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Wheat Rally May Top $9 as Russia Export Ban Boosts U.S. Sales

Wheat prices may rally another 12 percent from a 23-month high as a Russian ban on grain exports boost demand for stockpiles from the U.S., said Bob Young, the chief economist at the American Farm Bureau Federation.

“This will rattle the markets for the next several months,” Young said yesterday by telephone from the Washington. “Most people thought Russia would use government inventories to complete export sales” rather than risk its reputation as a reliable supplier and lose market share, Young said.

Grain output in Russia, the world’s third-largest grower, was reduced by the country’s worst drought in half a century. The government yesterday announced a halt on outbound shipments from Aug. 15 until Dec. 31. Companies may cancel shipments of about 600,000 metric tons to Egypt, the world’s biggest buyer, because of the ban, said Kirill Podolsky, the chief executive officer of Valars Group, Russia’s third-largest grain trader.

Wheat for December delivery rose 59.75 cents, or 7.9 percent, to close at $8.1525 a bushel yesterday on the Chicago Board of Trade, after advancing by the CBOT’s 60-cent limit to $8.155, the highest level since August 2008. September futures rose the daily limit to $7.8575.

The price may jump another $1 over the next few weeks, the American Farm Bureau’s Young said. Wheat reached a record $13.495 in February 2008, part of a surge in prices that sparked food riots from Haiti to Egypt.

Tighter Supply

Cargill Inc., the largest U.S. agricultural company, said yesterday that trade barriers will only make supplies tighter.

“The U.S. wheat crop has been strong and world wheat stocks are higher than they were during the wheat price spikes in 2008,” Mark Klein, a company spokesman, said in an e-mailed statement. “As we saw at that time, the implementation of any trade barriers as a result of lower yields and higher prices exacerbated supply problems.”

Exports from the U.S., the world’s largest shipper, rose 35 percent in the first nine weeks of the marketing year to 9.27 million tons from 6.87 million a year earlier, the U.S. Department of Agriculture said yesterday in a weekly report.

The rally in prices probably won’t lead to the highs reached two years ago, the Farm Bureau’s Young said.

The USDA last month forecast a 50 percent jump in global stockpiles from a quarter-century low in 2008, and the department said July 9 that the U.S. crop will be bigger than originally anticipated, raising its estimate 7.2 percent to 60.3 million tons. Domestic stockpiles will total 29.8 million tons in the year that ends in May, 12 percent more than a year earlier. The USDA will update its forecast on Aug. 12.

Food Costs

Food costs advanced to records in 2008 as some exporters curbed shipments amid a shortage. 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.

“There is no reason to expect food riots this year,” Young said. “We have the supply. The U.S. has always stood by its contracts and delivered grain during periods of shortages.”

Global wheat production will drop 4 percent this year, mostly because the drought in Russia will reduce the country’s output by 21 percent, Informa Economics Inc. said yesterday in a note to clients.

The worldwide crop will fall to 651.7 million tons from 679 million a year earlier, the Memphis, Tennessee-based agricultural researcher said. Combined production in 12 states of the former Soviet Union, including Ukraine, will fall 20 percent to 91.6 million from 113.8 million, Informa said.

Shrinking Surplus

“There is still a cushion, but the surplus is shrinking,” said Richard Feltes, the director of commodity research for MF Global Holdings Ltd. in Chicago. “It’s not a crisis, but there is going to be greater urgency among buyers to increase forward purchases.”

Russia needs more grain to prevent an increase in food costs and the liquidation of livestock herds and poultry, Feltes said.

Prime Minister Vladimir Putin said yesterday that the ban is “appropriate” to contain domestic prices that gained 19 percent last week, after drought and record heat in central Russia and along the Volga River forced the government to declare a state of emergency in 28 crop-producing regions. He proposed that Kazakhstan and Belarus, Russia’s partners in a customs union, join the ban.

“There’s going to be some political gamesmanship going on behind closed doors,” after Putin asked its neighbors to join the embargo, Feltes said. “It would make sense for Russia to buy the grain from its neighbors” in exchange for maintaining good relations on sales of crude oil and natural gas, Feltes said.

To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.

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