Timely research offers bread pricing insights

by Josh Sosland
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Little did two government economists know how timely their research would be when they embarked on a study of how well wheat price changes translate into flour price and bread price changes.

The economists from the Economic Research Service of the U.S. Department of Agriculture recently published the study, which looks at price movements for bread and beef. They were prompted to their exploration by the unprecedented commodity price spikes from 2006 to 2008. Their work was completed nearly in time for a renewed wheat price surge that has caused extraordinary agitation within the baking industry.

Two common sense points stood out in the researchers’ findings. First, the less value added to the product, the more likely it was that rising costs would be passed along. Second, the greater the degree to which profit margins were sub-par when a wheat price hike takes place, the more likely it was the rising costs would be quickly passed along.

Largely missing in the analysis is the human element — the diligence with which managers seek to pass along costs together with possible retailer and consumer resistance to higher costs. But the study’s conclusion that over time, sometimes more slowly and sometimes more quickly, higher wheat costs do turn into higher flour and bread prices serves as a welcome reminder that ultimately, the invisible hand of the market will prevail.
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