Grain Futures Surge…Will Prices Follow?

Grain prices are up. Wheat is now 30% more expensive than a month ago.  At the Chicago Mercantile Exchange, a trusted broker only needs a 5% deposit to fund a large transaction through a trading house. A deposit of US$5,000 would fund a US$100,000 contract. A broker buying wheat on 15 June and selling one month later would have achieved a US$6 return on every US$1 invested.

What is behind this rise? Euromonitor International’s packaged food market research show a decline in consumer demand for key bakery categories. Global bread retail volumes, for instance, are projected to decline by 2% in 2012. Obesity concerns in developed markets are mostly responsible for this decline. In the US, for example, retail bread volume sales are projected to decline by 1% in 2012. With the rate of obesity in the country nearing 40%, the case to reduce consumption of bakery products – which are regarded as highly calorific – is stronger than ever.

The reason behind the recent rise in wheat prices is the weather. Record temperatures in the US mid-west and dry weather conditions in the Baltic Sea region are making traders nervous. The latest projections from the US Department of Agriculture (USDA) for wheat output in the coming season are already 4% lower than for the season just finished. If dryness continues, wheat yields will deteriorate even further and the gap between production and demand will widen. Wheat is not only used as an ingredient in the manufacture of bakery products but in cattle feed as well, which is becoming particularly precious for ‘meat-hungry’ countries like China. Euromonitor International projects volume sales of fresh meat to rise by 13 million tonnes between 2011 and 2016.

The implications for small bread manufacturers in developed markets are dire, but Western European supermarkets and hypermarkets are in a position of strength. They accounted for 40% of total bread retail value sales in 2011 and are unlikely to pass on higher commodity costs to cash-strapped consumers. In the current recessionary environment, small bread manufacturers will need to specialise in high-added-value growth niches to survive. Organic bread in Western Europe, for instance, is predicted to rise by 12% in retail volume terms between 2011 and 2015. Premium regional bread varieties will also continue to drive demand in in-store bakeries. Bread manufacturers focusing on quality will thrive, regardless of the weather in Illinois.