Some of this 12.7 MMT shortfall will be covered by stocks on hand. At the beginning of 2012/13, Russia had 10.4 MMT of wheat in stocks, 5.0 MMT of which were held in government-controlled intervention stocks.

The USDA is currently predicting that 4.0 MMT of these stocks will be used to make up for the shortfall in production. It is possible this number could go higher, but there are sure to be consequences, such as higher prices, for drawing down ending stocks too low.  

Imports are another option to make up for part of the shortfall.

USDA currently estimates Russia will import 0.5 MMT of wheat this marketing year, while the Institute for Agricultural Market Studies (IKAR) estimates that imports could reach as high as 2.5 MMT.

However, production in Ukraine and Kazakhstan, the two closest sources of imported wheat for Russia, has been hit by the same drought that damaged Russia’s own crop. Wheat production in Ukraine is expected to fall 29.9 percent lower than last year. Production in Kazakhstan is expected to fall 53.8 percent, but Kazakhstan will export some wheat this year.

Whatever portion of the expected shortfall that cannot be met by stocks and imports will have to be brought north from the export-oriented Southern district.

SovEcon currently estimates the Southern district will produce 15.2 MMT of wheat.

If USDA estimates for stocks usage and imports turn out to be correct, then 8.2 MMT of this production will have to be moved north to avoid a shortage in the domestic market.

SovEcon is estimating that Russian grain traders have already exported 4.6 MMT of wheat in the first three months of the 2012/13, 60.0 percent of the USDA estimate of 8.0 MMT for the entire marketing year.

If the domestic market wants to avoid shortages, and the Russian government holds to its promise of not implementing grain export restrictions, then the only option is for Russian wheat prices to rise until they reach parity with competing supplies on the world market.