls to exporters and importers as the means of managing domestic supply and prices — stifling growth of its own agricultural sector in the process. Someday, Russia may benefit from embracing open markets and free trade rather than continually rushing in and out of the marketplace on a political whim. For example, opening trade would ensure that, even in times of a particularly short wheat crop, supplies would freely move into Russia from surrounding countries or from surplus areas abroad and quickly balance and quell any concern about local food supplies. Russia’s government should be in a position of confidence to be able to assure its citizens that no Russian is going to suffer in the face of rising wheat prices without imposing that suffering on other dependent nations. A failure to accept this reality may well doom Russia’s export-oriented agricultural economy and many dependent importing nations to another decade of this continual feast or famine turmoil.
In the meantime, the U.S. wheat industry offers reassurance in the fact that our doors are open for business 365 days per year. In our collective efforts to offer and efficiently supply the widest range of the highest quality wheat in the world, we are able to live up to our claim as the world's most reliable supplier.
By Vince Peterson, US Wheat Associates, Vice President of Overseas Operations
Source: US Wheat Associates