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Vladimir Putin, Russian prime minister, announced a ban on all the country’s grain exports, effective within 10 days, after a severe drought devastated crops and wildfires spread across the country, according to the Financial Times of UK.

The move, which caught traders and food producers by surprise, pushed the price of wheat to its highest in two years and evoked memories of the last time the then Soviet Union suffered a catastrophic crop failure in 1972. And Moscow introduced export restrictions during the 2007-08 global food crisis, triggering a wave of panic buying from North Africa and Middle East importers.

“There is full blown panic in the European grain market,” a senior trader was quoted saying.

European wheat prices rose more than 12% to hit a peak of €236 a tonne on record trading volumes. US wheat futures also jumped and are up more than 80% since mid-June, the fastest rally in nearly 40 years. There were fears that food price inflation could take off and that the world could even suffer a repeat of the 2008 food crisis should the big shortfall in wheat output persist.

“Soaring grain prices have brought food inflation back to centre stage,” said Joachim Fels of Morgan Stanley in London.

Prices of other crops including barley, corn and rapeseed, also jumped sharply.

Shares in some of the world’s largest food companies tumbled on fears they would struggle to pass on all the increased costs of buying wheat to millions of households already suffering the effects of the financial crisis. However, several companies have already said they plan immediate price hikes on goods, such as bread and biscuits.

“I think it would be expedient to introduce a temporary ban on export grains and other agricultural goods,” Putin told a cabinet meeting. “We cannot allow an increase in domestic prices and we need to maintain the number of cattle.”

The ban would take effect from August 15 and last until December 31.

The worst drought in more than a century in the Black Sea region has led to widespread alarm. Forecasts for the Russian grain crop have been falling daily, with the agriculture ministry’s most recent projection at 70m-75m tonnes, down from 85m tonnes a fortnight ago. Last year, the harvest was 100m tonnes.

Traders at Glencore, the world’s largest commodity trading company, early this week warned the crop could fall to about 65m tonnes.

Cargill, the world’s biggest trader of agricultural commodities, criticised Moscow’s move. “Such trade barriers further distort wheat markets by making it harder for supplies to move from areas of surplus to areas of deficit, and by preventing price signals from reaching wheat farmers,” it said.

Arkady Zlochevsky, president of the Grain Union lobby group, said that the swift imposition of the ban risked undermining Russia’s reputation as a reliable supplier.

The UN on Wednesday attempted to quell growing panic in the markets, saying that fears of a repetition of the 2007-08 food crisis were unjustified.

But it also cut its forecast for global wheat production by 25m tonnes to 651m tonnes, the biggest revision in 20 years, and warned that a continuation of the current weather conditions could affect planting of the next Russian crop, with “potentially serious implications” for global wheat supplies in the 2011-12 season.

Arkady Zlochevsky, president of the Grain Union lobby group, said the government needed to warn exporters ahead of such a decision and give them time to meet existing contracts, according to Interfax. “What are we to do with the grain that has already reached port?” he asked. “We have no mechanisms for returning it.”

The Russian lobbyist also said the Egyptian tenders that Russian traders had fought hard to win could now be under threat. “Russia’s reputation as a reliable supplier of grain could be under threat from such a sharp decision.”

Zlochevsky said it would make more sense to impose a ban later, by September 1 for example, so as to give exporters time to unload contracted supplies.

Putin said the government would disburse Rbs35 billion (NZ$1.61 billioin) in subsidies to agricultural producers. He also added that Russia would use its grain stores for distribution without auction to regions in need.

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