Hedging on Russian wheat may mean EU bakery price hikes, economist

By Ben Bouckley

- Last updated on GMT

Related tags Wheat Russia Eu

A leading economist says that industry sources and analysts predicting the Russian wheat export ban will have little impact on EU food prices are “naïve”, and overlook the fact that major futures contracts for Russian wheat are now worthless.

Dr Constantin Gurdgiev from Trinity College Dublin told BakeryandSnacks.com that reassurances global wheat supplies from the US and elsewhere would be adequate to safeguard against further imminent price spikes in the EU may be misguided; especially given that big food firms may have hedged with Russian grain, which is now unavailable.

“Many analysts and the media are ignoring this issue, saying that because of hedging price spikes will only be a problem after December 31. But in my view this is naïve, given that a lot of hedging on world markets will relate to banned Russian wheat.”

July wheat spike

Spot CBOT (Chicago Board of Trade) wheat prices have soared since early July after production problems in Russia, the EU and Canada, and the ban on Russian grain exports as drought decimated the Russian spring wheat crop – estimated to be around 42-45m tonnes this year compared with 61.8m in 2009.

Russia officially suspended wheat exports from August 15, with prime minister Vladimir Putin insisting on the need to: “prevent domestic prices rising, preserve cattle herds and build up reserves.”

Putin stated only that the ban would be “reassessed”​ after December 31, not immediately overturned, and Gurdgiev said Russia was unlikely to export wheat in quantity well into 2011, a view that tallies with a recent Rabobank note predicting exports of only three million tonnes next year.

Gurdgiev said:“Given the importance of grain to food prices for consumers and Russian industry as a whole, principally as animal feed, then I think it is unlikely that major exports will start again quickly.

“Russian government grain supplies totalling around 9m tonnes could be used to make up domestic shortfall, so the official priority will be to rebuild these stocks.”

Effect on EU prices

Martin Savage, trade policy manager at the National Association of British and Irish Millers, told BakeryandSnacks.com that although the EU was not unduly reliant on Russian grain, the scrapping of futures contracts could affect commodity prices here.

“In the UK we don’t use much Russian grain, maybe a little from there and from Kazakhstan, the UK harvest here supplies around 80-85 per cent of our needs.”

“Russia’s main markets are the Middle and Far East and Southern Africa – but since wheat is traded on a global basis with set prices it could affect EU prices.”

Credit ratings agency Moody’s said that major firms such as Kellogg’s and General Mills generally hedged against commodity price rises six to nine months ahead, with wheat costs only a “small portion of ​[their] total costs”​. Conversely, ingredients costs hit own-label manufacturers with lower margins harder, since they cannot afford to hedge.

Savage said that it was difficult to predict how soon price rises could hit consumers:“The media is toying with a figure of 5-15p on a loaf of bread, but it’s hard to predict precisely, since millers and bakers respectively will buy wheat of various qualities (with added premiums for breadmaking) over a range of contracts.”

“Flour prices have risen, and price rises to UK and EU consumers could feed through fairly quickly, but this depends upon numerous variables.”

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