Milling spreads in '07-08 disregard great dangers

by Morton Sosland
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While it is impossible to ascertain just how often the data are even looked at, much less studied, it seems likely that quarterly statistics compiled by the Economic Research Service on wheat and flour price relationships receive little more than cursory attention, if even that, from grain-based foods. For some years, the E.R.S., as the research and data-compiling arm of the U.S. Department of Agriculture, has assembled statistics seeking to measure the difference between the price of wheat ground to produce flour and the quoted prices for bakers’ standard patent in bulk and millfeed. Called a "price relationship" analysis, the data series is not meant to be a gauge of milling profitability or even a good measure of what it costs to produce flour. At some points in its long history, the series skewed perceptions about the pricing process in an industry as complex as flour milling is.

As a depiction of the simple relationship between wheat and flour, no allowance is made for all the other costs that go into milling. Further, the prices are mid-month estimates derived from sources like this magazine as well as assumptions about the quality of wheat ground that obviously varies substantially from season to season and even from week to week as well as from the experience of working millers. Thus, the series may best be treated as an abstract concept with historical value.

A recent updating of the relevant statistics for 2007-08, unquestionably one of most momentous years in the history of grain-based foods because of the historic climb in wheat prices, prompted a new look at these data. Contrary to the expectation that the past crop season, which included history-making highs in wheat and flour prices, would also witness a significant adjustment in this wheat-flour price spread, the past crop year provides a great surprise, to say the least. Hardly has there ever been a year when flour millers faced greater risks in pricing flour to bakers who themselves contended with unprecedented cost pressures than in 2007-08. Instead of millers moving aggressively to protect themselves against the horrific risks of booking flour in a period when volatility in wheat futures and cash premiums was frightening, the data show millers operating within traditional margin levels, which seems almost unimaginable in light of the potential horrors being faced.

According to the E.R.S., the spread between the wholesale price of flour and millfeed and the cost of wheat in Kansas City for the 2007-08 crop season averaged $2.16 per hundredweight, down from with $2.44 in 2006-07 and $2.38 in 2005-06. Not only did millers fail to capture any margin increase over raw material costs, they had to deal with an average price for No. 1 hard red winter wheat of 13 per cent protein of $22.67, contrasted with $12.41 in 2006-07 and $10.38 in 2005-06. Millers of spring wheat flour did a little better, based on comparable Minneapolis statistics. For 2007-08, the spread on spring wheat flour, based on No. 1 dark northern spring of 14 per cent protein, was $2.32, against $2.08 in the prior year and $1.84 in 2005-06. The spring wheat cost to mill a hundredweight of flour averaged $24.66 in 2007-08, compared with $12.33 in the prior season and $11.35 in 2005-06.

While once again affirming that crop year averages are largely without a base in the reality of flour milling, these numbers reveal what in all likelihood may be the only instance in modern history of an industry coping with immense pricing trauma by not significantly expanding margins. Any satisfaction that may be derived from such a startling performance should be moderated by realizing that volatility remains in these same markets and that adequate pricing spreads offer the only sensible way of operating successfully in response to this threatening environment. The good fortune milling may have enjoyed last year is definitely not likely to recur.

This article can also be found in the digital edition of Milling and Baking News, January 13, 2008, starting on Page 7. Click here to search that archive.

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