World events work against grain buyers

PORTLAND, Ore. -- The Baker & Spice bakery paid $19 for a 50-pound bag of flour in August. By the end of September, co-owner Julie Richardson was staring at $27 a bag, reading startling messages from her supplier warning of dwindling world wheat stocks and wondering how long she could hold out before raising prices.

"We're going to have to pass it on," says Richardson, 37, who opened her bustling bakery in this hilly Portland suburb three years ago. Richardson raised prices 12% this spring due to higher flour and other prices, the first increase since she opened. She anticipates another, smaller price increase before the busy holiday season.

"We can only (boost prices) so much until the customer sees the pinch," says Richardson, who uses organic ingredients but hasn't touted it in her advertising. That gives her more latitude to switch to conventional flour, which now costs about $10 a bag less than organic, though it's experienced similar price jumps this year. It also means she must rework baking formulas to ensure the product her customers expect and, she says, lower her "laurels on flavor and sustainability."

The tightest world grain stocks in about 30 years are contributing to rising food inflation, fueling worries about food shortages in some countries and straining international aid budgets. Russia recently imposed taxes on barley and grain exports to control domestic food prices before pending presidential elections.

Prices are being pushed up by bad weather in a host of countries, surging world demand and a drive in the USA and abroad to devote more acres to corn for ethanol production, which has tightened supplies of some grains and tied crop prices more closely to energy prices.

The decline in the value of the dollar has also contributed to surging international demand for U.S. grain. The falling dollar makes U.S. grain more affordable for foreign buyers as their currency picks up purchasing power. It also makes foods imported to the USA pricier.

Wheat touched $9.61 a bushel on Chicago futures markets in late September — doubling from the previous year — after it became clear that drought in Australia, a major exporter, would dramatically reduce production. Europe, Canada and other countries had poor crops. U.S. production was above last year's, but demand surged. U.S. wheat stockpiles are expected to be the lowest since 1948-49, the U.S. Agriculture Department says.

Futures prices have jerked around in the past couple of weeks as traders assess the supply outlook; still, they're up about 75% from a year ago. Corn futures are well down from the roughly $4.20 peak earlier this year but still well above the $3.00 levels of last fall.

High prices to stick around

Prices are likely to stay elevated for awhile. Global demand is so strong that record crops are needed just to keep up: World wheat consumption has outpaced production for much of the past decade. Better crops next year will not likely allow for significant rebuilding of the grain stockpile, due to increasing demand in surging economies such as China and India, according to an October report by the U.N. Food and Agriculture Organization, which called the outlook "grim."