Parched Russia warns on harvest as wheat prices surge

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Leading wheat exporter Russia cut its grain harvest forecast by millions of tonnes on Tuesday owing to the worst drought for decades, adding to concerns pushing wheat prices to a two-year high point.

Russia, currently the world's number three wheat exporter, has seen 20 percent of its arable land (10 million hectares) scorched by a heatwave which has also hit its ambitions to raise its share of global markets.

"I think we will have (a grain harvest of) 70-75 million tonnes," Deputy Agriculture Minister Alexander Belyayev told reporters in the Siberian city of Novosibrisk, Russian news agencies reported.

Giving the first official prediction since the full extent of the drought became clear, he said the ministry would give a more precise forecast once the harvest starts in Siberia from mid-August.

Russia had a strong harvest of 97 million tonnes of grain in 2009 and the agriculture ministry had already forecast that the harvest would be lower this year at 85 million tonnes.

Last year Russia also exported 21.4 million tonnes of grain and observers have already warned the volume risks being sharply lower this year owing to the drought.

The Russian Grain Union the day earlier gave an even bleaker forecast of the prospects for the harvest, predicting a volume for this year's harvest of only 72-78 million tonnes of grain.

It also warned that in a worst case scenario exports could halve this year, giving a range of between 11 million tonnes to 19.5 million tonnes.

But Belyayev insisted that "for the moment" Russia did not plan to impose export restrictions on grain and insisted that this year's exports would be "at the level of previous years".

"It (export restrictions) is a government decision but at the current moment we do not have this situation. Exports are very easy to lose and very hard to win."

"We will try to balance things and preserve our market as much as possible," he added.

Concerns about Russia -- coupled with a drought that has also hit Ukraine and Kazakhstan as well as a low harvest in Canada -- have already led to a spike in global wheat prices.

On Monday, wheat prices hit highs not seen since September 2008 in Chicago while on Euronext in Paris prices also hit a high not seen for more than two years.

"Wheat prices have seen the largest one-month jump in more than three decades on the back of a severe drought in Russia, prompting warnings by the food industry of rising prices for flour-related products," said analysts at Barclays Capital.

Michael Hewson, analyst at CMC Markets said: "Due to the fires, there are fears that Russia, Ukraine and Kazakhstan's export production could drop by as much as 27 percent for 2010/11."

He said the drought and ensuing wildfires in Russia had "prompted speculative buying" in the wheat market.

Russia has been targeting ramping up massively its market share over the next years by modernising infrastructure, in particular storage silos, and exploiting land that went fallow under the Soviet Union.

It has has been aiming to more than double its grain exports to 40-50 million tonnes a year by increasing supplies to grain-hungry consumers like Egypt.

The severity of the drought has seen emergency situations declared in 27 Russian regions, including part of famed black earth region where the soils are famous for their richness in humus formed by the decomposition of plant matter.

The agriculture ministry said on Tuesday it would soon start selling grain from its intervention fund to the Russian regions which have suffered most from the ongoing drought, the RIA Novosti news agency reported.

A country notorious for its bitterly cold winters, Russia is enduring its severest heatwave for decades which saw all-time temperature records tumble throughout July.

© 2010 AFP

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