Russian Wheat Export Ban Poses Severe Risk & Reward (ADM, KFT, POT, MOO, PEP, K, GIS, CPB)

Raging fires and severe drought in Russia have led to the government imposing a temporary ban on wheat exports beginning August 15th. The country claims to have sufficient stocks, but cannot afford to let the domestic wheat price rise as fast as prices are rising internationally.  Global wheat prices are at their highest in nearly 2 years, currently $781/metric ton, up nearly 8% from yesterday’s closing price. Less than two months ago the price was $428/metric ton.  This has potentially huge ramifications for producers, suppliers, and end users.

The Russian ban is turning out to be good news for US agri-giant Archer-Daniels-Midland Co. (NYSE: ADM), where shares are up more than 5.5% today on Russia’s announcement.   Potash Corp. of Saskatchewan, Inc. (NYSE: POT) has also seen shares in the last 48-hours rise from about $106 to $114 per share as higher prices mean more room for farmers to buy more fertilizer and potash products.  In the last few trading sessions the Market Vectors Agribusiness ETF (NYSE: MOO) has risen 5%, which is not bad for international ETF.  The news is far less good for food companies. Kraft Foods Inc. (NYSE: KFT), PepsiCo, Inc. (NYSE:PEP), Kellogg Co. (NYSE: K), General Mills, Inc. (NYSE: GIS), and Campbell Soup Co. (NYSE: CPB) are all trading down between 0.5%-2.5%.

Russia is the world’s third-largest exporter of wheat and had recently slashed its harvest forecast from 90 million metric tons to 70-75 million metric tons. Of that about 18 million metric tons was estimated to be exported. Russian wheat is cheaper and costs less to transport to large importers like Egypt than is US or Canadian wheat.

Canada, the world’s second-largest wheat producer, is also suffering weather-related problems with its crop. Only this time it was too much rain during the planting season that destroyed much of the crop and could lead to a drop of 35% in Canada’s harvest this year.

US consumers might be spared the bulk of the price increase due to an expected bumper crop of US wheat this year. US exports were expected to total 28.5 million metric tons before the Russian ban was announced, and that number could go higher. The US Department of Agriculture expects a US surplus of about 1 billion bushels this year, or about 25 million metric tons (a metric ton equals 39.2 bushels).

US food producers like Kraft and PepsiCo will be watching wheat prices carefully, particularly for their foreign plants. While US prices are not expected to be affected as much, Asian wheat prices will probably rise enough to affect consumers.

World wheat stocks have been above normal for several years, so the draw-down resulting from the Russian export ban may fundamentally not be as a terribly significant of an issue.  The risk is that Russia’s ban allows for ‘Force Majeure’ to be declared in some cases and many bets and contracts at the Russian level could be thrown out the window.  Speculative trading in wheat is a whole different bushel of grain. As long as weather concerns last with supply constraints, prices will rise.

Generally speaking, there seems to be enough wheat for this year and probably next. That could change if the Russian planting season for winter wheat is hampered by fires or drought conditions.

Paul Ausick