Wheat Shortage May Mean Higher Grocery Bills

Aug. 6, 2010— -- A summer of relentless heat in Russia could mean higher grocery bills for the rest of the world come autumn.

Wheat prices spiked Thursday after Russian Prime Minister Vladimir Putin issued a ban on exports as that country confronts grain shortages amidst drought and withering crops, a situation made worse by out-of-control wildfires.

The global ripple effect – other countries possibly hoarding food, grain supplies dwindling, commodities prices rising – is likely to impact a range of food companies and livestock farmers.

Meanwhile, in India, the government there is stockpiling wheat so aggressively that much of it is sitting outdoors under tarps and starting to rot, the A.P. reported Friday.

"A worldwide scramble for wheat supply is on," said Phil Flynn, commodities analyst at Chicago-based PFG Best. "Higher costs for wheat and grains may hurt the economic recovery because a few months down the road it means higher costs for everything from bread to cereal to meat as farmers reduce their herds."

Wheat-price-linked futures, which jumped 8 percent Thursday amidst reports of the Russian export ban, have been steadily rising and are now at a two-year high. In only two months the price of wheat has nearly doubled to around $8 a bushel.

"The implementation of any trade barriers [can] exacerbate supply problems," said Mark Klein, a spokesman for Minneapolis-based Cargill, one of the world's largest food producers and distributors. "Such trade barriers further distort wheat markets by making it harder for supplies to move from areas of surplus to areas of deficit, and by preventing price signals from reaching wheat farmers."

Russia exported more 17.5 million metric tons of wheat last year and is the fourth largest exporter of wheat behind the U.S., Europe and Canada. Its ban will commence Aug. 15 and last until the end of the year.

Pointing to similar grain shortages and food price hikes in 2008 that sparked riots in some parts of the world, industry members stressed how this time around the situation may not be as severe.

Food Costs Could be Noticeably Higher by Year End

"From a global perspective, the U.S. wheat crop has been strong and world wheat stockpiles are higher than they were during the wheat price spikes in 2008," Cargill's Klein said.

"Although the projected harvests in North America appear strong, and global stockpiles are significant, there's no doubt that higher prices are here to stay for the foreseeable future," said Andrew Barber, who runs Waverly Advisors, an asset management and market research firm based in Corning, New York. "But we are not looking at the kind of food riots seen in 2008," he said.

Most large food producers hedge prices in the near term, Barber said, so higher grocery bills will not be felt for a few months or by year's end.

Barber added that flooding in China is also going to cause rice shortages: "This could be just as important a story to the world's food supply as the wheat shortages."

Sharply rising wheat prices – despite large stockpiles throughout the rest of the world – owe to lingering uncertainty about continued problems with next year's Russian crop and fears of hoarding among other countries, analysts explained.

There more bad news. Locust swarms are threatening Australia's crop and heavy rains are putting Canada's crop at risk as well. But the wheat price spike also reflects the growing power of financial speculators, said Tim Jones, policy officer at the London-based World Development Movement, a nonprofit organization working toward putting an end to excessive food price speculation.

"Prices are climbing steeply for wheat, despite there being plenty of wheat available," Jones said. "Whilst drought has reduced Russia's wheat harvest, there is a bumper yield in the U.S. and global wheat stockpiles are high. We fear that excessive speculation on wheat by bankers has led to the price soaring. Speculators have bought unusually high numbers of wheat contracts in recent weeks."

That said, some large U.K. producers of bread have said that prices may go up, Jones said.

"This will leave people out of pocket in the U.K. and the U.S.," Jones added. "But in the developing world, it may lead to starvation."

"Get your Wheaties today," PFG Best's Flynn warned, "because they may be more expensive tomorrow."