Counter to worrying about ingredient costs
November 15, 2011
Almost guaranteed to arise in conversations this year among executives of grain-based foods are expressions of concern and even alarm about wheat and other crop prices and their impact on the cost of major ingredients and thus on operating margins. The reason for that attention is easy to understand in light of the widespread negative effects on financial results stemming from what has happened to prices for ingredients like wheat flour. Even with wide price gyrations both up and down, sizable upticks have been incurred in operating costs. The ultimate result is higher wholesale and retail prices for bread and other key products. With the approach of the 2012 election year, those retail advances have made food prices another one of the subjects of intense political debating, and that discomfits grain-based foods.
Few of those fretting about this subject are ever heard voicing even the slightest pleasure with the boost to the net income of farmers caused by these same price swings. Like the frequently-heard analogy to gambling where there are both winners and losers, it is important in considering all the implications of this year’s movements in wheat and flour prices to recognize that growers are significant beneficiaries of conditions just as other parts of the very same industry may be complaining and suffering. To a great degree what bakers and bread consumers are paying in additional ingredient and food costs is enjoyed by wheat farmers as additional income.
Obtaining a measure of this may be done in many different ways, but the best overall approach is to look at the increase in net farmer income, rather than in gross receipts. A sizable share of the producers’ gross belongs to production expenses, which for this year are estimated to be up 11.4 per cent from the 2010 fiscal year, whereas gross cash receipts gained 17.8 per cent. Changes of that dimension leave room for expansion in net farm income, which rose to $103.6 billion in the 2011 fiscal year, ended September 30 and up 31 per cent from 2010.
When it comes to wheat, it is helpful to understand that it is crops that have gained the most from market conditions in the 2011 fiscal year, posting a 19 per cent increase, whereas livestock gained 16 per cent. Many different categories of crops and livestock are estimated to have reached record highs in 2011. Wheat is not one of those, lagging behind its phenomenal performance in 2008. Yet, gross receipts from wheat rose almost 37 per cent in fiscal 2011 from the prior year. The net income of wheat farmers in all likelihood showed larger gains than that for other crops because the sharpest rise in expenses, for new seeds, for fertilizer and for other chemicals, do not affect wheat as much as corn and soybeans. Of course, wheat farmers did have to endure the same sharp cost increases as producers in general from items like fuel, equipment and labor.
Based on domestic food use, currently at 940 million bushels, as a share of total disappearance, the grain-based foods industry bears 40 per cent of that wheat cost increase.
Before bemoaning the excellent financial year that wheat farmers have had in fiscal 2011 and which, based on current projections, may well continue in 2012, grain-based foods would be smart to remember another industry concern — the shrinkage of acreage devoted to wheat. Since the peak of 1981, the U.S. harvested area of wheat has dropped 30 million acres, or nearly a third. That is attributed to the lesser returns from wheat in comparison to corn and soybeans as well as government program changes that no longer require wheat planting. As that acreage downtrend has persisted, the possibility of crop shortfalls stalks the nightmares of industry executives. For that reason, the current income situation may test whether improved prices and income alone are sufficient to make wheat once again a favored crop of the nation’s farmers.