Major downside and upside risks in flour prices
March 22, 2011
The perils of purchasing were on full display last week as flour buyers grappled with market conditions aptly characterized as “wild.” Two weeks after several bakers took advantage of a large flour price decline to extend contract balances through the end of the crop year, prices fell sharply again last week consistent with a general but brief buckling of commodity prices in reaction to the earthquake, tsunami and nuclear plant problems in Japan.
With prices slumping yet again, bakers opted to average down on pricing for the spring. The logic of taking the initial coverage was difficult to refute. Prices had declined more than $2 a cwt from highs, and with markets volatile, a tight carryover likely and winter wheat crop conditions precarious, it made sense to book protection.
Still, the coverage taken and what has transpired since then underscored again the major hazard that has emerged for bakers since the price spike of 2006-08, which is flour prices, while significantly below highs, are at wide premiums over historical averages.
Even at last week’s lows of about $19 per cwt, flour prices still had downside potential that was large enough to have a material impact on baking margins in the months ahead. Finding ways to protect against such risk is critical for bakers now and into the indefinite future.