Separating wheat from the chaff
Peter Flanagan examines what effect a global crop shortage would have on the country and the consumer's pocket
Published 04/11/2010 | 05:00
THE AUGUST announcement was a dramatic one; Russia, the second largest exporter of wheat was stopping exports for the rest of 2010 after the country's wheat crop was ravaged by wild fires that left Moscow enveloped in a pall of acrid smoke.
Prime Minister Vladimir Putin told the world that his country needed to guarantee supply for its own citizens first.
The reaction on the global markets was instant. Wheat futures at the Chicago Board of Trade, which had been bumping along at around $5 a bushel for most of the summer shot up overnight to around $8.
Last month there was another shock when the US Department of Agriculture unexpectedly warned that America's production of corn would drop by 4pc in 2010. This sent prices rocketing, with a rise of 8.5pc on October 11 -- the biggest one-day rise in 37 years.
Fears of a global food shortage were rampant, but apart from sporadic riots there have been few signs of rising food prices.
In Ireland, the deflation associated with the economic downturn has so far been enough to keep the price of staples that rely on wheat, such as beer and bread, more or less constant.
According to the Central Statistics Office, white sliced pans have cost between €1.30 and €1.33 for the past year, while a pint of lager has been in or around €4.35 since the start of 2010. But all that could be about to change as inflation returns to Ireland after a two-year hiatus -- driven higher by increasing commodity prices. The latest CSO figures show annual inflation now stands at 0.5pc, the highest rate since December 2008. When the Russian ban began three months ago, analysts were generally unflustered, citing the fact that most major firms had hedged their positions until the end of the year.
Now, with the Russian ban set to continue into the New Year, and demand from Asia still strong, combined with the news that the US crop is in worse condition than last year due to dry weather, that sentiment has begun to change -- and it looks like businesses and consumers are now facing a hit.
"The obvious companies that could lose out on the back of higher wheat would be the bakeries," says Liam Igoe of Goodbody Stockbrokers. "You have to remember, however, that wheat does not have the same level of input to the likes of a loaf of bread that is commonly believed. Wheat may account for only a third of the input costs but higher prices at wholesale markets are normally passed on to the consumer."
"Traditionally there is a lag between wholesale price rises and the cost of a product in a supermarket, but it remains likely that the cost will be passed on."
Other market observers are of a similar opinion. As inflation returns, then prices will rise anyway; but with wheat prices remaining high internationally, certain products, especially the likes of bread and beer, could rise disproportionately.
A rise in wheat prices is not the only commodity that can hit businesses hard. A rise in fuel costs would have an equally detrimental effect on business.
In the food industry, higher transport costs translate to lower margins for the bigger companies. Those margins can only be sustained for so long before the cost has to be passed on to the consumer.
Diesel prices have been fairly flat since April, with a litre costing about €1.24. A move in global oil prices can quickly be reflected at the pump but oil prices have remained more or less steady recently, with Brent Crude stuck between $70 and $80 a barrel over the past six months.
Michael Kelleher, an energy trading analyst with Bord Gais Energy, believes that could change: "None of us have a crystal ball but there have been indications that prices may rise in the medium term.
"Last week the Saudi oil minister, Ali Naimi, reportedly said he was 'comfortable' with oil in the $70 to $90 range, which would suggest that OPEC [which still controls much of the world's oil production] may look to push prices up.
"Demand from Asia is showing no sign of abating either and when this is combined with a weakening dollar, the likelihood is that oil may rise. The condition of the global economy will be the deciding factor."
Any rise in fuel, even as little as a 5c increase in a litre of diesel, could have a huge effect on Irish business, both here and abroad, John Whelan, chief executive of the Irish Exporters Association, said.
"Most Irish exporters are small- and medium-sized businesses that conduct the majority of their business domestically. If they can't sustain their export business, then the domestic business can become untenable as well. This isn't just about fuel prices, however, much of the packaging that firms use for exports contains petrochemicals so they will be affected by changes in the oil price as well," he said.
But the weakening dollar is perhaps one of the biggest problems facing Irish exporting businesses. The Dollar Index, which measures the Greenback's strength against a basket of major currencies, is near a six-month low while the euro is at its strongest against the dollar since April, making exports from Ireland more expensive.
The effect of "exporting inflation" on business is one that might keep John Whelan up at night, but it is the idea of "importing inflation" that could have the bigger effect on everyday life in Ireland.
Thomas Conefrey of the ESRI believes that while imported inflation is not a factor at the moment, it is likely that this will change.
"So far, the banks have driven inflation by raising interest rates independently of the European Central Bank (ECB), so importing inflation is not something Ireland is doing at the moment.
"Having said that, the chances of the ECB keeping interest rates so low in the long term is highly unlikely. Any move by the ECB will be driven by the state of the European economy but it's difficult to see interest rates being as low this time next year."
As commodities and inflation rise inevitably, there will be winners and losers. The sectors that may benefit from higher commodity prices are grain farmers but dairy and beef farmers will pay higher animal feed costs so it's a vicious circle.
Ultimately the main loser will be the consumer. Production costs will eventually be passed on and it will be us who are forced to delve deeper into our pockets for everyday goods. With the downturn showing no sign of easing, it is an extra expense few people can afford.