Milling & Baking News - September 12, 2006 - 8

E D I T O R I A L

Fall in stocks-use ratio signals grain transformation

lobal wheat and indeed all grain markets have
been reflecting a level of uncertainty that is
unusual for this point in the crop season. With
wheat harvests in the Northern Hemisphere completed,
the autumn coarse grain and soybean crops quite certain, conditions for seeding the new winter wheat crop
known and prospects for the Southern Hemisphere assessed, this moment would typically be marked by a ruling consensus about the forces that might drive prices
in the months ahead. Instead, heightened uncertainty is
the rule of the day. This stems from the way global grain
markets have been transformed by developments that
have not received the careful attention they deserve.
Of course, one of these transforming forces - the rising importance of ethanol and biodiesel - has received
more than its share of attention this crop season. Yet, even
as the focus shifts to studying how expanding production of these fuels may impact markets that once paid no
heed to industrial demand, the uncertainties also have
magnified. Grain markets now are moved by fluctuations in the price of crude oil, by contrasting prognostications about interest rates and economic activity, by
dueling views on the role of grain-derived fuels, and by
wonder about how political change may affect supply
and demand.
Now that a market analysis may hardly be written that does not acknowledge fuel demand, sight has
been lost of other fundamentals that merit equal or even
greater attention. As a result of the disappointing Northern Hemisphere wheat crops this year, in both North
America and Europe, the world crop of wheat fell to a
three-year low. And while price strength has prompted
reduced feeding of wheat in Europe and the Commonwealth of Independent States ending stocks will be on a
tonnage basis the smallest since the early 1980s. When
measured as a ratio of ending stocks to crop year disappearance, the ratio at the close of 2006-07, estimated
at 20.9%, is the lowest it has been in a record covering

the past half century. At the start of the 21st century, the
ratio of ending world wheat stocks to disappearance
was near the recent peak of 35%. The fall of 15 percentage points to the current ratio describes a world wheat
business living on the edge of supply adequacy. Even as
markets reflect this fact in increased volatility, warnings
are heard about the dire consequences of a significant
crop shortfall in 2007.
The record-low ratio of ending stocks to use stems
from another phenomenon that uniquely characterizes
the first seven crop years of the 21st century. In all but
one of these years, annual disappearance of wheat has
exceeded that season's crop. Considering that in both
the 1990s and 1980s, the last two decades of the 20th
century, the world wheat crop exceeded use in seven
of those ten years, the dimension of how the world of
wheat has changed becomes striking.
Not to be forgotten in examining the repercussions of
this transformation is the way the global grain milling
and marketing business has itself changed in the same
period. This has come about largely through the rising
dominance of companies ruled by economic incentives,
rather than government control. These companies are
inclined to maximize returns by steps like minimizing
inventories, thus providing a safety valve of sorts as
aggregate stocks fall. Yet, another safety valve from the
past is notably absent this season. That is the frequent
experience when wheat production fell short that other grains would make up for the bread grain shortfall.
In 2006-07, just the opposite is the case, with the "all
grains" situation, made up of wheat and coarse grains,
more precarious than wheat. For all grains, the ratio of
ending stocks to use is projected to fall to a new low of
15.7%, contrasted with its peak of 36.1% attained in the
1980s. Considering how this ratio is viewed as one of
the most fundamental measures of grain market movement, the dimension of this change signals a new world
of wheat and grain market behavior.

Bread prices at retail do not reflect sharp cost gains

f anyone is ever tempted to question the competitiveness of the retail market for bread in the United States,
or to wonder about just how negative low-carbohydrate dieting might have been for the industry, it might
be helpful to examine the monthly bread price statistics
compiled by the Bureau of Labor Statistics as part of its
cost-of-living calculations. What emerges from looking
over recent monthly prices is the tough slog wholesale
baking has faced in trying to recover surging ingredient and other costs ruling for the past year or longer. In
the case of white pan bread, the low price came in February 2004 when the city average dipped to 94.3 cents
per pound, which was a dime less than a year earlier.
It required more than a year for the city average white
pan bread price to rebound to $1.09 in June 2005. Ever
since, and in face of escalating ingredient and energy
costs, this price has held for only a brief time, averaging
$1.07 in July, the latest month for which the B.L.S. has
provided data.
If the situation with white bread pricing is far from
satisfactory, the path of whole wheat pan bread seems
contrary to all expectations. It was more than a year ago
that new dietary guidelines from the federal government singled out whole wheat bread for emphasis in

bakingbusiness.com / world-grain.com

eating. While the new guidelines played a role in diminishing the awful influence of low-carbohydrate dieting,
the accompanying suggestion that half the cereal products consumed should be whole grain portended a shift
in food patterns that would favor what had been a small
slice of overall bread consumption. Indeed, whole grain
was a niche that few if any baking companies saw much
potential for prior to the new guidelines.
As revealed by whole grain bread prices, the guidelines' impact may not be judged rip-roaring. The B.L.S.
data show the price peak for whole wheat pan bread of
$1.51 per pound was reached in June 2002. In the face
of active promotion and a heavy round of product introductions meant to capture consumer demand, the
average price fell to $1.28 in the spring of 2004 and
only recently rebounded to $1.42. Considering the earnest promotion of whole grain products in marketing
and advertising in recent months, it might be expected
that whole grain prices would have strengthened. The
U.S. city average shows this is not the case and that the
premium for whole wheat bread over white pan bread,
now at 34 cents per pound, has changed little, if at all, in
recent years, even as the case for whole wheat bread is
pressed with considerable vigor. MBN
Milling & Baking News, September 12, 2006 / 9

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Milling & Baking News - September 12, 2006

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