While the quality of the UK wheat harvest in 2006 has been generally good, events elsewhere in the world have led to a steep increase in wheat prices, especially during September and early October. The upshot is that UK bread wheat prices now stand some 40% higher than a year ago and this market strength seems likely to persist throughout this season.
A good part of this increase in wheat cost occurred in late September, some time after millers throughout the EU raised flour prices. This means that there could be more increases to come (see British Baker, 10 November, pg4). Graham March, chairman of Frank Roberts, comments: "The global situation on wheat is making further increases very likely, unless a significant change occurs very soon. Although we, and most other bakers, do what we can to offset increases on input prices, further flour price rises, together with high energy costs, would inevitably mean a price increase having to be passed on to the consumer."
Europe and the UK are not alone in seeing this steep increase in wheat prices; the picture is repeated around the world. The causes have been multiple but, ultimately, it is because supply has fallen well below demand at a time when global stocks were already relatively low. The main factors behind the September hike in markets have been: drought in Australia, leading to a wheat crop of about 10 million tonnes, rather than the 23 million tonnes originally expected; heavy buying by India, which will purchase over 6 million tonnes more than normal to keep its own market supplied; and problems in the Ukraine, caused by a combination of a smaller crop and insect infestation, which have led it to slash exports. The European Commission has sought to help by releasing over 1 million tonnes from intervention stores and will undoubtedly sell more, but there has not yet been much impact on the market.
Sometimes, speculative activity can lead to a spike in market prices, which then fall away as the speculators sell. On this occasion, however, the commentators seem to think that there is a solid basis for the market and that only the prospect of new supplies will have an impact. This means that there is unlikely to be any relief before April/May 2007 and, even then because of low stocks, much will depend on good crop reports from around the world.