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Eat your Wheaties, if you can afford to

Pasta, bread and even Twinkies are costlier as wheat prices rise to record levels.

September 18, 2007|Jerry Hirsch | Times Staff Writer

From pastries to pasta, the price of just about everything made with wheat is going up.

Blame the trend on a biblical bout of bad weather -- drought, freezes and floods -- that has decimated wheat crops and created shortages around the world.

Wheat futures hit a record of $8.87 a bushel in Chicago trading last week before retreating to $8.75 on Monday. Still, that's a huge jump from $3.95 a year ago.

"This is a historic level. There is no way we can cut costs fast enough or deep enough to handle this type of huge increase in wheat," said Bill Nictakis, president of the fresh bakery division at Sara Lee Corp.

Sara Lee raised the prices of its own bread and bagels by 5% last week, and the cost of what it bakes for the private labels of retailers by 6% to 7%.

And it's not just Sara Lee and its customers who are feeling the pinch.

Shoppers in Rome are threatening pasta boycotts to protest rising prices. In Lanzhou in western China workers are complaining about paying more at the industrial city's 3,000 noodle shops. And in the United States, parents are shelling out more for all the Wonder Bread and Hostess Twinkies that are stuffed into school lunchboxes.

The run-up is cutting into the profits of bakers such as Charles Feder. He buys about a ton of flour each week for his Rossmoor Pastries in Signal Hill, which counts Universal Studios, Walt Disney Co. and dozens of restaurants, hotels and country clubs among its clients.

"It used to be $7.50 for a 50-pound bag. Now it is approaching $11 and I am told it will go even higher," Feder said.

Feder raised the prices he charges for his breads, rolls and cakes by 4% earlier this year and plans to ask for 7% more next year. "It's tough. Wheat is in everything we do right down to the crumbs on the cheesecake," he said.

Interstate Bakeries Corp. of Kansas City, Mo., said higher wheat expenses were behind its price increases for products such as Roman Meal bread and Hostess snack cakes, but declined to give details.

Yet even though they've raised their prices recently, bakers are struggling to keep pace with the higher costs they face for wheat and other basic commodities such as butter. Sara Lee estimated that its hikes fell short of actual costs by about $10 million in its latest quarter, which is why it continues to raise prices.

The large baking companies typically use a financial tactic known as hedging to blunt sudden changes in commodity prices, but prices have risen so quickly that Sara Lee has been unable to fully offset the wheat price increase.

"We have an active hedging program, but nothing was put into place assuming that wheat will be at more than $8.50 a bushel. This has really surprised us," Nictakis said.

Droughts in big exporting countries including Australia, South Africa and Argentina have slashed wheat supplies overseas, while in the U.S. a combination of flooding and drought have weakened harvests.

Bad weather, however, isn't the only factor influencing the cost of the grain. Experts say many farmers have planted less wheat and switched production to corn, in part to capitalize on growing demand for ethanol.

But with prices now so high, wheat farmers are expected to plant new acreage -- which should ease prices, Nictakis said. But he said he doubted that prices would fall back into the under-$4 range, where they had hovered for nearly a decade.

"It is going to settle, but it is going to settle at a significantly higher price than we have seen," Nictakis said.

Some analysts see a volatile future, noting that rising prices have drawn in speculators looking to turn quick profits.

"Honestly, there is no way of telling where this is going," said Darin Newsom, senior analyst for DTN, an Omaha market research information company. "I can see it going above $9 and an argument for it falling back a dollar or two. There are a lot of speculators in the market and they might have decided to take their money off the table. The market is vulnerable when you reach these levels."

Rising wheat prices are contributing to some of the highest food inflation in years, said Michael Swanson, an agricultural economist at Wells Fargo & Co.

"Overall food prices are going up by 4.5% to 5% this year and will remain high well into 2008," Swanson said.

That's already showing up in many wheat-based products.

The price of white bread has risen by an average 7.7% through July. That compares with just a 2.5% increase in all of 2006, according to the Bureau of Labor Statistics. Breakfast cereal is up 2.3% this year after falling 1.8% last year.

For now, some shoppers say they are resigned to any increases.

"After it crossed $1 a loaf some years back I stopped looking," said Allen Zoroya, a writer in Mount Washington. "Now I just buy what I like."

But in Italy, where the price of pasta is expected to rise by as much as 20%, some consumer groups have called for pasta-buying strikes to protest the increases.

Rossmoor Pastries has also gotten complaints.

"The restaurants have printed menus and the caterers have signed contracts and they are resistant because the price of everything else is going up too," Feder said.

Like Interstate Bakeries and Sara Lee, big producers that are trying to offset higher commodity prices with productivity and operational improvements, Feder is reviewing how to reduce his businesses expenses.

He recently replaced seven gasoline-fueled delivery trucks with vehicles that run on natural gas and installed a pumping station at his bakery. They don't have the range of his previous fleet but he reduced his fuel expense to an equivalent of 75 cents a gallon.

But he doesn't want to give that gain back to his clients.

"This is a big savings for us," said Feder, "but I don't see why we should use it to subsidize our raw material costs."


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