Why wheat prices won’t tumble after Russia ends export tariff

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After several weeks of rumors during one of the largest wheat harvests in a decade, Russia’s prime minister Dmitry Medvedev announced on September 2, 2016 that the Russian government will essentially eliminate the year-and-a-half old wheat export tariff. As of September 15, 2016, the tariff will be lowered to zero.

In a year of already historic U.S. and world wheat production that has led to the lowest wheat prices in a decade, Russia’s considerable lowering of its barriers to wheat trade could lead to yet another downward jolt in the wheat markets. Consider the following:

  • Russia is in the midst of one of its highest wheat production seasons in a decade.
  • After Russia’s annexation of Crimea, Russian wheat farmers now have direct access to export facilities on the Black Sea.
  • With poor 2015/16 production in France and other parts of the European Union, Russia is expected to overtake western Europe as the largest wheat exporter in the world.

With only these factors, Russian wheat exports are making a considerable impact on global wheat prices. It is reasonable, then, to expect that the significant tariff reduction—the tariff will be reduced to 0% from the most recent value of 50% of the wheat’s export value minus 6,500 rubles—would lead to a further lowering of the global wheat price.

But, that doesn’t seem to be the case. The futures prices for the three major wheat classes remained relatively unchanged by the news. Similarly, world wheat export prices have remained flat.

So what’s going on? Why aren’t we seeing a market response that would be anticipated with news that carries a potential influx of supply into the global wheat markets? There are several factors that are likely key to answering this question.

First, consider the chart below, which presents data from the International Grains Council about production, total availability, and export for Russia over the past decade.

Russia wheat production export statistics
Chart source: International Grains Council, Supply and Demand, Russia.

The data show that although the Russian wheat tariff was in place, Russian exports continued to increase fairly proportional to Russian production. Consequently, the tariff reduction is not likely to change Russia’s existing trade volumes and affect global prices.

Next, consider the exchange rate of the Russian ruble. The chart below shows the exchange rate between the ruble and the U.S. dollar over the past year.

US Dollar to Russian Ruble Exchange Rate Graph - Sep 8, 2015 to Sep 2, 2016

Chart source: Indexmundi Exchange Rates.

The data indicate that since January 2016, the Russian currency has strengthened by approximately 25%. As a result, Russian wheat is now more expensive on the global market, making it less attractive for world buyers. As such, even with a tariff reduction, the demand for Russian wheat is likely not as strong due to the exchange rate as it would have been earlier this year.
Lastly, as I discussed in a previous post, despite Russia’s large production, the quality (protein levels) of the wheat is quite lacking. Because the market is currently feverishly looking for high protein wheat, as discussed by my colleague Joe Janzen, the influx of lower-quality wheat may not substantially move the global markets.
So, despite the potential for yet another piece of bad news for wheat market participants in a year already filled with whammies, Russia’s export tariff reduction seems, as of now, to be a benign blip on the amber-colored radar.

 

(Photo by Stefano Merli is licensed under CC BY 4.0)

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About Author

Dr. Anton Bekkerman is a former associate professor in the Department of Agricultural Economics and Economics at Montana State University. He currently serves as the director of the New Hampshire Agricultural Experiment Station. Bekkerman's primary areas of research are grain marketing, basis and price forecast modeling, understanding how grain prices are affected by changes in supply chain infrastructures and quality demands, and analyzing the economic trade-offs of adopting alternative dryland cropping systems in Montana. Although Bekkerman grew up on the east coast, he had made a small step toward production agricultural after ranching a flock of six backyard chickens.

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