Spot CBOT wheat prices have risen 59 per cent since the beginning of July as a result of uncertainty related to poor harvest news in the Black Sea region and elsewhere.
Price easing expected
Despite this upsurge Rabobank said in a note that it expects wheat prices to ease, so long as there is no more significant news supporting the current downward trend. The agro bank said supplies are not as short as they were during the 2007/2008 wheat price spike and stocks remain sufficient to absorb the current dip in production.
This should mean that in the short term the current wheat price situation will have little impact on food processing and bakery firms.
Author of the note, Sapna Naik: “Rabobank’s view is that there are enough wheat stocks to make up for the shortage and as such, this price hike is expected to be temporary. Bakery players’ margins are not expected to be impacted strongly.”
And, if prices remain high?
But if wheat prices remain as high in six months time, bakery firms may then face higher input costs and may struggle to pass these on. This is especially true for bread makers, for whom wheat costs make up about 29 per cent of the variable costs, and for whom there is little flexibility on prices.
The current softness of demand could accentuate the problem as it could further restrict the ability of bakery firms to pass on higher costs to consumers. During the 2007/2008 commodity spike, consumer confidence was higher than it is now, enabling manufacturers and retailers to put up prices but that may be harder this time around.
Faced with higher wheat prices, Rabobank said manufacturers may have to pursue cost cutting measures in the short term and work on safeguarding supply of raw materials in the long term. With input price volatility becoming a fact of life for bakery players, Rabobank said procurement strategy is more important than ever.
“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 the risk of margin pressure,” said Naik.