May 7, 2008

Price of Flour is Rising Fast

Nick Ferraro's business plan for opening Lancaster County's first Philly Pretzel Factory was based on paying $10 for the 50-pound bags of flour he would need to operate.

That seemed safe enough last July when the pre-mixed pretzel flour was selling for $8 a bag. But Ferraro said he might as well have thrown his business plan out the window.

With the price of wheat going through the roof this winter, Ferraro has been paying $27 a bag for flour instead of $10, plus a fuel surcharge that got tacked on shortly after he opened last September in the Shoppes at Kissel Village along Lititz Pike.

I've had to raise my prices a couple of times already, and I've only been open seven months, he said. I'm struggling.

The same thing happened to Mike Stauffer, who is in the process of buying Ric's Bread at 24 N. Queen St. When he started running the bakery six months ago, he was paying $15.50 for a 50-pound bag of flour. Last week, it was $26.80.

It's not just the flour. It's the canola oil, the eggs, Stauffer said. I had to raise prices, and it was the last thing I wanted to do.

Bread that he was selling for $4 a loaf is now $4.50 a loaf, Stauffer said.

He said he was beginning to have second thoughts about buying a bake shop because nobody seemed to know exactly what was going on with the price increases or when they would stop.

Nor is it just startups struggling with flour prices.

My flour bill went up $1,500 in one week, said Tim Mineo, owner of Alfred & Sam's Italian Bakery, 17 Fairview Ave. You have to pass it on to the consumer, or you go out of business.

Economists point to a complex web of international forces that have sharply increased U.S. exports and driven the price of wheat to all-time highs in this country.

Part of it stems from a shortage of grain on the world market because of drought and poor harvests.

Another part is a rising demand in populous countries where personal income has increased with the growing economies.

China and India are two good examples, said Sanjay Paul, an associate professor of international economics at Elizabethtown College.

And yet another significant part has been the decline in the value of the dollar that has accompanied the turmoil on Wall Street over the past few months.

It's a lot of things that seem to be coming together at the same time, said Lou Moore, a professor of agricultural economics at Penn State University.

Australia, which has been a major exporter of wheat, has been locked in a drought and has had little to contribute to the world market, Moore said. And last year, Russia and Ukraine had poor harvests and cut exports.

According to the U.S. Department of Agriculture, exports from this country began to rise dramatically last summer, increasing about 50 percent from the year before and then more than doubling during the fall.

From September through November, the U.S. exported 433 million bushels of wheat, compared with 212 million bushels in 2006.

A year ago, hard spring wheat, the best for baking bread, was selling in Chicago for $5.60 a bushel, Moore said. This week, it was selling for around $15.

Soft red winter wheat, which is used in snack foods and pretzels, was selling for $4 a bushel last year, compared with $7.52 this week.

But Moore also points to the depreciation of the dollar as a big factor, not only because it's kept wheat affordable for foreign consumers while prices were rising here, but also because futures traders started putting more money into commodities - including corn, wheat and soybeans - as a hedge against the value of the dollar falling even more.

Despite all these factors, there may be some relief in sight. Wheat futures were trading between $9 and $10 a bushel last week, off significantly from the record of nearly $13.50 in late February, the result in part of a recent USDA report projecting a 5.5 percent increase in wheat plantings this year.

The signals we're getting from farmers is that they're paying more attention to growing wheat than they ever have, said Greg Roth, a professor of agronomy at Penn State University.

That includes farmers in Lancaster County, who plant a fair amount of wheat, Roth said, citing figures from the Pennsylvania Agricultural Statistics Service.

The 8,900 acres of wheat planted here in 2006 is small potatoes compared with the 175,000 acres planted in corn that year, but that acreage will probably rise with rising wheat prices.

Farmers here are able to double-crop their soft winter wheat with spring plantings of soybeans, Roth said, giving them two grain crops and a straw crop in the same year.

High prices for soybeans are also prompting farmers nationwide to shift some of their cropland from corn to soybeans this year.

As farm economists always say, the cure to high prices is high prices, Roth said.

The cost of flour appears to have had little effect on bakery, grocery and restaurant sales, despite the higher prices businesses have been forced to pass on to their customers.

Mineo, of Alfred & Sam's, raised the wholesale price of his company's sandwich rolls 20 cents a dozen in January, the first increase since 2005, and he may have to raise the price again.

When flour for 55 dozen rolls costs $66 instead of $35, the added 20 cents a dozen has offset only about a third of the increased flour cost.

The pizza parlors and sandwich shops that are Alfred & Sam's customers have complained about the higher cost because they've had to raise what they charge for their sandwiches, Mineo said, but it hasn't affected the volume of his sales.

Glenn Lapp, owner of Good 'n Plenty Restaurant on Route 896 in Smoketown, which makes its own bread, also said his price increases haven't kept pace with higher costs.

We sell our bread as well as serve it in the restaurant, Lapp said. We gave up a little in price on what we sell and a little bit in price in the restaurant. And we're a little bit stuck.

However, higher prices may have prompted some grocery customers to shift to cheaper brands of flour and bread.

Sam Hamaker, grocery manager for Darrenkamp's Willow Valley store, said he's seen increased sales of the store's private-label bread at the expense of name-brand breads.

We've seen bread prices go through the roof, Hamaker said. We get increases every other month.

Romaine Wetzel, author of Easy and Tasty Recipes From Romaine's Kitchen, said rising prices hurt people like her who are living on Social Security, but they haven't affected the amount she cooks.

I still love to do it and give it away, she said.

Wetzel said she prefers Gold Medal flour for baking, but doesn't buy it unless it's on sale. Instead, she has three five-pound bags of Shurfine flour sitting on her shelf.

Roger White, an assistant professor of international economics and trade at Franklin & Marshall College, said people have little recourse when it comes to staples like corn and wheat.

When the price increases, it's not easy for consumers to substitute, he said.

White said he thinks one underlying cause of the higher prices is simply the worldwide growth in population and the costs involved in increasing food production to keep pace with it.

The current shifts in the export market are removing some of the trade distortions that have existed in the past, he said, and moving the world toward the correct pricing for food.