The moratorium will last from Aug. 15th to December 31st and will affect already-signed contracts, according to Bloomberg news. The news sent wheat futures soaring, for December delivery - the most active traded contract - added 60 cents (7.9%) to close at $8.15 a bushel on the Chicago Board of Trade yesterday. This marked the highest close for a most active contract since August 2008. In Asian electronic trading Friday morning, September wheat futures were up as much as 7% a bushel.
The Wall Street Journal says some estimates show that contract agreements involving Russian wheat previously allocated for export are now cancelled. In the middle of all this is international trading house Glencore, the world’s largest commodities trader, which may have pressured the Russian parliament in enacting the ban as the firm worried about fulfilling contracts amid rising prices and scarce supplies. The ban, now in place, grants Glencore the right to declare “force majeure”, a clause that allows cancellation of current deals because of reasons outside their control affecting up to 1 million metric tons of the grain.
Russia, the 3rd largest grain exporter, has reignited fears that the situation will worsen as governments might begin holding supplies – in turn, countries already facing supply shortages will rush to secure import shipment contracts. Rising costs will affect farmers in need of feeding livestock, as well as food companies.
Not surprisingly, U.S. grain merchants saw healthy gains in Thursday’s trade led by Archer Daniels Midland (ADM 30.25, +1.64, +5.73%) and Bunge (BG 54.48, +2.87, +5.56%) while decliners where led by cereal makers General Mills (GIS 33.85, -0.77, -2.22%), Kellogg (K 49.87, -0.89, -1.75%), and Ralcorp (RAH 56.11, -2.27, -3.89%). Rising wheat and food commodities prices affect packaged-food producers because of the way they hedge their ingredient costs as much as six months in advance – consequently, future profits will diminish if prices continue to increase.
Since May, food commodities futures have climbed in the U.S – wheat is up 53%, oats 44%, coffee 24% and corn is up 13%. Leading to increased costs to consumers as J.M. Smucker Co. (Folgers, Dunkin’ Donuts, Millstone) has already increased retail prices by 9%, to give one example. Packaged-food companies must now decide to hedge the recent spike in prices or wait and hope that commodities prices will pare their gains.
Globally the wheat supply situation doesn’t appear so dire, several top wheat-exporting countries have forecast bumper harvests and the US is faced with its largest stockpile of wheat in two decades, with some fearing deflation more than inflation. Martin Hennecke, associate director at independent financial advisory firm Tyche Group in Hong Kong, disagrees, he believes that what we are seeing now is “not just a one-off thing”. Hennecke said that “while a short-term reversal is possible, we are in the beginning of an inflationary global environment. And agro-commodities are coming up now from an extremely low historical base”.
Whether or not price decreases will occur remains to be seen. The next 2-3 weeks of weather in Russia will play an important role as farmers will begin planting their winter crop soon. If there is not enough moisture and the wheat is unable to grow, expect commodities prices to continue their ascent. Another important factor is the global economy’s reaction to the drought as governments may begin buying and hoarding in panic reminiscent of the food crises of 2007/2008. The U.S., the world’s largest wheat exporter, stands to be the primary beneficiary in Eastern markets like India, the world’s largest grain importer, which is heavily dependent on Russian import – as India is already in the market for U.S. wheat.
Written by Jonathan Granby and Alex Rodriguez, DailyFX Research Team
If you wish to contact the authors with questions or comments email jgranby@fxcm.com or arodriguez@fxcm.com
If you wish to discuss this or any other topic feel free to visit our Forum Page.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.
