Russian wheat export ban threatens higher inflation and food riots

Economics Editor,Sean O'Grady
Sunday 23 October 2011 03:41

The world faces an inflationary time bomb as shortages of food threaten to push prices to fresh all-time highs.

A variety of freakish weather conditions across the world has sent the price of staples including wheat, pork, rice, orange juice, coffee, cocoa and tea to fresh highs in recent weeks. Yesterday's decision by the Russian government to ban the export of wheat to protect home consumers saw grain prices jump 8 per cent on the day, on what was already a two-year high. Meanwhile, the burgeoning demand for foodstuffs and raw material growth in the resurgent economies of China and India has also driven oil, copper and other industrial commodities higher.

Taken together it suggests that Western nations will be hit by a sharp inflationary spike next year, as the price of bread, beer, petrol and many other everyday items climbs higher again. Given the sluggish prospects for growth in Western economies it threatens a return to "stagflation" – stagnant growth coupled with high inflation. The Governor of the Bank of England, Mervyn King, has warned that inflation will stay above the official target of 2 per cent for "much of next year". At least for a time it could spike much higher as global commodity prices surge once again, exacerbating the VAT rise in January.

In developing and emerging economies, however, the challenge is in some cases a matter of life and death. In these countries food represents a much higher proportion of household budgets than in the West, and they are less able to withstand such shocks. Freakish weather, as in Pakistan now, can also lead to immediate demands for extra food supplies.

Fears that the population may simply not have enough to eat because of the drought in Russia, the Ukraine and Kazakhstan, one of the world's great "bread baskets", prompted the Russian Prime Minister, Vladimir Putin, to sign a decree yesterday prohibiting the export of wheat, barley, rye, corn and flour until the end of the year. "We must prevent domestic prices from rising, preserve cattle herds and build up reserves," he said. Mr Putin added that ending shipments would be "appropriate" to restrain domestic food prices, which rose 19 per cent last week alone.

Conversely, flood conditions in Canada, another major grower, have also reduced supply. World wheat prices are up 92 per cent since early June. Worse could follow: the Russian weather has also threatened the next sowing season, and has harmed other crops such as sugar beet, potatoes and corn.

However, the United Nations Food and Agriculture Organisation (FAO) has tried to calm fears of a repeat of the food riots seen from Mexico to Indonesia in 2008. "Fears of a new global food crisis are not justified at this point," it said. "This rapid increase in prices is prompting concerns about a repeat of the crisis of 2007/08. But after two consecutive years of record crops, world inventories have been replenished sufficiently to cover the current anticipated production shortfall.

"On the other hand, should the drought in the Russian Federation continue, it could pose problems for winter plantings in that country with potentially serious implications for world wheat supplies in 2011/12."

Wheat is just the latest crop to be affected by unusual weather. Coffee has been hit by excessive rain in Brazil and Colombia, just as rice production was reduced in India last year because of a late monsoon in India; pork and other meat prices have been driven higher by rising grain feedstock prices; and the Floridian orange juice harvest is down because of an unseasonal frost.

Politics and speculators have also played a part; the unrest in Kenya in 2009 sparked a rise in tea prices, while the activities of some hedge funds have been blamed for wild fluctuations in coffee and cocoa. Earlier this month it emerged that hedge fund manager Anthony Ward had cornered a large slice of the cocoa market by buying 240,000 tonnes of beans – a £650m investment sufficient to make 5 billion chocolate bars. Mr Ward's hedge fund Armajaro, has refused to confirm or deny these reports. Last month the price of coffee leapt when hedge funds landed in a "short squeeze".

High and volatile food prices seem certain to lead to more calls for "financial food speculation" to be curbed, though conclusive evidence that they do much more than amplify existing trends is scanty. The EU's internal market commissioner, Michel Barnier, declared last year: "Speculation in basic foodstuffs is a scandal when there are a billion starving people in the world. We must ensure markets contribute to sustainable growth. I am fighting for a fairer world and I want Europe to take the lead on that."

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