Title: Rising wheat prices raise concerns

Sub-title: Recent skyrocketing wheat prices makes great headlines. But food forms only a small part of Canadian’s household budgets and overall prices have been stable.

 

While man does not live on bread alone, in much of the world, it forms a large part of his diet. So it should come as no surprise that the 50 percent rise in average monthly wheat prices between June and August of this year is raising concerns. That’s particularly true in developing nations where small price fluctuations in key commodities can have an exponential effect on malnutrition.

 

Canadian consumers, hurting from the recession, are also vulnerable. Widespread unemployment and underemployment in many regions, which comes on the heels of several decades in which family incomes have barely moved in real terms, has made many of them vulnerable to even small changes in their budgets. However according to the Carnegie Endowment, a repeat of the 2007-2008 food price crisis is unlikely, due to relatively high levels of global grain stocks, though “further policy and weather disruptions may significantly worsen the situation.” In short, we need to watch out.

 

The recent spike in wheat prices was spurred by a drought in Russia, the Ukraine and Kazakhstan, which together account for just over a quarter of global grain exports. Wheat production in Russia alone fell by 20 percent, leading that country to ban all shipments abroad for the rest of the year, in order to supply domestic consumption.

 

A crucial commodity

However while wheat is a crucial commodity in the developing world, that is less true in the advanced Western economies. “Food used to comprise a higher proportion of household budgets than it does now,” said Bradley Snider, an analyst at Statistics Canada. “And wheat products themselves form only a part of Canadians’ annual food budgets.”

 

Experts say that there are few signs that wheat or other food commodities prices are having a major effect here. According to this week’s Consumer Price Index data, food prices rose by just 1.6 percent in the 12 months to August 2010. In Canada, food makes up only 17 percent of the consumer price index, far behind shelter and transportation which make up 27 percent and 20 percent respectively.

 

When looked at in terms of what households actually spend on food, the totals are even more modest. During 2008, the last year for which data was available, the average Canadian family spent $7,430 on food. That works out to just 10.4 percent of total average annual family spending. However not all of families’ food budgets are spent on wheat products. For example during 2001, the last year for which data are available, families devoted only 15 percent of their total food budgets to “bakery and cereal,” products.

 

Longer-term food trends

That said, what will happen to food prices over the longer term is less certain. “Who knows?” jokes Mike McCracken, an economist with Infometrica, when asked. “Food prices rose by 4.9 percent during 2009, and by between 1.0 and 1.5 percent through the first half of this year. In short, there seems to be relative calm on the food front right now. For example there appear to be no major shortages in meat inventories. And the recent Russian shortages are in part made up by output from other part of the world.”

 

That said, several secular trends point to a rather sobering outlook. For example although it is far from certain that the droughts in Russia were caused by global warming, many experts warn that carbon emissions pose a significant threat to arable land bodies particularly near the equator. Another major challenge is increased demand for bio-fuels, which is tempting many farmers to shift their production away from food-stocks thus driving their prices up and potentially threatening major crises in some areas of the world.

 

The good news though is that over the short term, those problems look less daunting. For example as this article went to press, signs began to emerge that the wheat crisis may calm. Rainfalls in both Russia and the Ukraine during the weekend of September 21rst and 22nd sent futures prices up in four out of the last five trading sessions prior to press date.

 

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is a Montreal-based freelance business writer.

 

 

 

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