Worst Russian Drought in 50 Years Threatens Next Crop

Russia’s worst drought in at least 50 years, which already drove wheat prices to the biggest jump since 1973, shows no signs of easing and now threatens sowing plans for winter grains, the national weather center said.

Plantings scheduled to start in August in the northeastern areas of Russia’s European regions will be hampered by dry soil, the Hydrometeorological Center of Russia said in a statement. Winter wheat normally accounts for about 65 percent of Russian’s annual crop. The dry weather forecast for the central areas of those regions this month will extend the damage to crops including sugar beet, potatoes and corn, the center said.

“This is the first time in 50 years we’ve seen the combination of such a long period of abnormal heat and both atmospheric and soil drought,” the center said in its statement. Russia’s Grain Union has said the drought is the worst since record-keeping started 130 years ago.

Wheat jumped to a 22-month high in Chicago trading yesterday, extending a 38 percent advance in July that was the biggest since 1973. Futures may reach $8.50 a bushel, 23 percent more than yesterday’s closing price, as speculators “hunt what’s moving,” Peter McGuire, managing director at commodity trader CWA Global Markets Pty, said in an interview today.

Forecast Cut

The Russian Agriculture Ministry cut its 2010 grain harvest forecast to 70 million to 75 million metric tons, RIA Novosti reported, citing Alexander Belyaev, a deputy minister. The ministry’s previous forecast was for about 85 million tons, compared with last year’s output of 97.1 million tons. Russia was the world’s fourth-largest wheat exporter in the 12 months that ended in June, behind the U.S., the European Union and Canada, according to the U.S. Department of Agriculture.

Prices in Russia rose 19 percent last week, according to researcher SovEcon. That’s faster than at the peak of the global food crisis in 2008, when food riots erupted from Haiti to Egypt, according to the Grain Union. While the United Nations’ food-price index is 22 percent lower than its peak in June 2008, the gauge is 13 percent higher than a year ago.

Russian grain exports may fall as low as 11 million tons in the marketing year that started July 1 under a “worst-case scenario,” compared with 21.5 million tons last year, the country’s Grain Union said yesterday. The Russian government has no plans to restrict grain exports yet, RIA Novosti reported today, citing Belyaev.

‘Temporary Ban’

“The government should set a temporary ban on grain exports immediately,” said Nikolai Demyanov, deputy chief executive officer of International Grain Co., a unit of Glencore International AG. “It should set a ban rather than an export duty because a duty doesn’t qualify as force majeure for exporters,” he said by e-mail today, referring to a legal clause that allows a company to cancel contracts because of circumstances beyond its control.

Rising prices are encouraging farmers to stockpile grain, according to the Russian Grain Union, representing the country’s biggest producers and traders, and International Grain. Some are delaying sales and suspending supply contracts, according to Kirill Podolsky, CEO of Valars Group, Russia’s third-biggest trader.

“Defaults could be in the picture,” said Keith Flury, an analyst at F.O. Licht in Ratzeburg, Germany. “They’ve happened before, and they could happen again. Farmers are not in a rush to sell in the rising market.”

Volga River

Rainfall last month in central Russia and along the Volga River in the west of the country was 10 percent to 30 percent of the long-term average, with weather so hot that harvesters had to halt work because of overheating, according to the center. Twenty-seven crop-producing regions declared emergencies because of the drought. Wildfires are covering 172,372 hectares (666 square miles), with 648,556 hectares already consumed by fire, the Emergency Situations Ministry said today.

“We would need some really good rains to create solid moisture for crops to germinate in, or even for farmers to even bother to plant,” Flury said. “In the recent forecasts I’ve seen that nothing is expected soon, but we still have a couple weeks, and people are watching it.”

Russian President Dmitry Medvedev created United Grain Co. last year to export as much as 16 million tons of grain a year by 2015. It was given stakes in 31 silos and grain terminals by the government and plans to pursue export deals in Southeast Asia and Latin America. The company said today it signed agent agreements to bid in government tenders in Jordan and Iraq and plans to sign agreements in Egypt, Libya and Tunisia.

Wheat Declines

Wheat for September delivery fell 1.8 percent to $6.8075 a bushel in Chicago, as of 5:08 p.m. in London, dropping for the first time in six days. Wheat traded in Chicago is the third- best performer in the Standard & Poor’s GSCI Index of 24 commodities this year, behind lean hogs and Kansas wheat.

The jump in prices took many by surprise. A Bloomberg survey of 14 analysts last month gave a median estimate of $4.94 by the end of the year. Part of that pessimism was spurred by USDA forecasts for the second-highest wheat inventories since 2002. Stockpiles will reach 187 million tons by the end of the season in May 2011, the USDA estimates. That’s 62.6 million tons more than in 2008 and equal to three years of U.S. production.

“Speculators are entering the market,” McGuire of CWA said in a Bloomberg Television interview in Sydney. “You hunt what’s moving, and I think that’s going to continue in the next couple of weeks.”

Speculators including hedge funds increased their net-long position in Chicago wheat futures in the week ended July 27, according to U.S. Commodity Futures Trading Commission data. Net-long positions, or bets on higher prices, more than tripled to 7,212 contracts, the data show. The speculators had held a net-short position, or bets on lower prices, from the week ended June 23, 2009, through the week end July 20 this year.

To contact the reporter on this story: Maria Kolesnikova in Moscow at mkolesnikova@bloomberg.net

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