Much is to be learned from the consequences of the weather-induced collapse of grain crops in Russia this summer. For food manufacturers, particularly those that have wheat as an important raw material, the lesson may be simply the great pain caused by sharply escalating costs for grain-related ingredients. Having experienced only two years ago a similar skyrocketing, it seems a cruel fate to have that experience repeated so soon. For that reason, the fundamental lesson coming through is the often forgotten realization that Mother Nature can and does play havoc with whatever grand plans are made involving grain.
Besides the domestic food manufacturers caught flat-footed by record-setting cost upturns, think of the situation in Russia itself. It was only a little more than a year ago that President Dmitry Medvedev, confident of the future in the wake of two years of all grain production near 100 million tonnes, declared his country’s intention to overtake the United States as the leading supplier of wheat to world markets. To achieve that end, he announced investments of nearly $4 billion to modernize his country’s grain exporting infrastructure on top of the billions investors were committing to improving Russia’s farms.
How weird it is then that a little more than a year later Mr. Medvedev’s cohort in Moscow, Vladimir Putin, dramatically banned Russian grain exports starting August 15 and continuing at least through the end of 2010. Of course, the Putin announcement was meant to win the favor of consumers facing dramatic food cost increases as market prices reacted swiftly to this crop disaster. Three months without rain and unusually high temperatures devastated crops across the western part of the country. The most immediate damage was to wheat, but it is apparent that production of feed grains and hay also was curtailed.
For a country aspiring to lead grain exporting to ban exports, in effect cutting off supplies from major customers, reflects a cynicism about export markets that deserves analysis. Domestic food makers are well qualified to appreciate that irony. One may assume that Mr. Putin’s advisers assured him that stopping exports was essential to preventing food price inflation and that import customers may easily be won back by resuming price cutting. This view of a market governed only by price and not by quality or supply does not gibe with the United States experience many years ago of serious long-term market losses in reaction to an embargo on soybean exports to dampen inflation. The U.S. Congress passed laws to forbid such embargoes ever again.
Particularly disturbing about Russia’s action is the lack of sharp reaction from other countries. The immediate surge in prices should have been warning enough that this sort of move aimed at protecting domestic supplies is totally selfish. When a country that claims global leadership takes such action, it almost invites others to do the same.
The huge stake food manufacturers have is obvious. Not only does Russia’s export ban create severe problems, including soaring prices around the world, it distorts trading patterns in ways that are frightful for exporters and importers. If a user may no longer rely on grain from nations that gyrate like Russia between being aggressive sellers and non-shippers, supply assurances become an overriding need.
Trade negotiations involving grain historically have been aimed at opening markets to stimulate production where crops are grown most efficiently and where internal and export infrastructure best serve global needs. Much has been achieved, and the benefits are great. Suddenly, within a couple of years, the focus has shifted from gaining access to somehow assuring that exporting countries would continue exporting and fulfill supply commitments, regardless of crop shortfalls. This brings front and center the totally new issue of markets buffeted mainly by swings in exporter supplies rather than variations in imports. The latter moved markets for a long time, but something new has taken its place.