Food costs: World and US trends as predictors of what is to come

Dan Ettling shows why bakers need to care about harvest reports. Bakers should understand conditions affecting their raw materials - and react.

Many theories abound about recent increases in food costs. Accurate projections about the near future can be achieved though knowledge of the causes, and what is being done about them. It is important to attempt to differentiate between responsible concerns and sensationalism in this discussion.

So why are the prices of major ingredients used by bakers and other food producers so high? When will we see some moderating, where will the moderating be and how stable will the market be for the next one to three years. To accomplish this we need to consider the top factors impacting the world food market, beginning with the core commodity of wheat and look at the interactions of crops such as soy, maize, oil seeds etc.

The first critical factor affecting the global wheat market is that world stocks (inventory) have arrived at a 30 year low. Normally the world production stays fairly close to world use through market corrections. However, there are some exceptional harvest years due to certain circumstances such as drought etc.

In 1997-98, for example, world wheat production outpaced use by a little more than 35 million metric tons (mmt). We came into the new Millennium with good inventories and relatively stable prices. Twice over the last 8 years we have observed use significantly outpace production. In the period of 2002-04, the world production was about 55 million metric tons (mmt) short of use. Again in 2006-07, harvests collectively were short about 39 mmt below use. So our current situation really shouldn’t have been a surprise to anyone.

In the first instance, during 2002-03, one contributing factor was China having a bad year. China usually produces and consumes around 100 mmt. During this harvest they had both a bad crop year and low stocks going into the harvest. This impacted global markets in two distinct ways, both through demand as they bought up a lot of grain in addition to hiring a significant percentage of the overseas container ships which affects the shipping costs of everything.

A number of countries had off or poor wheat harvests in 2006-07. The Australian wheat crop harvest was less than half its recent average for two consecutive years due to drought. This means that it took Australia two years to produce one typical annual wheat crop by volume.

Other contributing factors to the current price situation include the dramatic spike in fuel costs. In addition to the overseas and regional shipping requiring petroleum, petroleum is also the basis for some fertilization of many crops.