Do wheat prices really have diminished role?

by Morton Sosland
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In a world of worsening perplexity, it is still a shock to read analyses from respectable sources asserting that wheat moves have little impact on the price of bread and other grain-based foods. Research conducted by the Economic Research Service of the U.S. Department of Agriculture and the Federal Reserve System points to this purported disconnect between bread and cereal prices and the wild gyrations of wheat in 2010-11 as evidence. That appears contrary to history-making parallels often cited by politicians wishing to intervene in one or another of these markets as a way of preserving food security. Yes, the principal comparisons in the past have focused on how wheat advances have prompted higher consumer bread prices. At other times, bread moves have been related to poor returns for wheat farmers.

The E.R.S. study, presented in a recent issue of its Amber Waves, focuses on the way the global index of prices for the four basic crops (wheat, rice, corn and soybeans) as compiled by the International Monetary Fund, rose earlier this year at a faster rate than consumer food prices. Between June 2010 and March 2011, the four-crop index rose 70 per cent, compared with 39 per cent for food. Milling-quality wheat was among the sharpest gainers in this period, but the lag in food, where bread is prominent, received major attention. At the same time, the E.R.S. notes that non-agricultural prices rose even more than food prices, contrasting with the lag by the four crops.

According to the E.R.S., six major price spikes have occurred in the four-crop index since 1970. It cites common factors contributing to these upturns, such as population gains, growth in per capita incomes, and depreciation of the U.S. dollar, as well as wide swings in production in important regions due to unfavorable weather.

In the same manner as it emphasizes the disparity between crop markets and consumer food prices, the E.R.S. follows a similar vein in arguing about the impact of biofuels on grain. “Attributing most of the 2001-08 rise in food prices to biofuels production seems unrealistic,” it says, pointing to the plunge of more than 30 per cent in crop prices during the last half of 2008 even as biofuels output continued to expand. It also notes that wheat and rice rose more than corn, a major fuel feedstock, in the period when biofuels output posted its largest increases.

It is the Federal Reserve, in a periodic “Main Street Economist,” that contends that wages and labor markets “more heavily influence U.S. food prices.” It says that unlike food prices in developing countries that are tied to crop prices, inflation in America is being held in check by the diminished power of crop prices. “With additional processing, commodity prices play a smaller role in the final retail food dollar,” the study says. It estimates that farm commodities account for about 15 per cent of U.S. retail food costs, down from a third in the 1970s. While forecasting that global food will continue to feel the impact of moves in wheat and other commodity prices, it says “U.S. food prices may be driven more by wages and economic growth.” Setbacks in commodities, it adds, will have a reduced impact tempered by stable wages.

These studies appear to reflect more an attempt to understand shifts in the U.S. economy and to explain away any negative from biofuels. Such a discussion conducted at a time like earlier this year when wheat prices were spiking would have properly produced outrage from food companies. Seldom has there been a time like this year when commodity prices hurt the financial results of so many food companies. Maybe detailed economic studies promote understanding of the diminished role for wheat prices in the final retail cost of bread, but that relationship is hugely important for bakers when it comes to what is paid for this major ingredient.


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