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Volatile wheat prices are as much a cause for alarm as are high prices


FEW rural pleasures match seeing a golden field of grain, rustling and ripe for reaping. But the harvest season in the northern hemisphere is being marked by turmoil on global wheat markets.

A big reason is to be found in one of the world’s largest wheat exporters, Russia. Hit by fires and drought which have wiped out a third of the grain crop, the authorities there have banned exports, first temporarily and now until next year’s harvest. As a result, wheat prices spiked: they have nearly doubled since the low point in June of $4.26 a bushel. That has prompted global jitters. When the UN’s Food and Agriculture Organisation (FAO) called a special meeting to discuss rising prices, headlines suggested that the world was facing a food crisis to rival that of 2007-08. Riots in Mozambique in recent days, perhaps prompted by spiralling food costs (see article), added more fodder to the fears.

Many poorer countries are fearful that rising food prices will spark more of the same: in the earlier crisis violent protests shook many countries including Egypt, Haiti, Côte d’Ivoire, Uzbekistan and Bolivia. To head this off Egypt, the world’s biggest importer of wheat, as well as Tunisia, Algeria and Jordan, have all reacted to the Russian ban by buying extra wheat on the spot market. It is likely that these and other countries have sought to secure supplies by buying wheat futures too, though the opacity of that market makes buyers’ identities unclear.

uch panicky behaviour amplifies the impact of the Russian export ban. But the effects of short-term jitters should ease soon. The crisis two years ago, by contrast, was the result of a more worrying structural shift: a slow build up of demand in developing countries where rising living standards fed the desire for more meat-based meals. This added to demand for cereals (a kilo of poultry requires about two kilos of grain, a kilo of beef much more). The result was a rise in prices over a much longer time and in many other commodities such as rice too. This year has brought a sudden spike, mainly in wheat. Prices now are still more than 40% below those record highs (see chart). They are barely higher than in January

Closer scrutiny reveals a sunnier picture in other respects too. Supplies are strong. The FAO estimates world wheat production this year at 646m tonnes, 5% down on 2009’s bumper crop but still the third-highest on record, thanks to excellent harvests in America and Canada. Australia is also set for a weighty crop, having successfully dealt with a threatened plague of locusts. Last year’s bonanza replenished stocks, which stood at a seven-year high at the beginning of the year. By 2011 these inventories will be run down to around 181m tonnes but this is still a lot more than the 144m tonnes of wheat stocks at the height of the food crisis.

Maximo Torero of the International Food Policy Research Institute, a think-tank, says that even with export bans in Ukraine and Kazakhstan (both under consideration, not least thanks to Russian pressure) supplies are still ample. And farmers should respond to the high prices by planting more wheat for next year. Oliver Walston, a Cambridgeshire farmer, says the jitters make life “difficult, exciting and depressing”. He regrets that he sold part of his harvest on forward contracts when prices were low. But farmers sitting on unsold stocks are in for a windfall.

Other factors should dampen prices, too. Livestock farmers are substituting cheaper feedstocks for wheat. The oil price is lower, cutting transport costs and demand for grain-based biofuels.

Admittedly, some stabilising factors from past decades have eroded. Increasing demand from developing countries has tightened the market, making disruptions such as Russia’s export ban more noticeable. Countries such as Russia and Ukraine used to be insignificant exporters: better farming there means now they supply some 30% of the world’s wheat. Other growers in the northern hemisphere have planted less. Abdolreza Abbassian of the FAO thinks that the variable weather in the region around the Black Sea makes it inherently less suited to cereal cultivation.


Puffed wheat

If volatility increases, it may prove a problem for farmers who have confusing signals about what crops to plant for the next year’s harvest. Climate change, with its promise of droughts and floods, also adds uncertainty. Recent floods in Pakistan, the world’s eighth-largest wheat producer, arrived after this year’s harvest but the damage wrought by the waters may yet affect next year’s crop.

During the previous food crisis several countries including Argentina and India as well as Russia reacted to the spiralling price of food crops with export bans, making the supply problem worse. Today’s lower prices and higher stocks should make that unlikely. But if other exporters do follow Russia’s example they may frighten importers into buying more wheat at whatever cost, ratcheting prices up even more.

Tilling the soil involves an early start. But farmers with time for some bedtime reading may find economics text books, with a chapter on game theory, as gripping as the seed catalogues that customarily lull them to sleep.