Wheat prices soar, supply tight – “The situation is contributing to a surge in U.S. food inflation and a debate about whether the Agriculture Department should let farmers plant on millions of acres set aside for conservation.”

September 28, 2007

Sue Kirchoff/USA TODAY/September 28, 2007 Friday

WASHINGTON — Wheat prices soared to a record on futures markets Thursday, propelled by tight world supplies and strong demand. Relief could be awhile in coming.

Wheat for December delivery closed at $9.33 a bushel in Chicago, more than double the price from a year ago. Drought in Australia and poor crops in other nations helped drive U.S. and world supplies to the lowest levels in decades. U.S. wheat stocks are pegged at 362 million bushels in 2007-08, the tightest since 1973-74.

“The wheat-production problems are exceptional. You don’t usually have bad weather in as many different places around the world,” says Edward Allen, agricultural economist at the USDA’s Economic Research Service.

Major wheat producers Russia and the Ukraine face export restrictions. In Italy, consumer groups staged a mini-boycott of bread and pasta to protest prices.

The situation is contributing to a surge in U.S. food inflation and a debate about whether the Agriculture Department should let farmers plant on millions of acres set aside for conservation.

“The farmers that I’ve been visiting with are all absolutely astounded at the prices,” says Cheryl Tuck at the Montana Wheat & Barley Committee.

The wheat rally is part of a longer run-up in prices, including corn and dairy products. Food prices, measured by the consumer price index, rose at a 5.6% seasonally adjusted annual rate through August, compared with a 2.1% rise in 2006. Cereals and bakery products rose 5% in the same period at a seasonally adjusted annual rate.

Food processors also face higher fuel and transportation costs. Illinois-based Sara Lee, which announced an increase in bakery-product prices this spring, began implementing a second 5% price increase earlier this month and will have to increase prices again if wheat stays above $8 a bushel. General Mills cut packaging sizes to cope with input costs.

“Over time, there will be improvements in the harvest and the crops that will help (wheat) prices stabilize a bit,” says Mark Goldman, director of communications for Sara Lee’s food and beverage division. “We don’t believe they will ever return to $2 to $3 per bushel.”

The USA is the world’s largest wheat exporter, selling about half its crop abroad.

The domestic wheat harvest is down about a third from its 1981 peak, as growers have moved to other crops with higher yields. That’s recently been exacerbated by government subsidies for corn-based ethanol.

“We’ve placed so much demand on … feed grain to turn into fuel, we can’t play catch-up quite as fast globally,” says Joe Victor, vice president of Allendale, a commodity research advisory firm.

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