Water, Wheat and Russia

In a time when there is much discussion of peak oil and the idea that other commodities are less abundant or more costly to access, one issue that might not get enough attention among investors is the shortage of water.  Some political scientists, for example, have suggested that the next war in the Middle East may be over water not oil.

Grain is very water intensive.  Roughly speaking, it takes 1000 tons (100 cubic meters) to grow a ton of grain.  Find a country that is importing grain, and you’ll find a country that has a water deficit.

There has been a drought around the Black Sea that has limited the wheat production in Russia and the Ukraine especially.  The price of wheat rose about 65% form late June through early August as the market priced in the export restrictions imposed in Russia and to a lesser extent Ukraine.  There was a drought in Australia and some flooding in Canada that also limited projections of the crop size.

After broad range trading over the past few months, wheat prices are moving higher again–with an almost 10% rise over the past couple of weeks.  Poor weather in central Europe have compounded the agriculture woes.  In addition, and more important, Russia is signalling it may be an importer of wheat.  Moreover, Russian farmers have reportedly been trying to cut costs (faced with smaller harvests–less income) and reducing the use of fertilizers.  This, coupled with the drought could mean little improvement in 2011.  The winter wheat planting area has been cut by about 15% to 15.7 mln hectares.  Since the fall of the Soviet Union, Russia has not been a significant importer of wheat.  This may change.