Wheat futures spiked by almost 5% yesterday after comments from the Ukrainian deputy agriculture minister on Facebook of “export limits for wheat” were misinterpreted as an imminent export ban.
Countries such as Russia and Ukraine introduced export bans on agricultural commodities during the period 2008–12, a decision designed to protect domestic consumers from higher food prices. However, these export restrictions may have exacerbated concerns about global agricultural supplies and in turn contributed to higher global food prices.
However, the Ukrainian agriculture ministry typically agrees an annual export quota with the grain trade, giving guideline figures on the volumes that are permitted to be exported each marketing year. In fact this will be the seventh year that Ukraine has set a non-binding quota on wheat exports.
Restrictions on agricultural commodity exports are legal under global commerce rules, even for those countries (such as Ukraine) that are bound by their membership to the World Trade Organisation (WTO). The General Agreement on Tariffs and Trade, the core treaty of the WTO, has banned “prohibitions or restrictions” on exports of commodities since 1947. However, it permits them when “temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential” to the exporting country. The treaty also fails to explain what it means by “temporarily” or what a “critical shortage” is, leaving countries ample room for manoeuvre.
Yesterday’s event shows how much the wheat market is on edge over higher prices and the risk of shortages. As I explained in a previous post with global grain demand so strong, agricultural markets have come to rely on near-perfect global growing conditions to support record-breaking crops.
If weather trends turn for the worse any resulting degradation in yields will have a huge impact on global inventories. Any adverse weather conditions in any of the world’s growing basins negatively impacting yields could cause global grain inventories to swing from record surpluses to huge deficits in a very short time with huge upward pressure on grain prices. With a heat wave hitting many of the worlds wheat growing regions any restriction on supplies that might force prices even higher (wheat futures are already up one third this year) is jumped on by the market.
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