Russian drought means every breadbasket region on Earth has been hit with crop failure in 2012, wheat prices set to soar

Siberian farmers can barely remember when they saw a wheat harvest so small. The last crop failure on this scale was in the early 1960s, when Nikita Khrushchev led what was the Soviet Union.

Back then, the shortage in one of the world’s top wheat growing regions roiled global grain markets, forcing Moscow to use its gold reserves to buy wheat from the US, its Cold War arch rival.

Today’s crop failure, which follows an unusually dry and hot summer, has sent global wheat prices soaring – to a four-year high yesterday – threatening higher food prices around the world.

Siberia is not the only problem. Wheat production in almost every other breadbasket region – Ukraine, Australia, Argentina and the US – is in trouble because of bad weather.

As a result, global wheat supply will fall in the 2012-13 season to 661m tonnes, well below consumption of 688m tonnes, according to the UN’s Food and Agriculture Organisation.

“The market, particularly for milling wheat, is very tight,” says a Geneva-based senior commodities trader, echoing a widely held view among dealers.

The shortage, which is becoming more evident as the harvest of spring wheat finishes in the northern hemisphere and farmers start harvesting their winter wheat in the southern hemisphere, is pushing up wheat prices only months after the cost of corn and soyabeans soared on the back of a drought in the US farming belt.

In Paris, milling wheat rose yesterday to a four-year peak, hitting €279.25 a tonne, up 40 per cent since January.

The European benchmark is near its all-time high of €295 set during the 2007-08 food crisis.

The price of feed wheat in London, an important reference in Europe, yesterday jumped to a record high of £221.75 a tonne, up 44 per cent from January.

Abdolreza Abbassian, senior grain economist at the FAO in Rome, warns the outlook for wheat is “deteriorating” rapidly as weather-related supply problems mount. “The potential for further price rises is there,” he says.

Wheat prices in Chicago, another important benchmark, are also up significantly, but remain well below record levels because of a better harvest in the US.

The rise in wheat prices is more worrying than the increase for corn and soyabeans earlier this year after the US drought because the crop is more important for global food security.

On the demand side, traders believe that demand for the grain will increase this season because ranchers will substitute expensive corn and soyameal for wheat to fatten their herds as much as possible. “The demand for feed wheat is going through the roof,” says a Sydney-based agribusiness executive.

On the supply side, the crop in the former Soviet Union, which over the past decade has become the source of incremental supply, has been thin due to a drought, heatwave and forest fires. The region produced roughly 114m tonnes of wheat in 2010-11, but this season the harvest has dropped 33 per cent to 77m tonnes, the lowest since 2002-03.

Pierre-Henri Dietz, agricultural analyst at JPMorgan in Singapore, says that importing countries are shifting their buying from Russia and Ukraine, where the exportable surplus has been almost wiped out, to the EU.

“From December 2012 through June 2013, Russia and Ukraine will probably only export 1.7m tonnes of wheat collectively, relative to 11.6m tonnes last year,” he says. The shift, noticeable in the import tenders issued by Egypt, the world’s largest wheat buyer, is putting upward pressure on European wheat prices.

The shortage in the former Soviet Union would be worrying enough on its own, but the problem is that crops are lower than expected in many other key regions, creating a global shortage.

The EU, for example, has harvested 131m tonnes this season, down from 137m tonnes in the previous one. Argentina and Australia, where harvesting is about to start, are set to bring in 34.5m tonnes of wheat, down from 45m tonnes.

The combination of strong demand and weak supply has forced an unusually large drawdown of stocks. Inventories are likely to drop 26m tonnes this season, the third-largest annual fall since 1980. The FAO estimates that global wheat inventories, measured as the ratio of stocks to consumption, will drop in the current 2012-13 season to 24 per cent, the second lowest in 30 years.

Against the backdrop of tightening supplies, market attention is shifting to the conditions of the 2013-14 crop, which will be harvested from next June. Early indications are not good because of dry conditions in much of the US, providing more upward momentum for prices.

Not for nothing did Lenin call grain the “currency of currencies”.

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