Thursday, February 28, 2008

Soaring wheat prices reach all-time high

Twenty-eight years ago I worked at a wonderful do-tank/appropriate technology incubator called the New Alchemy Institute -- a collection of scientists, activists, poets and practical philosophers committed to discovering environmentally sound approaches for providing food, energy and shelter. The feeling was that if individuals and communities could be empowered if they were able to gain some measure of control over meeting these basic needs.

Over the past couple of months news of oil prices hovering around the $100/barrel level, and a housing market in chaos have dominated the headlines. Today we learn that the third leg of the the basic needs stool is also in trouble. Wheat prices have reached $24 a bushel -- a record high. Don't forget that corn prices have also skyrocketed due to its use in the production of biofuels.

Trying to make sense of what's going on can be frustrating. Economists and Wall Street analysts say the way to drive down the high price of wheat is to raise the price even higher. Huh? That, you see, will encourage more farmers to plant wheat that will eventually glut the market and drive down prices.

Stephen A. Marglin thinks he knows what gives. His book "The Dismal Science: How Thinking Like an Economist Undermines Community" does provide an insightful perspective on all this. He argues (persuasively I submit) that the market operates under assumptions (half-truths if you will) that acknowledges the importance of the individual and the nation-state -- at the expense of community. Sadly, reality would seem to support his argument.

Two perspectives on this important development. One from The Christian Science Monitor, the other the Wall Street Journal's.(GW)

Wheat prices hit record high

The cost of March spring wheat hit $24 a bushel Monday, double its cost two months ago.

The Christian Science Monitor
February 28, 2008

Dressed in his white apron and baker's hat, Jose Espinal puts the finishing touches on a chicken pot pie that will be sold to customers of Cucina & Co. later in the day. He carefully places a crust on the pie and crimps the top and bottom together.

But to make the dough for about 300 pies, Mr. Espinal, the pastry chef, used 22 pounds of flour – an item that the store knows will soon be rising in price.

"I'm expecting it this week," says Michael Salmon, director of operations of Cucina, which is in Macy's in Manhattan. "Maybe 20 or 30 percent."

Why the increase? The prime ingredient in flour is wheat, which these days is acting more like oil – rising sharply on commodities exchanges. On Monday, the price of March spring wheat on the Minneapolis Grain Exchange shot up to $24 a bushel, the highest price ever. Within the past month, the price of some types of wheat has risen over 90 percent. Already, agricultural experts say, it's getting hard to find the type of wheat used to make pasta, noodles, pizza, and bagels.

"Supplies of some types of wheat will be extremely tight," says economist William Lapp, president of Advanced Economic Solutions in Omaha, Neb. "I don't think we'll see physical bread lines, but supplies will be just tight."

Companies that use wheat say they are overwhelmed by the sharp rise and have little choice but to pass on at least part of the increase to consumers. Flour manufacturers, for example, are raising prices by at least 30 percent or more. Since the beginning of the year, bread in the supermarket has risen anywhere from 10 to 30 cents a loaf.

Overall, in January, consumer food prices were up 4.9 percent in comparison with January 2007. Cereal and baked goods rose 5.5 percent. Some items went up even more: Dairy products increased 12.8 percent and fruits and vegetables 6.1 percent.

Rising food prices, combined with escalating energy prices and falling home prices, are putting a squeeze on consumers' pocketbooks. A drop in discretionary spending is one reason that economists are increasingly worried about the economy moving into a recession.

Rising food prices also make it difficult for the Federal Reserve, which has to balance rising inflation with a slowing economy.

Yet despite the recent rise in food prices, over a longer period of time, spending on food as a percentage of household income has been declining, points out Michael Rizzo, senior economist at the American Institute for Economic Research (AIER) in Great Barrington, Mass. For example, in 1970, food represented 19.3 percent of household expenditures. By 2006, it had shrunk to 12.6 percent.

"One of the reasons for the decline is the huge increase in productivity: It's become less expensive for the farmer to produce food," he says. "Even among the poorest, the share of their budget going to food purchases is at an all-time low."

Still, there is no doubt that over the short term, products made with wheat will rise in price. Because of the weak dollar and poor harvests abroad, exports of US wheat are up 30 percent this year. It hasn't helped that some parts of Kansas and Oklahoma have had drought conditions. At the same time, some farmers have shifted crops from wheat to corn and soybeans to take advantage of demand for biofuels.

"This has been a very unique year," says Steve Mercer, a spokesman for US Wheat Associates, which promotes American exports of the grain.

In fact, US stocks of wheat are now at their lowest level in 60 years. By the time the June harvest of spring wheat begins, there will be 27 days of wheat left in storage, estimates the US Department of Agriculture (USDA). (The normal supply is three months.)

"We think it's a dire situation," says Lee Sanders, senior vice president for government relations for the American Bakers Association, a lobbying group, which has asked its members to brief members of Congress on March 12. The group has also set up meetings with Agriculture Secretary Ed Schafer and the White House. Their goal is to free up land that has been put aside for conservation purposes.

While Washington debates, the impact of rising wheat prices is already being felt on many levels. Wegmans, a grocery chain based in Rochester, N.Y., says it has raised prices on packaged breads from 10 to 50 cents. Prices have also gone up on cakes mixes, crackers, cookies, and cereal. "We have absorbed some price increases, but at a point, you have to charge more," says Jo Natale, a spokeswoman for the grocer.

The flour that consumers use to do their own baking is also going up in price. Last October, King Arthur Flour, a producer of premium flour based in Norwich, Vt., raised prices by 12 percent. It just announced another price increase – of 46 percent – for grocery stores and retailers effective April 1. It has tried to explain the price hikes to its customers on its website.

"My biggest worry is the consumer," says Michael Bittel, the company's general manager. "It will take three years of top-notch crops that exceed demand and refill stocks."

Some bakeries say they're having trouble getting some products. In Brookline, Mass., the Clear Flour Bakery has worked hard to introduce whole-grain German rye bread to its customers. But now, it can't get hold of the rye.

"It's frustrating after building up the market that for three weeks in a row, we have not had it," says Abe Faber, co-owner of the bakery and a board member of the Bread Bakers Guild of America.

Wheat growers say the best cure for high prices is .... high prices, since they will prompt farmers to plant more wheat. Last week, the USDA estimated that would happen in the next growing season.

Unfortunately, many US farmers won't benefit from the current prices since they won't have a crop until June or July. "The vast majority have not been able to benefit," says John Thaemert, president of the National Association of Wheat Growers and also a farmer in Sylvan Grove, Kan.

He ticks off how the farmer has been hit by higher energy costs and fertilizer expenses. "We've had seven years of drought, people questioning my sanity while we're out here busting our buns," he says. "Now, there is the possibility of healing some of the hurt, paying some bills, and hopefully bringing another generation into farming."

In his part of Kansas, there has been good moisture this winter. He hopes to do all he can to produce wheat for the markets. "We've had some rain and a foot of snow. It was just beautiful," he says.


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