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Argentina and Russia - will either curb grain exports?

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It would hardly be unprecedented for either Argentina or Russia to trip up free trade, speculation of which, in crop trade, has added an extra leg to the rally in grain futures.

Both countries are serial offenders as far as closing off trade to protect their own farm commodity pipelines goes.

And crop supply alarms are ringing in both – in Russia because of the speedy pace of exports, with wheat shipments alone approaching 15m tonnes in the first half of 2011-12, more than the country usually manages in a full year.

In Argentina, the problem is drought, which has slashed hopes for corn and, increasingly, soybean harvests.

However, only one of the pair looks likely to enact export curbs.

Not far to go

And that's Russia.

The maths stacks up better. Russian grain shipments so far in 2011-12 look set to reach 20m tonnes by the end of this month, according to analysis group Sovecon.

It's not a stretch to think they can, before the season ends five months later, add the 3m-5m tonnes needed to reach a level which the government has said will trigger export restrictions.

And there is no reason to think the government will not be as good as its word, even if presidential elections in March come up with a surprise.

Protecting domestic grain supplies, and keeping food inflation in check, is likely to prove a far bigger priority than free trade, after the export ban in 2011-12 worked so well. It met domestic objectives without alienating customers, who queued up for Russia's cut-price grain as soon as the curbs were lifted.

Political ramifications

For Argentina, the case for curbs is not nearly so compelling.

Even the gloomiest production forecasts so far do not strip the country of exportable surpluses of corn and soybeans.

Nor are politicians so likely to jump so quickly anyway at restricting shipments of crops, despite in recent years imposing bans for exporting the likes of scrap steel, and restrictions on products from honey to quinces to some destinations.

Grain shipments are a nice little earner for the government, through export levies – duties which also mean Argentina cannot, like Russia, bank on low prices to win back favour with spurned customers.

Indeed, hefty restrictions on shipments would likely play out badly with the Chinese customers Argentina has expended significant political effort attempting to curry favour with for long-term trade deals.

Room for manoeuvre

Of course, it is possible that neither country will restrict exports. Russia's grain harvest last year proved some 3m tonnes bigger than had been expected, giving the government some elbow room to lift its export ceiling.

But Russia looks far more likely to act.

So investors should be pumping more risk premium into wheat futures than into corn or soybean ones. Which is exactly what they have been doing.


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