What price grain as drought hurts harvest?

Farmers, brokers and bakers are on tenterhooks as the global wheat crop is counted in. Richard Northedge reports

From the cabs of combine harvesters in fields across Britain, farmers are watching the weather and wondering what price this year's wheat crop will yield. Around the world, commodity brokers are in offices, staring at screens – but their thoughts are the same. The brokers' computers report the weather from all cereal-growing regions, and graphs show how the grain price has soared.

The price of wheat in London reached £160 a tonne last week – up from £100 five weeks ago – as estimates of the world harvest were cut. The worst Russian drought in a century has ruined much of the country's grain production. Other parts of Europe have been affected to lesser degrees. In Canada, rains have damaged wheat crops, but the result is the same: reduced supply to the global market.

With wheat used not just for baking but also as feed for dairy cows, poultry and livestock, as well as for brewing and as starch, the fear of lower output is raising fears of shortages and inflation. Broker Robert Montefusco at Sucden Financial says: "We're going to have a distressed harvest in Russia which is pushing up prices across Europe and the US."

But, in Britain, farmers are enjoying the best of both worlds. Bad summer weather has delayed the harvest, but more wheat was planted than at any time in the past five years, and those who did not sell their crop before reaping can exploit those soaring world prices.

The UN's Food and Agriculture Organisation (FAO) cut its forecast for this year's global wheat production to 651m tonnes last week: 15m below June's prediction and more than 30m less than in the past two years. Abdolreza Abbassian, a senior grains economist at the organisation, says: "International wheat prices have jumped by over 50 per cent since June. The rapid increase is prompting concerns about a repeat of the crisis of 2007-08."

Three years ago, wheat's price jumped to £250 a tonne, causing prices of basic foods to rise sharply, and provoking riots in Asia, Africa and the Caribbean. Such volatility highlighted the opportunities for speculators. Only last month, one hedge fund, Armajaro, took a £600m bet – buying 7 per cent of the world's cocoa production – on prices rising further; now these funds, along with banks' proprietary trading desks, are being blamed for the spike on grain markets.

Some of the dealing on futures markets is by farmers trying to lock in gains, while some is by the bakers and millers who want to secure supplies of wheat before prices rise further. And Michael Archer, a senior analyst at Britain's Home Grown Cereals Authority, says: "Financial speculators are not always a bad thing: they add liquidity to the market."

The FAO estimates that world inventories total 188m tonnes. Last week it reduced its forecast of global wheat consumption by 6m tonnes to 659m, leaving a small deficit on the 651m tonnes expected to be harvested, but stocks will easily absorb that.

Archer says: "The stock-to-use ratio is 28 per cent. We tend not to get jittery until about 20 per cent."

Fears of a new global food crisis are not justified at this point, says Abbassian. "Stocks held by the traditional wheat exporters – the main buffer against unexpected events – remain ample." But Russia is one of those traders, accounting for a quarter of exports last year, and, last Thursday, its Prime Minister, Vladimir Putin, banned sales abroad for the rest of the year rather than see bread shortages at home. Russia exported 21m tonnes last year.

Britain produces about 80 per cent of the wheat used in its bread and imports little from Russia. However, if world prices rise, British farmers and wholesalers would sell abroad if local prices did not follow.

The Federation of Bakers says it is too early to predict the impact on retail prices, but Martin Savage, a trade policy manager at the National Association of British and Irish Millers, insists: "At the most, a loaf will go up by 5p to 10p. But overall, yields in the northern hemisphere are going to be down and that has led to hedge funds buying so farmers have stopped selling as they think the price is going to rise further."