Russian Domestic Wheat Price at Season Record Fuels Concerns

(Bloomberg) -- Russian domestic wheat prices jumped in August to levels typically not seen this time of year, raising concerns about food price inflation and possible government reaction.

Wheat prices for the month are surging to the highest in at least a decade, contrary to the typical decline during this period as the new harvest flows in. That may be the result of farmers holding the grain back from the market because they’re wary of making bad deals under a recent export tax. The duty was meant to help stifle inflation, yet the annual rate is now 6.5%, the highest since 2016.

“Domestic wheat prices have rallied as farmers and internal traders are reluctant to sell, even after the new harvest, amid a formula-based export tax,” Eduard Zernin, head of the Russian Union of Grain Exporters, said on his Facebook page Aug. 17. “If current prices will be maintained for relatively long time, we can expect extra measures to stabilize them.” 

Russia, the world’s top wheat shipper, started a flat tax on wheat exports in February and switched to floating duties in June as it sought to cool food price inflation. The floating duty increased to $31.70 a ton this week, compared with $30.40 last week.

The current situation with inflation is indicative of what might come, Natalia Orlova, chief economist at Alfa-Bank in Moscow, said by phone. “If at the start of August there is no trajectory for a strong decline in prices, it is difficult to imagine that it will begin in September.” 

Another area of concern is how big the new harvest will be. The U.S. Department of Agriculture said this month it expects Russian wheat production of 72.5 million tons, a 15% decline from its forecast in July. Russia’s Agriculture Ministry maintains its forecast of 81 million tons, even as some independent analysts see it lower. 

The average wheat yield is running lower than last year, according to data from the Agriculture Ministry’s analytical center published on Monday.

“The fact that the forecast for the harvest was lowered is also one of the preliminary signals that inflation may not slow down as quickly as we would like to see at the turn of next year,” said Evgeny Koshelev, an analyst at Rosbank in Moscow.

Last month, the Bank of Russia delivered its biggest interest-rate hike since the 2014 ruble crisis to combat runaway inflation. It also left the door open for more increases.

The central bank’s press service said it monitors the prices as it can influence inflation expectations and consumer behavior of households. The ministry didn’t respond to a request for comment on the price increase.

The situation should normalize as the new harvest comes in, and prices should start leveling off, Zernin said.

“The wheat is not in deficit, but farmers are just afraid to make a bad bargain,” he said. “Oilseeds harvesting will start soon, pushing farmers to sell grains.”

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