Milling & Baking News - September 23, 2008 - 7

Editorial

Is price elasticity of demand for bread truly inelastic?

s prices for wheat, for flour and for bread own price movements. A 1 per cent change, up or
have soared as a result of this year's amazing down, in prices would result in the opposite change
market strength, a great deal of thought has in use of bread and cereals at 0.04 per cent. The latfocused on how demand is being affected by prices est consumer price compilations show white pan
rising to history-making levels. Is it possible that just bread prices up 13 per cent from a year ago, which,
as much wheat will be ground into flour for bread at based on the official estimate of price elasticity of
$8 and $10 per bushel as was used when the cost was demand for bread, would point to a reduction of
less than half those astounding figures? Aggregate 0.52 per cent in demand. Such a change is hardly
use forecasts, for the United States and other devel- measurable in the context of the U.S. domestic maroped nations, as well as for many of the developing ket for bread, helping to explain why the price upcountries, would indicate that demand has hardly turns are almost invisible.
been affected by this startling climb. Of course, inIt is no surprise that the price elasticity of dedividual cases may be cited where a country, mainly mand for bread is lower in the United States than
in Africa, has shut off imports because of foreign ex- in most other countries. Yet, even in the developing
change shortages to buy wheat
nations of Africa, countries like
Is it possible that just as
at these prices. Also, use in
Benin, Nigeria and Tanzania,
much wheat will be ground the calculation is less than 0.5
feeding has come almost to a
halt in the wake of wheat prices
per cent. This means that a 10
into flour for bread at $8
considerably higher than being
per bushel as was used when per cent price advance in these
paid for corn and other feed inthe cost was much less than countries would prompt a 5 per
gredients. Yet, with these excephalf that astounding figure? cent fall in demand. From an
tions considered, it appears that
economist's point of view, the
consumption rates for wheat and bread confirm their low price elasticity of demand for bread reflects not
classic positions as products whose demand is hardly just the basic importance of this food to the well-bemoved by even large price changes.
ing of people around the world, but also indicates
Economists have studied for years the so-called that in most nations, bread has attained a status
"own-price elasticity of demand" for products like where it has relatively little competition in the diet.
wheat, flour and bread. "Own-price" means measur- Bread made from lower-priced corn has historically
ing how the price for wheat itself affects the level of replaced wheat only in those situations where a
demand for wheat. The U.S. Department of Agricul- government has dictated this change.
ture has done studies of major food groups, including
Not only may grain-based foods derive a degree of
bread and cereals, and it has compiled these measures comfort from the low price elasticity of bread, but the
not just for America, but for most of the other coun- measure of 0.04 for cereals and bread is the lowest of
tries of the world. The original goal was to determine any of the food categories. Indeed, bread is only half
how changes in international prices might affect de- of the 0.082 price elasticity of demand for the entire
mand for U.S. wheat in export trade. The possibilities food, beverage and tobacco group. Yet, unprecedentof prices soaring into the stratosphere played hardly a ed wheat price moves, like those occurring this crop
role in these calculations.
year, may weaken the basis for estimating that low
For grain-based foods, it should be no surprise price elasticity. This is particularly so when the climb
that these studies affirm that consumption of bread in wheat outshone other grains and commodities in a
and cereals changes very little in response to their way that is without precedent. MBN
MORTON SOSLAND, EDITOR-IN-CHIEF
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