Milling & Baking News - August 24, 2010 - 7

Editorial



Understanding needed in reaction to price swings

s the influence of Russia's grain crop disas- have spoken of hedged positions that should foreter on wheat markets waxes and wanes, all stall the impact from the wheat climb as well as
too often expert analyses and even simple companies that did not hedge. What many analyses
conversations about what this may mean reveal an neglect are the great difficulties inherent in hedging.
abysmal lack of understanding about the economics Hardly anything has become more challenging for
of grain-based foods. Hardly anything is more gall- bakers in recent years than adopting strategies in
ing, and perhaps alarming, than the frequent asser- anticipation of price moves that do not occur. That
tion that since wheat accounts for only a minimal part is especially telling for bakers who maintained long
of the cost of producing a loaf of bread, advances of 50 positions in futures in 2009 after the 2008 wheat marper cent in flour prices should really have little or no ket explosion, only to suffer the ignominy of hedgeffect on retail bread prices. Another equally specious ing losses. It is little consolation to realize that much
assertion is to blame the rise in wheat on speculators of the recent management uproar at General Motors
while at the same time hinting that
Corp. was the result of huge
Hedging choices have become hedging losses in rare minerif bakers had hedged successfully
a minefield for baking
any upward price pressure would
als where the board of directors
management that require not
have been avoided.
was not informed of this expoonly superb management skills
While no one disputes that
but also seeking expert advice. sure. Hedging choices have
many different costs go into
become a minefield for baking
delivering a finished loaf and that this cost array management that require not only superb managemeans that wheat flour is only one of many, the ment skills but also seeking expert advice.
point so often overlooked is how narrow, even tiny,
Partly because of problems related to hedging and
is the baking profit margin. As a result, the dramatic the inclination among bakers to assert that hedging is
rise in wheat flour, as experienced at a near record not the same as speculating (often translated as gampace in the past several months, means that the fail- bling), bakers and their spokesmen usually blame
ure by bakers to raise prices erodes already mini- speculators for the sort of wheat market moves exmal profitability. Modern baking operates on such perienced in the last several years. Without denying
narrow margins that prices must be increased in how trading volume has escalated to unprecedented
response to such dramatic cost upturns.
levels, even with crop and disappearance volumes
If that is not happening, and such moves have not not much changed, and that this is largely explained
yet been widespread, the credit or the blame largely by non-commercial trading, it is ill-advised to hold
belongs with retailers who resist price increases even that trading lids would prevent such price gyrations.
while recognizing the urgency for their bread suppli- Futures trading is regulated, and, indeed, regulation
ers. As food retailing has moved into fewer hands, is being increased in the wake of new laws and rules.
one alternative for wholesale bakers is developing That should be sufficient to protect against attributing
and promoting products with flexible pricing. This seemingly inexplicable price move to speculators.
helps explain recent accelerated growth of whole
The awareness of bakers, as well as all in grain-based
grain products. Like the embrace of variety bread de- foods, of the potential problems and missteps in hedgcades ago, bakers understand that specialty bread, in- ing should prompt a positive attitude toward expandcluding whole grain, offers pricing advantages.
ed market participation. While this may magnify price
Stock market reports attempting to explain how swings it also expands the very desirable efficiencies of
the Russian wheat situation may affect the bottom the market in price determination - in futures pits as
line of publicly-listed food and baking companies well as on the shelves of grocery stores. MBN

MORTON SOSLAND, EDITOR-IN-CHIEF
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Milling & Baking News, 4800 Main Street, Suite 100, Kansas City, Mo, 64112
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