Restrict or not to restrict, that is the question!
Russia does not seem to be able to make up its mind on whether to restrict exports for wheat. The grain markets have been spending the summer worrying about the decision that they may or may not make. Russia may also sell from stockpiles through grain interventions to reduce any increase in price and control inflation. Food CPI is now at 5.5% which is higher than what is found in other parts of the EU.
The idea that export restrictions can be used to help curb domestic inflation is becoming more prevalent. According to The Economist, between 2007 and 2011 33 countries imposed export restrictions on food. Agriculture accounts for less than 10% of world trade, but more than 2/3rd of the cost of border distortions.
The law of unintended consequences is that efforts to stop price rises domestically through export restrictions can have the impact of raising prices around the world. Demand increases as imports fight for what may be left on the world market. One study calculates that 45% of the huge price increase in rice prices in 2006-2008 was attributable to trade restrictions.
The uncertainty from Russia just adds to the risk premium in grain prices.
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