Wheat vies with oil for role in global economy

by Morton Sosland
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Even though it’s obvious for grain-based foods executives to worry about the impact of current high ingredient prices on the industry, parallel attention is owed energy markets that not only contribute to similar cost and pricing pressures but loom as potentially powerful influences affecting demand for bread and other flour-based foods. It may even be claimed that the outlook for grain-based foods is as tied to the behavior of oil as it is to fluctuations in wheat. Both markets are subject to and are responsible for economic forces affecting the well-being of a broad range of industries, none hardly more directly than grain-based foods. The difference this time is that global prices for both skyrocketed into nearly uncharted territory, which in turn poses a massive challenge that is different from the past.

That difference is best analyzed in the way that the two commodities are moving on similar trajectories, whereas past courses often were sharply divergent. Sure, earlier times included similar parallel moves, but for the most part the opposite is the case. Rather than dismissing parallel moves as temporary blips, their repeat from only three years earlier is startling. This is especially so when it is realized that both approached near record levels at times when many respected analysts contend that supply-demand conditions hardly justify such strength.

Both have displayed sensitivity to developments that on their surface might not appear so threatening. Much of the recent strength in oil is attributed to the revolution interfering with Libya’s oil exporting. Yet, that single country is a relatively small supplier. That interruptions in Libyan oil exports could be blamed for recent price gyrations reveals a characteristic not often attributed to a global market with the exceptionally broad supply-demand reach of oil. As seems to be the current case, oil markets are more often affected by politics than by bumps in supply, which are rare for this commodity’s known availability.

Wheat’s supply-demand issues are similar, but also are viewed as more complex, if for no reason other than the key role weather plays in the size of annual wheat harvests, a factor unknown in oil. Yet, politics also loom as a significant force in wheat. Nothing underscores that more powerfully than the manner in which recent gains in wheat were precipitated by actions taken by Russia’s leadership to protect domestic supplies by halting exporting. A disappointingly small 2010 harvest due to unfavorable growing conditions gave Moscow the excuse for taking actions generally regarded as politically motivated and irresponsible in light of resulting food shortages.

Uncertain prospects for Northern Hemisphere winter wheat, related to unfavorable weather in places like the American Great Plains, emphasize how weather affects the wheat supply. Yet, weather also plays a key role in energy markets as a demand, not a supply force.

When it comes to the state of the economy and the commodity that has the greatest impact on consumer demand, the immediate inclination is to say oil prices and their direct tie to the cost of motor fuel have the reins. Current gasoline prices are credited with curtailing some consumer spending, not just in America but in other parts of the world. Thus far, this damper on consumer buying is not felt in lesser spending on the products of grain-based foods. But if fuel prices continue near present levels, grain-based foods will know their impact.

Acknowledging that high oil prices threaten economic well-being certainly does not mean that wheat, along with other grains like corn and soybeans, are without power in influencing the future course of the U.S. economy. Wheat moves have consequences well beyond their effect on the cost and pricing structures of grain-based foods. They are important to much of the world’s population, and prices that put these grains beyond the reach of millions of people are perhaps even more worrying than oil in creating political turmoil and even revolutions.

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