Wheat prices reach 22-month high

Wheat prices have hit a 22-month high after a severe drought and ensuing wildfires in Russia devastated crops.

Chicago Board of Trade (CBOT) wheat for September delivery broke through the $7-a-bushel level in US trade for the first time since September 2008, before falling back to $6.93.

Prices have risen 50% since late June.

Concerns are growing that the rise will lead to an increase in prices of flour-related products such as bread and biscuits.

Gary Sharkey, head of wheat procurement at Premier Foods, which makes Hovis bread, told the Financial Times that the industry would be "unable to ignore a 50% rise in wheat prices".

'Exposed'

Russia was the world's fourth largest wheat exporter in the 12 months to June behind the US, the EU and Canada, according to the US Department of Agriculture.

And along with other former Soviet Republics such as Kazakhstan, it accounted for about 25% of the world's wheat exports last year, said Richard Feltes, senior vice president and director of commodity research at Chicago-based MF global.

He added that while there was uncertainty over the volumes of crops being lost, such drastic change in production would severely cuts into global supply.

"This is a big event, the most serious since 1975," he told the BBC News website.

"The end user globally is very exposed here."

Martin Deboo from Investec said it would have an effect on both food prices and food company profits.

The heatwave and drought have led to wildfires in several regions in Russia

"Experience of 2008's round of inflation would suggest cost side increases from wheat do get passed on to the consumer eventually," he added.

"Generally the wheat content of a loaf of bread is probably about 12-15 pence a loaf [in the UK]. So if this wheat cost increase has to be passed on then we're talking about 5p on a loaf of bread."

He added that the price of other food products could also go up.

"Animals are fed on wheat or wheat derivatives and therefore this will feed through indirectly into meat and poultry prices, so this will have a significant effect on food price inflation generally."

However a leading food manufacturer told BBC News that a rise in wheat prices on the commodity exchanges would not necessarily mean higher prices for shoppers in supermarkets.

"Although there is inflationary pressure on commodities like wheat in the futures markets, food producers will want to wait a couple of months to see how harvests have performed around the world before making any decision on prices."

Digging into reserves

Wheat prices dropped back slightly from their highs after Russian Deputy Agriculture Minister Aleksandr Belyayev said that there was no need for Moscow to restrict its grain exports at the moment.

"[Restrictions] will not be imposed yet. The government is to decide, but the situation today does not demand this. It is very easy to reduce exports, but it is very hard to increase them," he said.

Russia has high levels of grain in reserves and will start using those.

But Mr Belyayev said that production levels would be lower than forecast.

"We will manage to produce 70-75 million tonnes, I think," he said.

The Ministry of Agriculture had forecast the grain crop to come in below 85 million tonnes, compared with 97 million tonnes in 2009.

Picking up the slack

Kona Haque, commodities strategist at Macquarie Bank, said that Kazakhstan and Ukraine, who have also been affected by the drought along with Russia, would see their export levels go down, but there would not be a global wheat shortage.

"The crop declines we are seeing [in the former Soviet Union] are very real, 20-25% drops in production leading to equivalent decline in exports," she said.

"But the fact remains that there are still big exportable surpluses in other parts of the world, particularly the US, that will be able to pick up some of the slack."

But she admitted that headlines of droughts and fires meant that it was inevitable that prices would go up in the short term.

"Particularly in south east Asia there are a lot grain purchasers who are scrambling to get hold of as much wheat as possible in case prices rise even further," she said.