Chaly: Russia won't be able to refuse from Belarusian milk powder this year
Russia has banned its wheat exports and has asked Belarus to join the ban. But, in the view of Euroradio's expert Syarhei Chaly, the absence of limitations will allow us to trade grain in a more advantageous way. The drought in Russia will boost the supplies of Belarus-made milk. Syarhei Chaly: Before understanding the consequences of Russia's wheat export ban, let's take a small tour to the grain market. It is not very complex. But, if you fail to understand, the motives of the ban will remain unclear.
Euroradio: How does it happen that the wheat price is growing in the middle of the harvest season when there is a lot of wheat? This is contrary to the demand and offer rule!
Syarhei Chaly: Indeed, the growth of wheat prices in the world markets has been taking place for nearly two months. The wheat price has soared by approximately 1.5 times.
But, the wheat price should have been dropping by now, because a new harvesting campaign is under way and there is grain from a new harvest. The thing is that the wheat market is not a commodity market. It is a financial market in which one can speculate. It is a market of futures, with a big number of players who play according to the schedules regardless of what is happening with the offer and demand.
Euroradio: It means that the contracts to supply wheat today were concluded several months ago at low costs before the unexpected growth?
Syarhei Chaly: Yes. And, these contracts were concluded, assuming that the wheat price would logically keep falling in summer. Moreover, if we look more than two months back, we can see that grain was the weakest out of agricutural produce interms of the price. Out of grains, wheat was the weekest. The cost peaked in the spring of 2008. It has dropped by four times since then!
Therefore, this year's growth of 1.5 times is a hardly noticeable growth from the bottom. It is caused mainly by technical reasons. Prices cannot fall endlessly. They should start rising after a long fall.
Euroradio: Bad news from wildfires in Russia could also affect the costs. The drought in Russia has significantly cut the wheat harvest...
Syarhei Chaly: This is yet another mistake made by people. They think that the costs in the financial markets respond to news. And, the news about grain are not very optimistic, indeed. On August 4, Food and Agriculture Organization (FAO) lowered the forecast about this year's wheat harvest from 676 million tons down to 651 million. Russia accounts for these 25 million tons in losses. Russia planned to harvest over 90 million tons, but the current forecast is only nearly 70 million. The same situation is in Ukraine, although the harvest was not affected by drought but by heavy rains.
The news broke on August 4, while the growth of the costs has taken place for nearly two months. There is no link between the costs and the news. There is no link either between the costs and an important news about Russia's wheat export ban.
Syarhei Chaly: Let's understand why the ban emerged now. Russians justifie the measure by a need to soften cost fluctuations in the domestic market. But, there is a good and famous instrument -- a reserve fund -- for this. The idea is as follows: production volumes in Russia were record-breaking for several years. In order to prevent the costs from falling, a fund with almost 10 million tons was created. It is logical to sell it today when the costs are going up. This will also allow to increase the offer and to stabilize the costs.
Instead, an export ban was imposed.
Euroradio: Why?
Syarhei Chaly: Because not just one person 'sits' on the grain. There are producers, officials and traders. The decision to ban exports was lobbied by Glencore, the main exporter of the Russian grain. Exporters found themselves in a difficult situation. They must execute futures contracts at the lower prices. In spring, the cost of wheat was $150-$160 per ton. Now, they have grown to $220-$230. And, an export ban is a force majeure which helps traders to get rid of their obligations in the contracts without sanctions and fines or to postpone the execution of the contracts to the time when the costs drop.
Euroradio: It appears that the proection of Russia's domestic market is not the main reason for the wheat export ban?
Syarhei Chaly: This decision is not protectionist. It is a lobbist decision in the interests of certain traders and against producers. In other word, it is in the interests of speculators in the grain market who 'feed' bureaucrats in order to avoid financial risks.
Euroradio: How much would traders lose, if there was no ban?
Syarhei Chaly: Approximately 500,000 tons were contracted at the lower prices. Unofficial reports suggest 2 million tons were contracted.
Euroradio: $70 per every ton...
Syarhei Chaly: What would be a loss of traders would be a win by producers. Because the export is now banned, there are huge queues in the port of Novorossiysk, since grain was transported there even without contracts, hoping to sell it quickly on the spot and export while the prices are high. Naturally, this grain will appear in the domestic market. And, this will reduce the costs, making the execution of futures contracts profitable again.
The Russian budget will get nothing from the wheat eexport ban. In order to get something, it would make sense to sell the grain from the reserve fund. Instead, it has already been announced that wheat will be supplied to Russia without an auction. In other words, there will be a corrption scheme here.
Syarhei Chaly: Russian officials get paid by traders, while producers are paid by the budget. If the thing was only about softening the cost fluctuations in the domestic market, it would be done by grain interventions from the reserve fund. Only after this, it would make sense to consider an export ban or export duty, because domestic costs would become lower that the world costs.
Euroradio: The grain that was supposed to be sold abroad will remain in Russia's domestic market and the market of the Customs Union. Is it bad or good for our country?
Syarhei Chaly: Russia's domestic demand for grain is 74-75 million tons. If Russia harvests nearly 70 million tons this year, it will have to import! Good opportunities will open up ahead of us. Firstly, we can compensate the deficit of grain from our harvest.
Secondly, we need to take a look where grain is used in Russia. First of all, this is bread industry. But, grain accounts for only 25 percent in the prime cost of the product. In the dairy and meat-processing industry, grain accounts for 40 percent of fodder in the prime cost. In a situation when there is little fodder grain or if it is oo expensive, cows in Russian farms will have to be cut. This will bring about the deficit of dairy products. We will have an opportunity to increase supplies of milk powder which Russia does not want to buy from Belarus and to increase supplies of fodder grain.
Wheat costs are rising, yet they should have dropped
Euroradio: How does it happen that the wheat price is growing in the middle of the harvest season when there is a lot of wheat? This is contrary to the demand and offer rule!
Syarhei Chaly: Indeed, the growth of wheat prices in the world markets has been taking place for nearly two months. The wheat price has soared by approximately 1.5 times.
But, the wheat price should have been dropping by now, because a new harvesting campaign is under way and there is grain from a new harvest. The thing is that the wheat market is not a commodity market. It is a financial market in which one can speculate. It is a market of futures, with a big number of players who play according to the schedules regardless of what is happening with the offer and demand.
Euroradio: It means that the contracts to supply wheat today were concluded several months ago at low costs before the unexpected growth?
Syarhei Chaly: Yes. And, these contracts were concluded, assuming that the wheat price would logically keep falling in summer. Moreover, if we look more than two months back, we can see that grain was the weakest out of agricutural produce interms of the price. Out of grains, wheat was the weekest. The cost peaked in the spring of 2008. It has dropped by four times since then!
Euroradio: Bad news from wildfires in Russia could also affect the costs. The drought in Russia has significantly cut the wheat harvest...
Syarhei Chaly: This is yet another mistake made by people. They think that the costs in the financial markets respond to news. And, the news about grain are not very optimistic, indeed. On August 4, Food and Agriculture Organization (FAO) lowered the forecast about this year's wheat harvest from 676 million tons down to 651 million. Russia accounts for these 25 million tons in losses. Russia planned to harvest over 90 million tons, but the current forecast is only nearly 70 million. The same situation is in Ukraine, although the harvest was not affected by drought but by heavy rains.
The news broke on August 4, while the growth of the costs has taken place for nearly two months. There is no link between the costs and the news. There is no link either between the costs and an important news about Russia's wheat export ban.
Who suffers and who wins when wheat prices are growing
Syarhei Chaly: Let's understand why the ban emerged now. Russians justifie the measure by a need to soften cost fluctuations in the domestic market. But, there is a good and famous instrument -- a reserve fund -- for this. The idea is as follows: production volumes in Russia were record-breaking for several years. In order to prevent the costs from falling, a fund with almost 10 million tons was created. It is logical to sell it today when the costs are going up. This will also allow to increase the offer and to stabilize the costs.
Instead, an export ban was imposed.
Euroradio: Why?
Syarhei Chaly: Because not just one person 'sits' on the grain. There are producers, officials and traders. The decision to ban exports was lobbied by Glencore, the main exporter of the Russian grain. Exporters found themselves in a difficult situation. They must execute futures contracts at the lower prices. In spring, the cost of wheat was $150-$160 per ton. Now, they have grown to $220-$230. And, an export ban is a force majeure which helps traders to get rid of their obligations in the contracts without sanctions and fines or to postpone the execution of the contracts to the time when the costs drop.
Euroradio: It appears that the proection of Russia's domestic market is not the main reason for the wheat export ban?
Syarhei Chaly: This decision is not protectionist. It is a lobbist decision in the interests of certain traders and against producers. In other word, it is in the interests of speculators in the grain market who 'feed' bureaucrats in order to avoid financial risks.
Euroradio: How much would traders lose, if there was no ban?
Syarhei Chaly: Approximately 500,000 tons were contracted at the lower prices. Unofficial reports suggest 2 million tons were contracted.
Euroradio: $70 per every ton...
Syarhei Chaly: What would be a loss of traders would be a win by producers. Because the export is now banned, there are huge queues in the port of Novorossiysk, since grain was transported there even without contracts, hoping to sell it quickly on the spot and export while the prices are high. Naturally, this grain will appear in the domestic market. And, this will reduce the costs, making the execution of futures contracts profitable again.
The Russian budget will get nothing from the wheat eexport ban. In order to get something, it would make sense to sell the grain from the reserve fund. Instead, it has already been announced that wheat will be supplied to Russia without an auction. In other words, there will be a corrption scheme here.
It makes no sense for Belarus to support the Russian ban
Syarhei Chaly: Russian officials get paid by traders, while producers are paid by the budget. If the thing was only about softening the cost fluctuations in the domestic market, it would be done by grain interventions from the reserve fund. Only after this, it would make sense to consider an export ban or export duty, because domestic costs would become lower that the world costs.
Euroradio: The grain that was supposed to be sold abroad will remain in Russia's domestic market and the market of the Customs Union. Is it bad or good for our country?
Syarhei Chaly: Russia's domestic demand for grain is 74-75 million tons. If Russia harvests nearly 70 million tons this year, it will have to import! Good opportunities will open up ahead of us. Firstly, we can compensate the deficit of grain from our harvest.
Secondly, we need to take a look where grain is used in Russia. First of all, this is bread industry. But, grain accounts for only 25 percent in the prime cost of the product. In the dairy and meat-processing industry, grain accounts for 40 percent of fodder in the prime cost. In a situation when there is little fodder grain or if it is oo expensive, cows in Russian farms will have to be cut. This will bring about the deficit of dairy products. We will have an opportunity to increase supplies of milk powder which Russia does not want to buy from Belarus and to increase supplies of fodder grain.
