Rising Wheat Prices Hinder Local Business Profits
Last updated Thursday, March 20, 2008 4:46 PM CDT in Business
By Kim Souza
The Morning News
Record high wheat prices are pinching the profit margins of food makers as large as Tyson Foods Inc. to small family-owned bakeries like Ranalli's in Tonititown and Fayetteville-based Eureka Pizza.
Flour, once a relatively cheap ingredient critical for bakers, has tripled in price, said Rolf Wilkin, owner of Eureka Pizza. With 12 stores in the region, Wilkin uses custom-milled flour processed at the Shawnee Milling Company in Oklahoma. His price for a 25-pound dough bag is partially protected through future contracts purchased last year, but has jumped 60 percent in the past two weeks. In April, when their last future contract expires, his price is expected to jump another 40 percent.
Wilkin said prices were going up so quickly that futures contracts for the coming months could not be purchased, taking the dough price from $8.92 a bag in early March to a projected $20 in April. In the past eight years, the price has been about $7.
With the hefty increase, Wilkin said, pizza prices will have to be raised.
"General Mills said Wednesday they were making cereal boxes smaller. We don't have that option in the pizza business. We will be charging about 33 cents more for each pizza and while that won't cover all the extra costs, we must stay conscious of our customers who are facing sticker shock at the grocery store and the gas pump," Wilkin said.
Smaller bakers like Agatha Penzo of Ranalli Farms in Tontitown uses about 400 pounds of flour per week baking fresh pasta, breads and cookies. She said her flour costs have jumped 66 percent in the past three months and egg prices have doubled.
Penzo said customers will likely be paying more for the fresh baked goods when the bakery opens April 5.
"There is no way we can absorb these higher costs. We hate it, but we have no choice but to raise prices if some relief is not seen soon," Penzo said. "We haven't had to face this dilemma in the eight years we have been in business."
The cost of cereals and bakery products climbed at an annual rate of more than 9 percent last month, according to the Bureau of Labor Statistics, compared to a 4 percent rise in the overall Consumer Price Index during the past 12 months.
At the Chicago Board of Trade, a bushel, 60-pounds of wheat, trades for roughly $11, twice more than a year ago.
Tyson Foods CEO Dick Bond has been outspoken about ripple effects from the government mandate to produce alternative fuels, namely corn-based ethanol.
The Springdale-based meat giant estimates rising grain prices will cost the company an extra $300 million this year. While most of the added expense is related to corn and soybeans, the company said rising flour and cooking oil expenses had prompted price hikes for many of its food service customers.
Tyson Foods produces between seven and nine million pounds of tortillas per week, in addition to nearly 4 million pizza crusts made by its Green Bay, Wis.-based subsidiary TNT Crust.
Most of the tortillas and pizza products produced by Tyson Foods are sold through the company's food service contracts with large national food chains.
The company said it was forced to take price increases in 2007 with its food service customers and TNT has also implemented price adjustments because of increased costs of flour and cooking oil. Tyson Foods would not speculate on future price adjustments.
Part of the blame for rising wheat prices can be attributed to the ethanol craze. Because of the demand for ethanol, farmers planted more corn to produce the fuel and diverted acreage away from soybeans and wheat.
Brandy Carroll, agricultural economist with the Arkansas Farm Bureau, said a perfect storm was to blame for higher wheat costs.
She said in 2007 much of the crop was lost to a late frost in the U.S. and a severe drought in Australia.
"Australia is a big exporter of wheat, only about 25 percent of their normal crop yield was realized last year because of the drought," Carroll said.
Shorter supply worldwide has been a problem given the fact wheat is a food crop. She said a weaker dollar has made U.S. supplies cheaper in the global marketplace. Other countries dependent on wheat for food are buying the cheaper U.S. wheat. Carroll also blames higher wheat prices on Wall Street speculators who bid up the futures prices of most grains, though they will never take delivery of the commodity.
"In February, the price of summer wheat hit a record high $25 per bushel on the Minneapolis Grain Exchange, which was unbelievable," Carroll said.
This week, summer wheat for May delivery was $13.40 per bushel, the historical range has been from $3 to $7 per bushel.
Higher prices generally bring increased plantings and Carroll said this year was no exception. The U.S. Department of Agriculture projects the 2007-2008 wheat acreage in the U.S. to be 60.4 million acres, compared with 57.3 million last year.
Unfortunately for many Arkansas wheat farmers, the 2008 winter wheat crop is in jeopardy,
She said much of the Arkansas wheat crop was damaged in the recent floods, devastating farmers who also lost their 2007 crops to a hard freeze last April.
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