Nepal is a food deficit country so it is vulnerable to fluctuations in global supply-demand of food. The case in point was the sugar shortage last year. This year it my be food grains if the drought in Eastern Europe causes a sharp fall in global supply of wheat. Weather woes spark fears for wheat
FT, 2-Aug-10
By Javier Blas in London
For veteran wheat traders, the current rally has a strong feeling of déjà vu.
Back in 1972, the then Soviet Union suffered a catastrophic drought that left the country badly short of wheat. Moscow plunged into the world market to cover the shortfall, buying almost all the available surpluses in the US.
The purchases, which later became known as the “Great Grain Robbery” as Washington was unaware for weeks of its Cold War rival’s buying spree, triggered food price hikes worldwide.
In the ensuing four decades the landscape seems all too familiar.
The worst drought since records began more than a century ago is torching the wheat fields of Russia, Ukraine and Kazakhstan, cutting the production outlook for the three countries.
In contrast to the “Great Grain Robbery”, the countries are today large exporters, but the shortfall is hitting global wheat supplies, which is having exactly the same impact as the buying of years ago: pushing up prices.
European wheat prices jumped on Monday to a two-year high above €200 a tonne, after a 50 per cent rally since the end of June, fuelled by the drought. In Paris, Liffe November milling wheat hit an intraday high of €211 a tonne, up 8.0 per cent on the day.
“There are no sellers on the market, everyone is buying today,” says Fabien Fouillard, a derivatives broker at Plantureux in Paris.
European wheat prices have only traded higher during the 2007-08 food crisis, when the benchmark briefly hit an all-time high of €300 a tonne.
In Chicago, CBOT September wheat prices rose to a 22-month high of $7.11 a bushel, up nearly 7.5 per cent on the day. In July, CBOT wheat prices surged by 42 per cent, the biggest monthly increase for the Chicago benchmark since 1959.
Traders, analysts and food industry executives fear prices could rise further as they continue to downgrade the size of Russia’s wheat crop due to persistent bad weather. The latest tentative estimates put the country crop at 45-50m tonnes, the lowest in five years, and potentially below annual consumption of 47m tonnes.
Alexander Bos, agricultural commodities analyst at Macquarie in London, says the market perception of Russia’s grain situation has gone “from bad to worse” over the past few weeks.
“We are losing a significant amount of production in the Black Sea region and there is potential for even higher prices over the next few weeks.”
Russia has been gripped by a heatwave in the past five weeks and the fields have not enjoyed rainfall for even longer. Meteorologists say there is little hope of respite with temperatures forecast to remain abnormally high until the middle of August.
Analysts also expect lower output in Ukraine and Kazakhstan. The former Soviet Union countries last year produced 20.9m and 17m tonnes of wheat, respectively.
In addition, wheat production in Canada, one of the world’s largest exporters, is set to fall sharply because heavy rains during the planting season forced farmers to leave a significant number of acres unplanted.
The Canadian Wheat Board, the marketing agent for Western Canada’s farmers, last week cut its forecast for the 2010-11 crop to 18.5m tonnes, down 36 per cent from last season’s 28.8m tonnes.
Allen Oberg, CWB chairman, says the rains have created a dire situation. “Farmers are resilient, but when you cannot even get seed into the ground, it’s devastating.”
The global shortfall in wheat production is reviving memories of the 2007-08 global food crisis, which saw the price of agricultural commodities from corn to rice surge to record highs and food riots in countries from Haiti to Bangladesh. The crisis also pushed the number of chronically hungry people globally above the 1bn mark for the first time.
There are notable differences with the current situation, however.
On the demand side, consumption growth is weaker due to the general macroeconomic situation, which is damping demand from the animal feeding industry. On the supply side, wheat inventories are much ampler after very good crops over the past two years.
This combination means prices are unlikely to surge to the all-time highs of 2007-08 or trigger the panic of the “Great Grain Robbery” of 1972-73.
Even so, the current rally is more than enough to revive old memories.
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