The great wheat scare

The great wheat scare

Early this month Russia imposed a ban on wheat exports. For a period it roiled the markets. Wheat futures rose sharply in commodity exchanges. Large buyers of Russian grains, mostly in West Asia, resorted to panic purchases, fearing high prices and unavailability later. Suddenly, it was a return to a situation that prevailed two years earlier when grain prices shot up dramatically and a new term was invented for the phenomenon: Agflation.

There are two ways to look at the situation. At the level of availability there is little to fear. For example, India, a big consumer of wheat, has some 24 million tonnes (mt) of the grain in stock, 7 mt more than the buffer stock requirement. A similar situation prevails in many other countries. So why is Russian wheat in news?

Part of the answer is the self-fulfilling nature of expectations set into motion when one country bans the export of agricultural commodities. This leads to a chain reaction whereby other countries take similar decisions. Soon enough, in real terms, this leads to an actual reduction in the availability of the commodity in question due to such bans. A crisis is born out of thin air.

What leads countries to behave irrationally on this front? Part of the answer lies in the fact that many, if not most, developing countries are both producers and consumers of foodgrains. In case of high price volatility their effort is to protect both producers and consumers. But when they ban exports, they end of harming both groups. Banning exports prevents farmers from making profits from the high prices. At the same time, when most countries ban exports, those countries that face a temporary excess demand cannot protect consumers. An orderly conduct of these markets requires the absence of such bans.

Here a word is called for on the operation of futures markets that are meant to smoothen availability of commodities across time. The fact is when bans are imposed they rock the futures markets too. For example, by 7 August, two days after the Russian ban, wheat futures (for early September delivery) had risen by 26% in over a week and by nearly 65% over a month (ending on 7 August). Clearly there were few, if any, grounds for such panic.

Commodity export bans: irrational or reasonable? Tell us at