Russian Prime Minister Vladimir Putin announced on Saturday that Russia will end its wheat export ban on July 1, potentially easing supply constraints that have pushed up prices of grains and created inflation concerns.
The ban was put in place last year after a heatwave, followed by massive wildfires, devastated large areas of Russian farmland and saw food prices spiral upwards. Ukraine also stopped exports.
UK and US markets were closed Monday for a bank holiday, but wheat traded down 5 percent in Paris following the news. French agricultural trader Agritel said in a market commentary that the revocation of the ban had largely been priced into markets, and that uncertainty, including the forecasts of another hot summer in Russia, should keep prices buoyant.
On Tuesday morning in London, wheat for July 1 delivery was down by more than 2.5 percent.
Erin Fitzpatrick, commodity analyst at Rabobank, told CNBC.com that an earlier relaxation of restrictions in Ukraine had prepared markets for the Russian export ban to end, so the announcement had been priced in.
"Russia was such a large exporter prior to the drought that the entire market was expecting them to come back and become an exporter again this year," Fitzpatrick said.
Russia could export as much as 15-20 million tons, dependent on weather conditions
Weak rainfall in Germany, France, the UK and Poland is adding to continued supply concerns. The International Grain Council trimmed its global wheat production forecasts for 2011/12 by 5 million tons in May, down to 667 million tons, although it noted that output is still likely to be higher than last year.
Even so, consumption of wheat is set to hit record levels of 669 million tons this year, the IGC said.
This should mean that the current high price environment persists, according to Fitzpatrick.
"We're forecasting a global correction below the numbers that the IGC has come out with and actually below the USDA (United States Department of Agriculture) forecasts for global wheat production. The exports coming out of Russia and the Black Sea region are probably not going to be enough to offset the declines in other parts of the world, particularly in Europe," she said.
"We've seen very dry weather, particularly in France, the UK and parts of Germany this year, which is going to cause Europe's wheat production to fall for the fourth year in a row. As a result, the exports coming out of the Black Sea region are not going to be enough to fill the void due to weather disruptions in other parts of the world," Fitzpatrick said.