Ukraine's grain exports tumble; food price shock looming

By bne IntelliNews July 18, 2012

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Ukraine's grain exports tumbled in early July, according to a report from agriculture researcher ProAgro. That's not only bad news for Kyiv's precarious fiscal position, but compounds falling harvests around the world, threatening a new food price shock.

Ukraine shipped 107,910 tonnes of grain in the first 11 days of July, an 87% drop from the 840,350 tonnes shipped in the first fortnight of June. The fall looks all the more serious given that it is high season for grain production as the agricultural year kicks off.

The falling exports are due to a lower-than-expected harvest of 45.3m tonnes this year, down from 56.7m tonnes in 2011, the Kyiv Post reported . Ukraine's Minister of Agrarian Policy and Food Mykola Prysiazhnyuk lowered the grain export forecast for the current marketing year (July 2012 - June 2013) to 20m tons from 22-23m tons last week. In the 2011 agricultural year, Ukraine exported a total of 21.8m tons of grain, up 81% from 2010, which was plagued by a very poor harvest forcing the government to impose export restrictions.

The country is not alone. Russia has cut its grain production forecast by 15% year-on-year to 80m tonnes for this agricultural year. It was expecting to export 20m tonnes of grain before the revision, but the Russian Agriculture Ministry estimates grain exports could fall to as low as 16m tonnes under a worst-case scenario, Minister Nikolai Fyodorov said on July 17.

In Turkmenistan, the grain harvest has been so poor that flour and bread prices have already more than doubled, forcing the government to introduce a rationing system. The USA is suffering a drought and has cut grain production forecasts.

"Just a few weeks ago, the expectation was of bumper crops. But America's on-going hot, dry summer means the US Department of Agriculture last week slashed its 2012-13 corn crop and season-end inventory forecasts by 12% and 37% respectively, the deepest prediction downgrades in 25 years," points out Liam Halligan, Chief Economist at Prosperity Capital.

Added together, Ukraine and Russia are amongst the world's five biggest grain exporters in the world. The poor harvests and reduced export expectations have already sent the global price for grain soaring. Halligan says prices are up by about 40% in the last month alone.

A food-induced price shock hit in the summer of 2008, a year also marked by poor harvests, which lead to food riots in some counties of the former Soviet Union, The price spike was one of the contributory factors to sparking the global financial crisis that autumn, and also kicked off the Arab Spring.

All the conditions for a similar shock are now in place. "With the price of agricultural staples such as corn, soyabeans and wheat soaring for the third summer in five years, the risk of another food price shock is now looming," says Halligan.

On a local level, the grain harvest is a vital element in Kyiv's ongoing fight with its precarious fiscal position, and the government has been banking on it to raise the country's foreign exchange reserves and help stabilize the hryvnia..

Prime Minister Mykola Azarov reiterated the point on July 15, telling a local TV station: "A good harvest means that [foreign] currency will come to our country. This means that we will have stable foreign exchange reserves, which, in turn, means that the exchange rate of our national currency will be stable."

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