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____________________ Tuesday July 29, 2014 ___________________


World Events

Wheat could become pawn in Russia's game of realpolitik

Canadian farmers have to wait and see how the Crisis in Ukraine unfolds to determine the value of their crop - by Ryan Lijdsman

EDMONTON, AB - While Canada's involvement in the "Ukraine Crisis" has been little more than rhetorical to this point, our political impotence does not mean that our economy will be immune to its effects, especially after the downing of Malaysia Airlines flight 17.

Both Ukraine and Russia have had bumper wheat harvests this year and wheat could become the next pawn in Russia's game of realpolitik. Russia could dump its excess wheat on the global market either out of fear of future economic sanctions, or as an overt strategy to lower wheat prices.

Canada is one of the largest wheat exporters in the world, exporting approximately 70 per cent of the more than 17 million tonnes of wheat, durum and wheat flour we produce each year. Last year's bumper crop was 50 per cent above the average, which allowed our exports to grow more than 23 per cent over the three year average.

This year's flooding and the cold spring has dampened hopes of another bumper crop, however. Statistics Canada estimates there will be a reduction of 7.4 per cent in wheat production this year, which will help alleviate the carryover of grain from last year's bumper crop and inadequate rail capacity - an issue that hurt farmers economically and the reputation of Canadian supply.

In fact, the U.S. Wheat Associates went as far as to suggest that U.S. sales of spring wheat and durum were being partially boosted by Canada's logistical problems, and that Canada is now viewed as being unable to meet the demand that is normally shared by Canada and the U.S.

These logistical bottlenecks have resulted in Canada not being a major driver in the world price of wheat, but we are impacted, both positively and negatively, by other producers.

The current driver of world prices is the Black Sea region. Both Ukraine and Russia are having bumper harvests and exports from the region account for nearly 20 per cent of the global total. This year Russia could export more than 20 million tonnes of wheat.

Along with the Black Sea region's bumper crop driving prices down, the geopolitical situation in Ukraine is also causing price volatility. In May, when protests in Odessa turned violent, the price spiked 2 per cent. The day that the Malaysia Airlines flight was shot down, reportedly by Russian-backed rebels, the price spiked nearly 4 per cent.

It is unlikely that internal strife in Ukraine will cause any more than temporary price spikes or that any broad sanctions against Russia will apply to food. However, fears of wide ranging economic sanctions are leading buyers to move faster than usual on purchasing Russian wheat and Russia could choose to dump grain at low prices to avoid the potential of not being able to sell it in the future.

Russia could also dump wheat for strategic reasons. A lower world wheat price would adversely impact Ukraine, Canada, the U.S, and Australia - the latter three all major wheat exporters and vocal opponents to Russia's involvement in Ukraine.

Alternatively, Russia could do nothing, believing the EU and the U.S. will not be able to agree on sanctions. However, if broad sanctions come into effect Russia would find it more difficult to sell wheat because of the restrictions on its financial institutions and currency exchanges. The result would be lower supply in the world market and price increases.

Grain farming is never easy, but the last two years have been especially hard. Canadian farmers have had to suffer through both low prices, a carry-over of 17 million tonnes of unsold grain, floods, and a cold spring. Now, in addition to domestic issues, Canadian farmers have to also wait and see how the Crisis in Ukraine unfolds to determine the value of their crops.

Ryan Lijdsman is a Canadian-based international business consultant. Follow Ryan on twitter @ryanlijdsman
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