Filling the Wheat Gap After Russia's Export Duty

7 MINS READJan 22, 2015 | 10:15 GMT
A self-propelled combine harvester on a field near a village south of Moscow on Aug. 15, 2010.
A self-propelled combine harvester on a field near a village south of Moscow on Aug. 15, 2010.

Moscow plans to implement an export duty on Russian wheat Feb. 1. The measure, which is meant to ensure wheat supplies to the domestic market in light of the declining ruble, initially caused uncertainty in global markets. However, given other market forces, the impact of the Russian export duty is expected to be minimal. Other suppliers, primarily European, should be able to make up the deficit without substantial disruptions in supply as well as moderate prices. But should the disruption in supply be larger than expected or should prices rise substantially, it will be wheat importing countries in the Middle East and North Africa, many of them oil producers already hurting from the decline in oil prices, that could face problems.

The impact of low oil prices, Western sanctions and a general lack of market confidence culminated in the decline of the ruble in December 2014. The depreciation of the ruble saw increasing exports as well as increasing domestic consumer prices. Ensuring the country's grain supply, especially as Russian exporters continued to supply the more profitable foreign market, has become a priority. On Dec. 25, Moscow introduced an adjustment to the export custom tariff rates for wheat. Taking effect Feb. 1 and lasting through June 30, the duty will amount to 15 percent of the custom price, plus an additional flat rate of 7.5 euros (approximately $8.6), with the total no less than 35 euros per metric ton. 

While the declining ruble makes exports more attractive for Russian producers, the tariff will mitigate these benefits for producers, reducing the competitiveness of Russian wheat on the global market. In addition, with Russian wheat producers forced to sell on the domestic market instead of profiting from favorable export conditions, it could decrease the capital available to reinvest, harming future production for the 2015/2016 season.   

The implementation of the extra tariff will not surprise or shock the market, since speculation regarding possible restrictions on exports goes back several months. Furthermore, informal mechanisms, including increasing the time taken on quality monitoring, port and rail delays have reportedly been implemented to hinder grain exports, possibly providing an additional deterrent even after the tariff is in place. As one of the top five wheat exporters in the world, a shift in Russian exports does not go unnoticed by the market. Market prices initially increased when the duty was announced. The approximate export price of wheat in the European Union according to the International Grain Council approached a low of just over $200 (roughly 175 euros) per metric ton in September 2014, but neared $250 (roughly 217 euros) late in the fourth quarter of 2014 amid speculation regarding the Russian tariff. However, they later settled and even declined to $234 (roughly 202 euros) per metric ton Jan. 19. 

This tariff will mark the third time since 2007 that Russia has implemented wheat export controls or restrictions to protect the domestic market. In 2010, exports were banned after a severe drought. That ban did not bring food prices down in Russia, but did increase prices outside of Russia.

Abundance of Wheat

This round of Russian export controls, however, will not have the same impact on the global market. The initial spike in prices caused by speculation on the topic has already subsided. Furthermore, the U.N. Food and Agriculture Organization recently announced that the December 2014 food price index fell to a four-year low. Even when speculation about possible Russian export restrictions created the slight spike in wheat prices in the fourth quarter of 2014, prices remained lower than they were a year previously. The global market has an abundance of wheat, with numerous countries competing to fill the gap left by Russia. And because of poor weather, the quality of the European Union's largest wheat exporter, France, is lower than normal. The French crop will be sold as feed grain to countries — often non-traditional locations with higher quality standards — but also makes it more available for countries with lower quality standards, including Egypt. Buyers looking for higher quality wheat will replace French crops with those from countries like Germany and Poland.

The impact of the Russian export duty will be further mitigated by the strength of Russian exports up until now. According to the U.S. Department of Agriculture Foreign Agriculture Service, more than 80 percent of forecast Russian exports for the 2014/2015 season had already shipped by the end of 2014. The most recent World Agriculture Supply and Demand Estimates report from the USDA adjusted projections for Russian exports down by 2 million metric tons, roughly 10 percent of this season's total projected exports. In terms of volume, the decline in Russian exports that will need to be replaced for the 2014/2015 season will only be a small fraction of the estimated 159 million metric tons destined for export.

Still, there will need to be adjustments in the market that could see individual countries benefit from the decrease in Russian supplies. Countries that typically looked to Russia for wheat — Turkey, Iran and Egypt — will have to look elsewhere. European exporters, including France, Romania, Poland and Germany, have the geographic advantage of being closest to the largest demand centers in North Africa and the Middle East, making them a natural replacement for Russian wheat in these markets. Ukraine is perhaps the most natural replacement and will be able to take advantage as Russian exports decline. Although conflict continues in eastern Ukraine, wheat exports are not likely to be affected. India, Australia, Canada and Argentina will also fill in for smaller demand markets in Southeast Asia and Africa. At current prices, the U.S. crop will be less competitive as a replacement for Russian wheat.

While competing exporters will benefit, importers will have to make corresponding adjustments, deciding which country can most affordably meet their desired quality of grain. Some of the largest wheat importers, like Algeria and Egypt, have recently issued tenders for shipments from European suppliers. With the decline in quality of a portion of the French crop, adjustments were already being made independent of the Russian ban. Algeria, traditionally supplied by France, has shifted toward German and Polish supplies and purchased a large tender of 900,000 metric tons. The size of the tender is thought to have been in response to the Russian tariff, even though Russia is not a typical supplier of Algeria. 

Of Russia's main markets, Egypt is extremely vulnerable to supply disruptions and price increases because of its large food subsidies. However, Egypt expects to receive one last delivery from Russia (120,000 metric tons) in January, and issued the first tender of 2015 for 180,000 metric tons from France. The Egyptian Ministry of Supply and Internal Trade has stated that supplies are sufficient through April 2015 when the domestic harvest begins. In addition, there is speculation in Russian media that Moscow and Cairo are negotiating an exemption from the tariffs.

Behavioral Shifts

All of these factors — the abundance of wheat on the global market, low prices in comparison to recent years and the large amount of Russian wheat already exported — will minimize the impact of the Russian export tariff on the global market. Still, we have already seen behavioral shifts in the buying patterns of key wheat importers (Algeria) that are also oil producers and exporters. Wheat import bills are comparatively small portions of the national budget. For example, Algeria has a wheat import bill of approximately $2 billion (in 2013, $2.1 billion of wheat was imported), equating to roughly 2 percent of the national budget. Even with an expected deficit of roughly $50 billion (assuming oil prices hit under $40), the wheat import bill would only amount to 4 percent. Moreover, with low food prices compared to previous years, small shifts in prices due to supplier shifts will not place significant pressure on national budgets.

Still, Russia is one of the lowest cost producers of wheat and there is no guarantee that there will not be some level of price fluctuations on individual tenders as different suppliers step up. Even if these potential increases are small, low oil prices have already strained the budgets of oil-producing nations and we could see domestic grain prices increase in places like Iran, potentially resulting in social unrest. Adjustments in subsidies or prices become more likely if the Russian tariffs are extended into the 2015/2016 season. 

But in its current form, the curb on Russian exports will not have the same impact on the global market as the 2010 export ban did. Rather, any impact we see will be localized and smaller, with individual alternative exporters benefitting from increased export revenue. Importers may see small shifts in prices that could strain budgets and exacerbate stress caused by low oil prices. But even in these cases, because other market forces will counter the Russian action, the impact will remain minimal.

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