(cont. in
Russia. August. 2010. Part 2: Wildfires. )
It seems that August continues to be most intense month in Russia's political life. The heat wave followed by massive wildfires in the central Russia and Siberia add to the long list of events that took place in Russia's most contemporary history: August Putsch (August 19-21, 1991), Financial crisis (August 17, 1998), Kursk Submarine Accident (August 12, 2000), Russian-Gerogian Conflict (August 8, 2008), Sayano-Shushenskaya hydro accident (August 17, 2009).
This summer the heat wave in Russia reached absolute record temperatures.
There were 21st temperature record registered in Moscow this summer. Two records were broken in June, ten in July and ten in the first half of August. Low rainfall and hot temperatures damaged 32 percent of the country’s grain crops, said Russian Agriculture Minister, Yelena Skrynnik on July 23. This satellite vegetation index image, made from data collected by the Moderate Resolution Imaging Spectroradiometer (MODIS) on NASA’s Terra satellite, shows the damage done to plants throughout southern Russia.Hot and dry summer resulted in massive drought, which led the government ban its grain export.
Agricultural analysts are estimating that grain output will suffer a 40% loss this year, cutting previous forecasts of 70-75 million tons to 59.5-63.5 million.Prime Minister Vladimir Putin suggested the ban could remain in place until well into 2011. Mr Putin said that this year's crop could be as low as 60 million tonnes, well below last year's 97 million, and Russia needs almost 80 million tonnes to cover domestic consumption, so even with this ban, there might be a shortfall of nearly 20 million tonnes for the Russian consumer.President Medvedev's verified Twitter account (
KremlinRussia) posted a link to presidential
memo, which assigned responsibilities to different cabinet members. The two biggest concerns so far are (1) monitoring internal dynamics of food prices (and if necessary intervention) and (2) mitigating the possibility of grain reserve imbalance between different regions of Russia.
It is too early to say if Russia's neighbors may follow suit.
A senior Ukrainian Farm Ministry official said this year's wheat harvest could fall to about 17 million tons, below the consensus in a Reuters poll last week of 18.1 million and down from 20.9 million in 2009. However, the decision to ban Ukraine's export has not been made.
Analysts already expect the London-listed Russia's deep-water
Novorossiysk commercial sea port on the Black Sea may lose up to $40 million over a ban on grain exports imposed by the Russian government.
Novorossiysk port also serves as a transportation hub for Russia's landlock neighbors.
Now let us zoom out from Russia's map and look at big picture. The total drop of Russia grain production (plus its closest neighbors) is going to be 20-25 million tons lower that previous forecasts. Fortunately such amount will not significant impact world's grain output. Take a look at data provided by UN's Food and Agriculture Organization. World grain production fluctuates between 670-685 million tons per year, in which 25 million ton or even 30 million tons shortage makes less than half of a percent of global food production.

Moreover, the reaction of other food commodities suggest us that there is no upward reaction to the expected drop of grain output in Eurasia.

Then the question is
What's All The Fuss About? And here I can give you two different explanations. First, the ban is Russia's internally driven policy directed toward domestic audience. Unfortunately, its domestic media machine works so efficiently that it spins its internal message into global media.
This leads us to the second and more important point: Russia's domestic policy is unintentionally helping international food commodity traders. I am concluding this post with SPIEGEL magazine article
Speculators Rediscover Agricultural Commodities. The article was published on July 29, 2010 before the Russian ban on grain, nevertheless it captures the trend:
Driving the price explosion was the growing use of agricultural commodities to produce biofuel. But 2008 was also the year in which, for the first time, the public realized that grain merchants were no longer the only ones trading on the exchanges (in their case, by buying grain futures to hedge against poor harvests), but that the major players in the financial markets had discovered the lucrative trade in agricultural commodities.Last year, Goldman Sachs earned $5 billion in profits with commodities alone. Other major players include the Bank of America, Citigroup, Deutsche Bank, Morgan Stanley and J.P. Morgan.They are no longer merely offering classic funds, but are now trading in financial instruments that function similarly to the subprime mortgage loans on the now-collapsed US real estate market. With these instruments, known as collateralized commodities obligations, or CCOs, profits are based on market prices. The higher the trading prices of wheat, rice and soybeans, the bigger the profits. The market's behavior reminds one of the Internet bubble at the beginning of last decade and the fluctuations just prior to the financial crisis, then-Merrill Lynch President Gregory Fleming said in May 2008.