By Ariana Eunjung Cha and Janine Zacharia
Washington Post Foreign Service
Friday, August 6, 2010; A01
Russia announced Thursday that it will ban all grain exports for the rest of the year, sending wheat prices soaring to a two-year high and raising the possibility of inflated food prices that could throw an already fitful global economy recovery off track.
A severe drought and wildfires have destroyed one-fifth of Russia's crop and forced the country to draw from emergency reserves.
In announcing the ban at a cabinet meeting in Moscow, Prime Minister Vladimir Putin said that Russia, one of the world's largest wheat exporters, needs to "prevent a rise in domestic food prices." He said he would decide after this year's harvest whether to extend the ban, which covers exports from Aug. 15 to Dec. 31.
Internationally, wheat prices have increased nearly 50 percent since June, fueling worries about a repeat of the food crisis in 2008 that triggered riots from Bangladesh to Haiti to Mozambique. Wheat prices in the United States are less likely to remain high, experts said, and a bumper crop could put American farmers in a position to benefit from the low supplies elsewhere.
Prices of other crops, including barley, rice and corn, also rose sharply after Russia's announcement.
In an era of free trade, export bans by countries are usually considered a last-resort measure to protect national interests. Indonesia, where whole forests have been leveled by wood processors, banned the export of raw logs. India is considering a ban on exports of iron ore to secure its mineral wealth for its fast-growing economy.
In 2007 and 2008, a number of countries, including Russia, restricted the export of grain as prices began to skyrocket.
While commodities analysts emphasized that there is no reason to fear another global wheat shortage, governments and companies worldwide are preparing for the worst.
In Egypt -- one of the biggest importers of wheat and a nation that experienced deadly violence in bread lines two years ago -- the government assured the public that it has a four-month supply of wheat and urged Russia to honor contracts it signed before the ban. In Europe, the United Kingdom's Premier Foods and Switzerland's two largest food retailers warned consumers that they may increase prices of products that contain wheat, from crackers to beer.
The Food and Agriculture Organization of the United Nations said this week that although the food-price index is 13 percent higher than it was a year ago, it is still 22 percent lower than its peak, in June 2008. "Fears of a new global food crisis are not justified at this point," the FAO said in a report.
Grain harvests around the world have been devastated by unusual weather this year.
The countryside in western Russia, suffering from the nation's hottest summer since recording began 130 years ago, is now battling wildfires that have engulfed 196,000 hectares (about 484 acres) and are continuing to spread.
Heavy rain destroyed much of Canada's wheat crop, and the country is forecasting a 35 percent drop in production. In China, the world's most populous nation, the worst flooding in more than a decade is predicted to cut rice production by 5 to 7 percent. China produces about one-third of the world's rice.
Dax Wedemeyer, a broker-analyst with U.S. Commodities in West Des Moines, Iowa, said that if forecasts for bumper-crop harvests in the United States and Australia turn out to be true, the impact from the Russian ban could be minimized. But he said any additional complication could pose major challenges for developing countries that depend on imports.
"I'm very uneasy about these supplies," Wedemeyer said.
But Maximo Torero, a researcher at the International Food Policy Research Institute in Washington, said his calculations show that there is a sufficient buffer in the global wheat supply and that the high prices are the result of panic buying, perhaps by importers from the Middle East and Africa who depend heavily on Russian farms.
"It shows how much the grain markets have become linked to the financial markets," Torero said.
Russian wheat makes up about 11 percent of global exports, but as of June there was an "abundance" of wheat inventories elsewhere that was more than enough to make up for the shortfall, Torero said. The United States alone stores more than 26 million metric tons of wheat -- three times the expected decrease in Russian exports.
The United States is one of the only corners of the world that should not be adversely affected by the Russian ban.
The U.S. Agriculture Department is forecasting a surplus of about 1 billion bushels, and the shortage in the rest of the world means a larger profit margin for the industry this season.
As a result, Shawn McCambridge of the Prudential Bache commodities firm in Chicago said he does not think that the recent rise in wheat prices will lead to significant increases in U.S. consumer prices, as it did when commodities spiked in 2008. Back then, fuel costs were also skyrocketing, and the double whammy really hurt shoppers, he said.
Moreover, McCambridge said, that the Russian ban may be a boon to U.S. farmers. In recent years, American wheat farmers increased production, but low-priced wheat from the Black Sea region ate into the U.S. share of the international grain market.
"It will be able to shift some of that export business back to the U.S. exporters at a time that we really need to increase demand," McCambridge said.
In trading on the Chicago Board of Trade on Thursday, the price of wheat for December delivery jumped to 57.25 cents a bushel. That was the highest since August 2008 but still significantly below the record of $13.50 in February 2008.
Zacharia reported from Jerusalem. Correspondents Sudarsan Raghavan in Nairobi and Mandi Mourad in Cairo and staff writer Ylan Q. Mui in Washington contributed to this report.