Wheat prices took a pause on Friday from their surge after Russia imposed a ban on grain exports on Thursday, which triggered a panic in commodities markets and sent wheat prices to their highest level since the 2007-08 global food crisis.
The rally opens the door to a sharp increase in the price of everyday staples such as bread and flour.
The market was frenetic on Friday amid talk of contract defaults following the ban, and as food companies and importing nations scrambled to find alternative supplies. In early trading, wheat prices in Chicago surged as much as 6 per cent, but later prices went down 3 per cent amid a general sell-off in commodities.
Vladimir Putin, Russian prime minister, on Thursday announced the ban on all the country’s grain exports, effective within 10 days, after a severe drought devastated crops and wildfires spread across the country.
The move, which caught traders and food producers by surprise, pushed the price of wheat to its highest level in two years and evoked memories of the last time the Soviet Union suffered a catastrophic crop failure in 1972.
“There is full-blown panic in the European grain market,” a senior trader said.
On Thursday, European wheat prices rose more than 12 per cent to hit a peak of €236 a tonne on record trading volumes. US wheat futures jumped by their daily limit to $7.85 a bushel and are up more than 80 per cent since mid-June, the fastest rally in nearly 40 years.
On Friday, US wheat futures traded 2.8 per cent down to $7.65 a bushel, after hitting in early trading a two-year high of $8.41 a bushel.
“Bottom line – no sign of a top as yet,” said Richard Feltes at brokerage MF Global in Chicago. “We think wheat end users are still short and at risk for further price gains,” he added, echoing a view widely held among grain traders.
Another trader said that prices could continue to move higher next week amid panic buying, but that from a supply and demand point of view, prices probably have already risen enough. “That does not mean the rally is going to stop,” he added.
The rally is triggering fears that food price inflation could take off and that the world could even suffer a repeat of the 2008 food crisis should the big shortfall in wheat output persist. “Soaring grain prices have brought food inflation back to centre stage,” said Joachim Fels of Morgan Stanley in London.
Prices of other crops including barley, corn and rapeseed also jumped sharply.
Shares in some of the world’s largest food companies tumbled on fears they would struggle to pass on all the increased costs of buying wheat to millions of households already suffering the effects of the financial crisis. However, several companies have already said they plan immediate price rises on goods, such as bread and biscuits.
Unilever, the British consumer goods group, dropped 5.2 per cent, while General Mills, one of the world’s largest food companies, was 2.5 per cent lower. Nestlé fell 2.1 per cent. But the shares of trading companies such as ADM and Bunge surged on the prospect of more businesses exporting wheat from the US.
On Thursday, Mr Putin told a cabinet meeting: “I think it would be expedient to introduce a temporary ban on export grains and other agricultural goods.”
“We cannot allow an increase in domestic prices and we need to maintain the number of cattle.”
The ban would take effect from August 15 and last until December 31, a spokesman for Mr Putin said.
The worst drought in more than a century in the Black Sea region has led to widespread alarm. Forecasts for the Russian grain crop have been falling daily, with the agriculture ministry’s most recent projection at 70m-75m tonnes, down from 85m tonnes a fortnight ago.
Last year, the harvest was 100m tonnes.
Traders at Glencore, the world’s largest commodity trading company, on Tuesday warned the crop could fall to about 65m tonnes.
Cargill, the world’s biggest trader of agricultural commodities, criticised Moscow’s move. “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,” it said.
Arkady Zlochevsky, president of the Grain Union lobby group, said that the swift imposition of the ban risked undermining Russia’s reputation as a reliable supplier.
Mr Putin said the government would disburse Rbs35bn ($1.17bn) in subsidies to agricultural producers. He added that Russia would use its grain stores for distribution without auction to regions in need