One reason is that wheat has been viewed as a clever commodity to turn to, as the usually reliable gold and oil stocks defied predictions by failing to spark after the dollar fell and questions rose over deep sea oil supply. As news came through of wheat production problems, panic and fear fermented, which resulted in some big-money trader gambles. This has pushed world wheat prices up by 59% since the beginning of July (CBOT).
Is it a blip?
Most bakers couldn't give two hoots about the vagaries of traders, except when it manifests itself on the balance sheet, as it will following Rank Hovis' flour price hike. So is it a blip or a long-term trend? Larger bakers that have forward-purchased will find their palms less sweaty than those buying ad hoc. With many operating on six-month contracts, the short-term impact of flour hikes will be limited.
Dutch financial services provider Rabobank predicts that if the raw material costs stay high after six months, bakers will be hit on margins, and what's more, will find it hard to pass on costs to retailers. Private-label suppliers would be hit the hardest, and smaller players, without the benefits of bulk buying power, would be hit harder.
The key will be how you manage your buying amid price volatility. "With wheat at a 24-month high, manufacturers' purchasing decisions on whether or not to lock in the price will affect their competitive position, and increase the risk of margin pressure," said Rabobank. Companies that have long-term strategic partnerships with their suppliers will have some buffer from the volatility. "If companies continue to dip into the market with tactical buying, they are at the whim of the market," said Duncan Rawson, associate director at agrifood business consultancy English Farming and Food Partnerships (EFFP).
As Britain's biggest high street baker, Greggs had already forward-bought through to the end of the year before the spike, but believes prices are overheated. "We expect and hope that prices will come back down," said chief executive Ken McMeikan. "The difference this time, compared to 2007/08, are that the reserves in the system are a lot higher. We believe this is a short-term over-reaction and a nervousness. At this time of the year we would normally be looking to buy for the first and second quarter of next year. It will probably force us not to go as far forward with the amounts we normally buy."
Not that forward-buying is any guarantee. "In 2008 we put our prices up by around 5%," said Steve Simpson, production director at 35-shop Thomas the Baker, which buys flour a year at a time. "This time round we're going to have to take it on the chin and our margins will be squeezed. People are very price-sensitive in North Yorkshire and the recession has hit this part of the world."
The backdrop to 2007/8 also saw high food inflation at 12%, while people still had money to spend. Now, an analysis by Verdict (see table) predicts products such as croissants will rise by as much as 11.1%, while mass redundancies and the VAT increase will make consumers even more price-sensitive.
Moreover, the most immediate impact of food inflation will be felt in the price of bread and bakery products, said Verdict. "It's going to be a lot more difficult for the supply chain to pass on prices increases," added Rawson. "Farmers will do okay and retailers will be doing their damndest to protect margins. It's those sitting in the middle of the chain the bakers and the millers who will be squeezed."
Torrid time ahead
What's more, bakers are in for a torrid time on all fronts: wheat, dried fruit (pg 6), cocoa and dairy have risen and sugar could follow, with Napier Brown recently predicting a 10% price rise over the next two years. Although commodity prices fell between June and July, UK wholesale prices for butter (unsalted) were up 59% year-on-year, bulk cream was up 51% and mild cheddar up 12% well above last year's equivalents (DIN Consultancy).
As British Baker went to press, signs were the wheat price was dropping back slightly after the Russian panic. But "for the first time since the 2008 food crisis, we're producing less wheat than we consume," added Rabobank.
What is clear is that bakers need to plan for a volatile future.