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Food shock 2012 — Inflation higher, trade balance weaker


This year’s higher global wheat prices (mainly because of the drought in the US) and poorer harvest in Russia YoY mean that we could see more severe inflation risks and a weaker trade balance. According to our base case scenario for 2012, Russia’s harvest is at a normal level (down from last year’s above normal), except for grain.

Unlike 2010, when a drought seriously affected the Russian harvest across the board, the vegetable harvest in Russia this year is unlikely to be influenced much by the weather. We see it returning to normal levels and not leading to a repeat of the depressed prices in 2H11. The base effect coupled with the impact of higher prices of meat, oils, cereals and bread pose extra inflation risks for 2H12. We are increasing our year-end CPI forecast to 7.3%, from 7.0%, on the back of the stronger growth in food prices which we now expect (food CPI YoY growth rates to reach 8.8% by yearend).

We do not believe that stronger food CPI growth this year will have a significant effect on the CBR’s behaviour in 2H12 and we stick to our 50bp rate hikes forecast (25bp in each of September and October). However, in order to limit the impact of food price increases on inflation expectations, the rate cuts that we expect next year might be postponed into late 2Q13.

The key food items in Russia’s external trade are wheat (on the export side) and meat, oils and sugar (on the import side). Due to the poorer harvest, we expect grain exports from Russia of 12-15mnt, as opposed to the 28mnt exported in the 2011-12 grain season. At the same time, the combined effect from increased imports of sugar (volumes) and meat and oils (prices) will likely reach USD 0.5bn in 2H12 and USD 1.5bn in 1H13. The total effect on external balances (a negative impact of USD 1.0bn in 2H12 and USD 2.9bn in 1H13) will be marginal, but nevertheless supports our cautious view on RUB later this year. 

Maxim Oreshkin, Daria Isakova, Ivan Kushch
VTB Capital analyst

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