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Economic ResearchGlobal Data Watch
August 6, 20101
JPMorgan Chase Bank (Legal Branch Name)
Anatoliy Shal (+7 495) 937 - 7321anatoliy.a.shal@jpmchase.com
Russia: wheat price shock tolift headline CPI inflation
•Drought to have limited economic impact apart frominflation•We lift end-2010 CPI forecast from 7% to 7.5%oya,and 2011 average from 6.9% to 7.5%•CBR expected to view the supply shock as transitory
A devastating, prolonged heat wave and severe droughtacross many of the grain-producing regions will signifi-cantly affect Russia’s and a few other FSU countries’ agri-cultural output this year. Moreover, since the drought hasshown no signs of easing and weather forecasts for thecoming weeks remain grim, the risk is that next year’sgrain crops will also be affected—winter wheat will bestunted by the dry soil. Combined with a discouraging out-look for EU crops, this has pushed global wheat pricessharply higher. Global prices have already gained over50%, from $5.3 to $8.3/bushel; Russia’s domestic pricesrose even more within the last 30 days. In addition, on Au-gust 5, Russia announced a ban on grain exports throughyear-end, effective August 15. This should help containfurther domestic price gains, but may send global priceseven higher. J.P. Morgan’s commodity team expects thatany meaningful decline in prices is unlikely to occur beforelate 2010, but wheat prices are forecast to recede to below$6/bu in 2011, as higher prices now are likely to promoteincreased global planting. Were 2011/12 yields to recoverto trend, global stocks could rebound and lead to funda-mentally weaker prices in 2011.
Grain exports to at least halve
After a series of downward revisions, grain crop forecastscurrently stand at 65-75 million tons (mnt) in Russia, im-plying a decline of more than 20% from last year (97 mnt);the quality has also suffered from adverse weather condi-tions. Even though any supply shortage for domestic con-sumption (75-77 mnt) is set to be covered by remainingstocks from last year’s harvest (16-21 mnt), Russia’s exportpotential has been seriously affected. In addition, skyrock-eting domestic prices and uncertaintly about the true scaleof crop damage prompted the government to introduce atemporary ban on grain exports (untill end-2010). This willfurther limit exports in 2010/11 marketing year, which, bymost estimates, are likely to at least halve (from 23 mnt in2009/10). In Ukraine, the grain harvest is forecast to fallless severely, from 46 mnt last year to 38-40 mnt this year,with exports shrinking from 21 to about 16 mnt.
Economic Research Note
Reports suggest that apart from grains, sugar beets, pota-toes, and other vegetables will also be affected by thedrought and heat. For livestock, output losses are less se-vere, but a rising cost curve—higher-cost/lower-qualityfeed—may press margins and reduce competitiveness ver-sus imports.
Economic impact
•
GDP:
The direct impact on GDP is likely to be only afew tenths of a percent, as agriculture is a small share of GDP in Russia (4%) and in Ukraine (7%, but crops are lessaffected by drought in Ukraine). The abnormal heat is alsoaffecting activity in manufacturing and services. Russia’sservices PMI fell from 55.4 to 54.2 in July and companiescited the heat wave among the reasons for the decline in ac-tivity. Press reports also suggest that some manufacturershad to halt production due to heat and smoke from forestfires. But the ultimate loss of output is likely to be limited, asfirms may make up for this loss by increasing productionlater on. Another channel may, however, prove to be moreimportant: the exogenous shock to food inflation will weighon real disposable income, hence private consumption.•
Trade balance:
Declines in grain export volumes arelikely to be at least partially offset by higher export prices.The total loss is likely to be on the order of US$1-2 billionfor Russia and close to zero for Ukraine. Food imports arelikely to rise, too. Both Russia and Ukraine are heavy foodimporters; weaker domestic output of meat, milk, sugar, andvegetables suggests higher imports. Still, for both countries,the trade impact is likely to be negligible for the overall BoP.•
Fiscal balance:
The direct cost for the budget is likely tobe low. Russia may grant RUB25 billion of budget loans,
External trade indicators in food and agricultural products, 2009
US$ bn
RussiaUkraine
Meat and meat preparation6.20.57Milk and dairy, eggs, honey1.30.14Vegetables, root crops1.70.08Fruit4.40.63 Animal or vegetable fats and oils0.90.37Sugar0.80.09Other food products11.92.60
Total food imports27.14.48
% GDP
2.2 4.0 
Cereals and oil seeds3.64.6Other food products5.34.7
Total food exports8.89.3
% GDP
0.7 8.3
Source: Comtrade, Ukrstat, J.P. Morgan estimates
ExportsImports
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