WHEAT FOCUS: The heat on wheat
and a global shortage meant global inflation. This year, with
stocks at a 30-year low and wheat prices soaring, it is possible
consumers may never even notice. All the pain, it seems, is
destined to be felt by the food industry alone.
Stagnating wheat yields and a ticking up of demand in the late 1990s had laid the table for a crisis that was finally triggered last year by the heatwave in Europe. With world buffer stocks now wiped out, wheat prices have risen by 50 per cent or more since last year.
The risk of further price rises is open-ended, as farmers wait on weather reports and market watchers eye China as the swing factor that has passed from net importer, to exporter, and back again.
For the food industry, it is a raw material spike that comes at a sensitive moment. Consumers are in no mood to pay more, for anything, even staples, and more importantly the large food retailing chains are determined not to charge them any more.
With the vast majority of wheat used to make flour, it is an equation that is already pressing down on profit margins from the milling industry through to bread, breakfast cereals and pasta.
Grain millers such as the UK's Rank Hovis have increased flour prices twice. Bread prices have risen too, but not by enough to cover the increased costs. And the last six months has seen a succession of companies, such as Cranswick, Northern Foods and Greencore, highlighting the pressure for those involved in processing.
Nor is margin pressure confined to baked goods manufacturers or sandwich makers - just this week starch producer group Tate & Lyle announced that its margins had been badly eroded by the high cost of wheat which could not be passed on to customers in such a highly competitive market.
And sectors which might at first glance seem less likely to be affected by rising wheat prices are also being hit. The poultry sector is bracing itself for a tough year ahead on the back of a doubling in the price of feed wheat. With feed accounting for 40 per cent of the cost of an oven ready bird, poultry prices have already come up by 20 per cent, and more rises have been flagged.
The real problem for many producers is that the wheat crisis is not a solitary raw material pressure, but simply the latest.
As companies up and down the food chain search for new and greater cost savings, there is a growing awareness that acting as a wall between a volatile world and cocooned consumers requires more than efficiency.
There is a need for risk management.
The risk of further wheat shortages may yet disappear. Growing demand for wheat, in particular from China, has exacerbated the global situation. But another major wheat producer, Russia, looks set to become a net exporter of wheat as its own domestic demand drops off - providing timely supplies to the world market. Yet it remains an equation surrounded by ifs and buts.
The food industry has always had to deal with risk. It gave birth to the futures markets - in pork bellies, orange juice and potatoes. But it has stood at the sidelines as its own risk tools have become the domain of financial experts and trading companies.
Faced with an escalating need to lock in prices, and most specifically right now wheat prices, the European food industry may now need to turn to risk management as an even greater priority than cost management.
