Related article: Wheat Market Update: 14 09 2007

Here at straightgrade.com we feel that it is incredibly important for owners, managers, and purchasers to be aware of the forces that drive ingredient costs (that’s why we give you access to commodity market data right on the frontpage of straightgrade.com). But it’s not all that surprising that most owners/managers who operate small to medium sized bakeries (and some rather large ones) view flour pricing as some sort of game they are not allowed in on. And it doesn’t take long in this business to understand why they feel that way. Here’s a typically scenario: an ingredient salesperson shows up when the bakery is first opening, he gives pricing (often his/her best if it is a new account that is being competed for) and that is it. A few months after the dust settles the owner/purchaser take some time to go over the invoices and the price of the flour has changed. If it has gone up then a phone call often follows which often results in a less than clear justification from the salesperson.



Well, the fact of the matter is your flour price is controlled by a number of factors including everything from the salesperson’s desired profit margin, the distributor’s operating cost (transportation, insurance and warehousing to name just a few) and, perhaps most important of all, the commodity wheat markets. It is these commodity markets that we will take a short look at in this article.



As everyone learns at school, prices are most often determined by the forces of supply and demand. In this day and age (especially as we will see in a moment) that is perhaps too simplistic of a formula for wheat and flour prices but it still hold mostly true. Every year wheat of all the major classes is planted throughout the world and during its growth cycle it is subject to the forces on nature including rain, sun, wind, drought, etc. During this growing period the crop and the weather that is influencing it are analyzed and evaluated repeated and the USDA issues reports (you can find a collection of one such influential report here).



How these reports are interpreted by the various players in the grain market can have a tremendous impact on the price of wheat. But here is the interesting thing: these pressures are felt on the wheat that is currently in the marketing channels (ie not the wheat that is still in the field-being affect by a drought for example, but last year’s wheat crop, which has already been harvested and waiting to be shipped to the mill). So what the markets are factoring in is how much the condition of the current crop is, in their estimation, going to affect the supply characteristics of the wheat that has been harvested and is currently being bought and sold. If the current conditions are bad, this will affect future supply making the current wheat more valuable and thus raise the price. If the current crop looks great and there is going to be ample supply of good quality wheat upon harvest then current demand should be able to be met with little problem and prices should fall.



Traditionally the time of the year, in addition to crop conditions has had an impact on the wheat market (although it appears that, for reasons we will look at next, this impact is lessening). Again, these seasonal influences can be reduced to supply and demand pressures. The time of heaviest demand for wheat based products tends to be in the fall when bakers and grain-based food manufacturers are producing their highest volumes of products. Therefore you often see a spike in wheat prices at this time of year. On the other hand, the hard wheat harvest begins in southern Texas in late May (most years) and this initiates the first influx of wheat into the marketing channels (ie the path from the farm, to the elevator, to mill, to your bakery). With this jump in supply you often find some of the lowest wheat prices of the year. And, traditionally throughout the year there have been other key times to buy and other times to sit back and wait for the next cycle.



In the last few years there has been a large influx of ‘fund’ money into the commodity markets. This is money coming from investment funds who are looking around for various markets in which they can make some short term investments, play a short-term cycle and then get out and move the money elsewhere. These funds, unlike many of the traditional players in the commodity markets are not going to ever take delivery of the wheat. It is simply a transaction for generating a return. The net impact has been, in recent years, a reduction in the cyclical supply and demand nature of the markets. There is so much of this fund money in the commodity markets that they are able to influence swings up and down outside of the usual cycles of crop conditions and seasonality.



So what does this mean to you the baker. It means you need to pay attention to what is going in the commodity wheat market. By watching the prices of wheat in the various markets you can get a sense of where you pricing (as determined by your distributor, or mill) is headed. It also gives you a bit of the upper hand because, as they say, knowledge is power. If you see a price increase that you don’t see reflected in the trends of the market you owe it to yourself to call your distributor and at least ask for an explanation. But don’t forget to indicate that you are aware of trends in the wheat market. It could very well be that the price is being influenced by other factors (an insurance increase for example) but if you let your distributor know that you are aware trends in the wheat market it helps you to form more of a partnership and your supplier will view you as someone with whom they must work closely to get you the best pricing.