Commentary: In fast moving situation, 'go slow' in seeking government intervention
February 14, 2008
by Josh Sosland
It is difficult to overstate the need for caution as the grain-based foods industry responds to the unprecedented and alarming developments in wheat markets. With wheat futures prices surging in a bubble-like frenzy, the temptation to seek government assistance is not surprising. Fueled by mounting concerns over tightness in old crop spring wheat supplies, Minneapolis nearby futures prices surged last week above $15 a bu. Kansas City and Chicago futures contracts also rose to new record highs. Bolstered by advancing cash wheat premiums, flour prices for standard bread flour eclipsed $30 a cwt last week.
Already, bakers have invited Washington to intervene in export markets as well as in commodity markets and have warned of the possibility of bread prices jumping to $5 a loaf. Given the industry’s longstanding and wise attitude strongly in favor of free markets as well as its deep suspicion of government interventions, grain-based foods should take a breath and think long and hard before seeking help from the federal government.
To begin with, the industry should recognize immediately that the problem at hand is not one of prices that are too high (even though prices are shockingly high). The real problem facing bakers right now is price volatility that is nearly unmanageable. Wheat prices are moving up too fast to expeditiously pass along higher ingredient costs. Additionally, with wheat prices not only at record highs but basically 100% above previous records, flour buyers face unprecedented and terrifying downside risk.
Still, bakers should work assiduously with suppliers to find market-based solutions to these challenges before considering appeals to Washington. Should acres that are not environmentally fragile be released from the Conservation Reserve Program as bakers and millers are requesting? Of course, but such a move will not ease old crop tightness or volatility. Should index funds be allowed expanded speculative positions? A strong case has been made against such a move until the impact is better understood. Should wheat export sales be suspended temporarily or indefinitely? That is a much more complicated question. It was difficult not to be troubled by the spate of export demand earlier this crop year from nations such as Algeria whose presence has been absent for many years. These buyers affirmed America’s "residual supplier" status by swooping in only when other exporters had stopped selling.
This real-life experience is not the picture of a free market or a level playing field and leaves the U.S. market susceptible to the kind of volatility witnessed in recent days. But most of these "foul-weather" buyers have been withdrawn again from U.S. markets for months, and it would be unimaginable to cut off wheat supplies this year to countries, including many in the Pacific, that have been consistent and loyal customers of U.S. wheat year after year for decades. Not surprisingly, these nations — Japan, South Korea, Taiwan, the Philippines — are strategic allies of the United States, and they are strategic allies of a healthy U.S. wheat industry — important to growers and bakers.
As grain-based foods looks for relief for the current wheat situation in wheat, care should be taken not to turn these wheat buyers into sacrificial lambs. At least for now, markets are working. While booking flour was difficult while wheat futures prices were locked limit up, markets continued to function this week. Rather than inviting the government to intervene in grain markets (and undesirable intervention in bread markets almost certainly would follow), grain-based foods companies should pursue purchasing strategies using tools afforded in free markets.