Russian Wheat Export Quotas Elimination Unlikely to Ease Agriculture Commodity Price Inflation -Fitch

Fitch Ratings says that Russia's intention to eliminate export quotas for grain is a positive move towards restoring the supply and demand balance for global wheat stocks, as wheat is a critical input for packaged food companies. However, ongoing restrictions in Ukraine and challenging weather conditions in other key harvesting regions will likely keep world stocks of wheat tight as international wheat prices remain above their five-year average. Russia, the second-largest wheat exporter in 2009/2010, will let a grain-shipment ban expire on 1 July 2011. However, this move may not ease the global shortage caused by drought and flood damage to European and US crops. Export restrictions also remain in Ukraine. On 19 May 2011, the Ukrainian parliament passed a law, replacing export quotas by temporary export duties on certain agricultural products (including wheat, wheat blends and rye at 9% on the customs value, but not less than EUR17 per ton). The law prescribes that the export duties will be in force until 1 January 2012.

"Although Russia and Ukraine represented 22% of global wheat exports in 2008/2009, this proportion is expected to decline to 6% by the end of the current season," says Pablo Mazzini, Senior Director in Fitch's European Corporates team. "The removal of the ban in Russia does not necessarily mean there will be sufficient supply to offset losses in Europe and the US." Depending on weather conditions, Russia will likely export 10 million tons in the 12 months ending June 2012, up from four million tons in 2011, according to the USDA. Likewise, during the same time, the USDA expects Ukrainian wheat exports to grow to 8.5 million tons from 3.5 million tons. This is still below the range of 28 million-31 million tons exported by Russia and Ukraine combined per year in 2009 and 2010. To put this in context, wheat exports from the EU-27 and USA have averaged 45 million-51 million tons per year between 2008 and 2010 (35%-41% of global exports) so any reduction in exportable wheat from these regions will likely translate into tightened stocks and upward price pressure.

According to the International Grains Council, global wheat output is expected to hit 667.3 million tons in 2011-12 (versus 649.1 million tons in 2010-11), 4.9 million tons below the April outlook. The reduction in wheat output forecasts is largely driven by a drought in major European wheat producers (Germany and France) and the poor quality of the US produce. At the same time, global wheat consumption in 2011/2012 is expected to be boosted by the continuing rise in demand for wheat-based foods in developing markets, especially Asia, and by increased use for feed to replace high-priced corn. This is likely to translate into elevated wheat prices for the rest of 2011.