Prompted by wildfire and drought, Moscow's decision will hit price and supply globally, writes DANIEL McLAUGHLIN

RUSSIA HALTED grain exports yesterday as drought and wildfires devastated its crops, driving up world wheat prices and sparking fears of a repeat of 2008 food shortages.

Temperatures hovering around 38 degrees have brought drought to an area three times the size of Luxembourg in central and southern Russia, and wildfires across the region have killed at least 50 people and devastated villages, farmland, forest and infrastructure.

Russia’s arable farmers, who account for 4 per cent of gross domestic product, have been the hardest hit, with 28 crop-producing regions now under a state of emergency and grain yields expected to fall by more than 20 per cent compared to last year.

Russia’s problems have sent grain costs spiralling. Russian wheat prices rose 19 per cent last week, faster than at the peak of the global food crisis in 2008, when food riots erupted from Haiti to Egypt. Wheat prices on the Chicago Board of Trade have surged to their highest levels in almost two years, and climbed 38 per cent in July alone, the sharpest such rise since 1973.

The soaring price of wheat prompted the export ban in Russia, the world’s third-largest grower of the crop after the US and the European Union, amid government fears of a rise in domestic food costs that would hurt the poor and damage the ruling party’s chances in next year’s elections.

Prime minister Vladimir Putin said Russia would suspend grain sales abroad from August 15th to the end of the year, to “prevent domestic prices from rising, preserve cattle herds and build up reserves for next year”.

With many farmers facing ruin amid Russia’s worst drought in half a century, Mr Putin also pledged to provide 25 billion roubles (€640 million) in loans for farmers and 10 billion roubles in aid. The government will also distribute grain from state reserves without auction.

“The goal is not to make money, but to help agricultural producers who need this help today,” Mr Putin said.

While some experts said the export ban was Mr Putin’s only option, others said it would be disastrous for Russia’s farmers and for the country’s bid to take a bigger share of the world market.

“As of today, Russia has no grain market,” said Kirill Podolsky of the Valars Group grain trading firm. “This will be a catastrophe for farmers and exporters alike.”

Major wheat importers such as Egypt, the world’s biggest, will be hard hit by Russia’s export ban and the rising price of grain on international markets, where speculators are pouring fuel on the fire created by the drought in Russia and Kazakhstan and poor growing weather in Canada.

“Speculators are entering the market. You hunt what’s moving, and I think that’s going to continue in the next couple of weeks,” said Peter McGuire, managing director at CWA, the commodities trader.

With global supply tightening and prices soaring, the United Nations Food and Agriculture Organisation (FAO) has been forced to address concerns about a repeat of the 2008 food crisis.

The FAO insists that world grain stocks, especially those held by major exporters, are sufficient to cover shortfalls after two consecutive years of record harvests.

“External factors, including the macroeconomic environment and developments in other food markets, which were major drivers behind the surge in international prices in 2007/2008, are not posing a threat so far,” the FAO said.

Analysts say Europeans and Americans may end up paying slightly more for their bread in the coming months, but the biggest impact will be felt in poorer, importing nations in the Middle East, Africa and parts of Asia.

For its part, Russia is bracing for the economic impact of an environmental and agricultural disaster that will leave it with a big bill for compensation, reconstruction and aid. Higher food prices will also eat into the disposable income of the nation, which could restrict spending and dampen growth.

Experts also warn that farmers in Russia’s drought-stricken areas will be unable to plant winter grains this month unless heavy rain falls soon, with what the FAO called “potentially serious implications for world wheat supplies in 2011/2012”.