Sunday, July 23, 2006

Rising grain prices may push up cost of bread

Record summer temperatures, low global grain stocks and the expected growth in biofuels, have seen wheat prices rise to ten year highs and may lead to big increases in the cost of bread and pasta. Corn [maize] and barley prices are also likely to raise which may affect the cost of beer and breakfast cereals. For the fifth year in six global production is expected to fall short of demand. Hedge funds have been active in wheat futures, with a sharp increase in the number of contracts bought in the US, UK and elsewhere in Europe.

Both the US and Northern Europe have experienced record temperatures, which some see as evidence of the reality of global warming. Some wheat farmers in the UK are harvesting a month early for the first time since the 1979 heatwave. In Northern Italy, the hot, dry weather is estimated to have caused €100 of damage to crops with yields forecast to fall by 9 per cent.

Ethanol plants using wheat as an ingredient will open in Europe in the next two years. Christopher Brodie, a partner at hedge fund Krom River, commented, 'Once the ethanol plants open, we will link the price of petrol to the price of bread, because the price of wheat will be settled by who pays more, the oil industry or the food industry.'

Shroud wavers among the farming community will no doubt see these developments as supportive of their food security arguments for continuing subsidies. Alternatively, one could see it as market forces of supply and demand generating a better rate of compensation for farmers, ultimately leading, if the trends are sustained, to a rise in supply.

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