Russia Blocks Wheat Exports As Recession Likelihood Grows
While crude oil's nosedive has gotten most all of the attention in the last few weeks in terms of global factors influencing the U.S. grain markets, there's another sector that could move to the front of traders' minds in the near future, especially for the wheat trade.
Russia's economy is bleeding, so much so that the nation's currency, the Ruble, has lost half its value in the last year, a good chunk of that coming recently (10% of which came in one day earlier this week). Earlier this week, interest rates were hiked by almost 7% in an effort to stem the currency's devaluation. It's hit the nation's grain sector hard and now has the nation implementing export restrictions to ensure enough supply of grain -- namely wheat -- is retained for domestic purposes, reports show.
It's an unfolding situation that's tightly linked to the world crude oil market's dive; oil accounts for half of the Russian government's revenue, meaning the recent oil price movement -- largely blamed on OPEC's failure to adjust its members' production levels and increasing U.S. production in the Bakken Formation area of the northern Plains -- has kicked slight economic growth to contraction, says Ian Bremmer, president of the Eurasia Group, a global political risk research and consulting firm. And, that contraction is only going to worsen in the coming year.
"Russia's economy has been slowing for some time, and is now poised to fall into recession. In early December, Russia's economy ministry was forced to revise its estimate of 1.2% growth for 2015 down to a 0.8% contraction," Bremmer says. "Since then, oil -- which makes up 50% of government revenue -- has continued to slide, falling below $60 this week. Russia's central bank warns of a contraction of 4.7% in 2015 if oil prices stay at that level on average."
On Tuesday, the Russian government restricted grain export certificates to a few nations, leaving exports unaffected to Egypt, Turkey and Armenia, reports show, though Veterinary and Phytosanitary Surveillance Service (VPSS) officials deny it's happened yet. Regardless of whether it's been mandated yet, analysts say it's inevitable and though the nation still has an estimated 30 million metric tons of grain available to the export market before key domestic stocks are impacted, it's a sign that the economic contraction won't likely go away soon. And, that kind of demand restriction could have long-lasting implications for the nation's farmers, says Iurii Mykhailov, Agriculture.com correspondent and editor-in-chief of Agribusiness-Ukraine magazine in Kiev, Ukraine.
"I think that the possible ban on the grain export will be introduced because of the sharply increased refinancing rate by the Russian central bank. This means the sharp increase in the interest rate (maybe up to 25% to 30% per annum) so there well will arise big problems for the growers next spring as they will be unable to buy inputs such as seeds, fuel, fertilizers, pesticides, etc., in the necessary volumes," Mykhailov says of the announcement Tuesday. "So growers either will have to decrease the planting area or to decrease the volumes of inputs per hectare. Either way this means the decrease of the crop."
The implications of recession unfolding in Russia will be magnified by a federal government that's unpredictable in its actions at best, Mykhailov says. Continued restrictive economic policy to reverse the economic downturn could have the opposite effect.
"Russian economists start to talk about the collapse meaning it is to late to do anything; regardless of the measures taken, the situation will go from bad to worse," he says. "The Moscow authorities are absolutely unpredictable. There are proposals in Moscow to ban the possession of hard currency by the population in order to provide the hard currency influx to banks. The authorities may also introduce the mandatory 100% selling of the export income in hard currency (now the requirement is 50%). Also the authorities may cancel the ban on the import food though this again requires the spending of the hard currencies. There are a lot of possible decisions."
And, don't think U.S. farmers aren't watching the situation closely.
"Grain commodities are a hedge against the value of the ruble but may be cashed in on before Russia restricts exports. Of course this may trigger a form of Russian export restriction to feed their skinny chickens after blocking imports from the northern hemisphere," says Agriculture.com Marketing Talk advisor and Pacific Northwest wheat farmer Palouser. "And even Brazil will want proper payment for meat. Doesn't take much to feed the oligarchs but the rest of Russia isn't going to take this lying down in my opinion."
But, in the broader context of the world wheat trade, don't look for a monster jump in prices just yet, adds market analyst Dan Hueber, author of the Hueber Report at the Center for Agriculture in Sycamore, Illinois. The wheat world's low on potentially bullish news right now, making the Russian situation the main theme driving wheat bulls moving forward.
"There are no outstanding weather threats around the world at this time. So realistically, outside of the concerns surrounding the economic situation in Russia, I see little to suggest we can continue to push this advance much further," he says. "I believe it is time for producers to be looking into adding both old- and new-crop sales."
But right now, Mykhailov says anything can happen in the nation that's teetering on economic collapse both financially and geopolitically.
"One must not exclude the possibility of coup d'etat, riots and revolution," he adds.