Wheat prices will remain high for the next ten years, says Rabobank's Director of Commodities, Dirk Jan Kennes. The current price peak is not only down to the Russian drought, it signals a structural change in the market. The US could offer short-term solutions. But long-term the food industry must improve efficiency, or charge consumers more for bread, beer and meat.

Wheat prices have risen by more than 50 per cent since the end of June, topping EUR 200 per tonne, according to Rabobank. The immediate cause of the spike is the continuing drought in Russia, Ukraine and Kazakhstan, which is devastating crops. EU producers France and Germany are also bracing for poor harvests. Prices rose even further this week as President Putin announced a ban on grain exports from 15 August to the end of the year.

Demand rising

Mr Kennes said: "On the surface, this situation feels like the food crisis of 2007 and 2008. "Poor harvests are once again driving the price-spike. But global stock levels are much higher right now than at that time. So this time round, we should be able to cope better with the production declines."

For the first time since the 2008 food crisis, we are producing less wheat than we consume. Growing populations and rising prosperity are causing this growth in demand. Changing consumption patterns in countries like China and India mean more people are eating wheat-based products. And as people become more prosperous, they start to eat more meat.

Mr Kennes explained: "Not everyone makes the connection between meat and wheat. But grains are essential elements of animal feeds. For every kilogram of chicken you buy in the shop, you need two kilogrammes of animal feed."

Global stocks falling

Although stock levels are currently high, the world probably does need to deal with lower average stocks. "Tighter grain markets on the one hand, and a more liberal EU agricultural policy on the other will leave less room to buffer potential production shortages. So prices will fluctuate much more. Stocks are now around the same level as just before the food crisis in 2007. But if you adjust the figures for India and China, global stocks are lower," says Mr Kennes.

After the EU, China is the biggest wheat producer in the world. But, like India, it uses most of its harvest to feed its own enormous population. Self-sufficient countries that do not bring their product to market have a limited impact on the world price.

Shift in wheat production

In the last three years, wheat production has increased by 15 per cent, from 600 million tonnes in 2007 to 680 million tonnes in 2008 and 2009. The bulk of the extra wheat came from countries in the former Soviet Union and the EU, picking up the slack left by US farmers as they switched their wheat acreage to corn and soybeans. But as harvests fail in Europe, there may still be relief in sight from the US.

Mr Kennes explained: "Although wheat acreage has shrunk, we are expecting big export volumes in the US. This could meet demand and prevent further reduction of stocks. India currently holds strategic stocks of 14 million tonnes, in contrast to their normal level of eight million tonnes. So if the US harvest does disappoint, the solution may lie in the East."

Risk management for food industry

On the production side, it is not enough for farmers to bring new land into operation. They also need to improve their yields. This all brings higher costs, which in turn pushes up prices. If wheat price volatility stays at structural high levels, it will have a significant impact on margins and risk distribution in the food supply chain.

Mr Kennes concluded: "Companies in the food supply chain responded to the price volatility in 2007 and 2008 by taking positions on the futures markets and hedging their risks. They should still take these operational measures and keep a very close eye on the commodities markets, bearing in mind that timing is all-important. But they also need to consider strategic options such as consolidation. The industry must improve its operating efficiency to absorb the rise in cost prices. Otherwise, the cost of bread, beer and even meat, could rise in the shops."

Further Reading

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