Bakers may have to get used to higher wheat prices following the spike in mid-2010 as signs are that world production may not rebound as fast as it did after the 2007/08 peak.
According to the Rabobank quarterly wheat forecast, spot CBOT prices are expected to hover just below $7 a bushel in the first three quarters of 2011. This follows a spike of around 60 per cent this summer when news of a poor global harvest and the Russian export ban hit the market.
The peak in prices is low compared to the spike in 2007/08 when wheat reached $10 a bushel but back then prices fell as quickly as they rose. Supply responded quickly to the spike and prices were down to below $6 a bushel in almost 6 months.
Muted supply response
This time around Rabobank believes that supply will not be able to respond so quickly.
“In 2011 we do not expect the same magnitude of supply response amid this rally due to the intense competition from other crops and poor weather conditions during the recent winter wheat plantings in the Northern Hemisphere,” said Rabobank.
With prices set to remain at high level for some time, a wise procurement strategy is unlikely to be enough to protect bakers from higher input costs.
Gordon Polson, the director of the Federation of Bakers in the UK, said big bakers have minimised the impact of short term fluctuations and ensured good continuity of supply through long-term contractual arrangements. But Polson told this publication: “If the long term trend is upward, as it appears to be, then this will not make them immune.”
Sustained high wheat prices could be difficult for bakers to deal with financially. This is especially true for bread makers, for whom wheat costs make up about 29 per cent of variable costs.
Rabobank warned earlier in the year that the current softness of demand could accentuate the problem as it may further restrict the ability of bakery firms to pass on higher costs to consumers.