Part I: Ingredient prices challenge profitability
The first in an exclusive series on the volatile state of bakery ingredient prices, Modern Baking explores key factors driving the problem and how bakers are dealing with it.
The meteoric rise in ingredients prices to record levels appears to have peaked. Bakery operators and their bakery supply distributors, still reeling from financial hits of $30-per-hundredweight flour and near-60-cents-a-pound soybean oil, are trying to recover their footing. Doing so has not been easy.
Worldwide Factors Cited for Volatile Commodities Prices |
| A shortfall in 2007/08 U.S. wheat production and a weaker U.S. dollar, which encourages agricultural exports, have contributed to a 60-year low in U.S. carryover stocks. |
| Reduced production among major grain exporting nations has yielded a 30-year low in world wheat stocks, causing some nations to curb exports. |
| Demand for wheat, soybeans and feed grains by developing countries, such as China and India, has mushroomed. |
| Increased European Union use of biodiesel has helped to fuel higher soybean oil prices. |
| Federal mandates and tax incentives to produce ethanol as an alternative fuel to gasoline have diverted U.S. corn use to fuel from food. |
| U.S. corn stocks, down sharply in 2007/08, likely will decline further in 2008/09. |
| Higher prices for corn and soybeans encourage their production at the expense of wheat output. |
| Federal agricultural price supports for producers have created artificially inflated U.S. prices for some products, notably sugar. |
| Farm production costs have climbed as a result of rising prices for petroleum and equipment, the latter boosted by strong demand by China and other developing countries for farm equipment, as well as rising costs for raw materials, such as steel. |
| Increased speculative commodities futures trading by index funds has generated the perception that they have inordinately raised prices and skewed the markets’ price discovery mechanism. |
Market volatility created the greatest disruption in ingredient supplies and prices since the mid-1970s when sugar prices shot from 8 cents a pound to 60 cents. Battered and bruised, bakers and distributors are confused, asking, “What’s next? What can we do?” Their confusion is profound, given that conditions 30 years ago involved only one commodity; during the last 12 months, world events have sparked price volatility for every major bakery ingredient and many minor ingredients.
The quick answer: Raise retail prices. That is what most operators did not do during the sugar price surge, forcing marginal bakeries to shutter. But present-day conditions are more complex and require measures beyond increasing prices.
For this article, the first in an exclusive series, Modern Baking spoke with millers, distributors, and retail, supermarket in-store, specialty wholesale and foodservice bakery operators for their observations. Their perspectives, offered here and in accompanying articles, offer ideas and suggestions to manage what may lie ahead.
All agree that prices began edging higher about a year ago and the steep incline began in earnest last fall. “I check my invoices religiously, and when I see prices rise by 3 percent, I take notice,” says Dan (Klecko) McGleno, owner, St. Agnes Bread Co., a St. Paul, Minn., specialty wholesaler. “Before last fall, it wasn’t unusual to see prices for one ingredient spiral out of control. But, late last summer, I saw prices of flour, honey, eggs, egg replacements, walnuts, and trans-fat-free and conventional shortening increasing by more than 3 percent within a week.”
By year-end, flour prices especially had struck bakery operators broadside. Schnuck Markets, St. Louis, which operates 101 in-store bakeries, supplied in part by its central bakery, regularly books flour purchases several months in advance. “We had booked flour through December, and come January we wondered whether we should book at $27 (per hundredweight); a year earlier we paid $12 to $14,” recalls Bill Mihu, vice president, bakery.
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© 2009 Penton Media Inc.
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Bakery-Net Viewpoints: |
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Heather Henstock: |
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Paula Frank: Eat two cupcakes, and call me in the morning |
| Read More Editor's Notes | |
