Wheat is a truly global commodity input, as it is used for bread and pasta in Western countries and noodles in Asian countries. When wheat prices rise, companies are faced with the dilemma of taking a hit to gross margins or passing on cost increases to the consumer, which often decreases demand. Wheat futures on Chicago’s commodities exchange more than doubled in September 2007 compared to the previous year, going from $3.95 a bushel to nearly $9. What’s driving up wheat prices is a matter of simple supply and demand, as bad weather, including a spate of storms and droughts, have created shortages of this important grain. A more fundamental challenge compounding the recent effects of bad weather is that farmers are increasingly switching to grow corn because of the skyrocketing demand for the ethanol-producing grain.
Examples of Companies Suffering from Rising Wheat Prices
Sara Lee (NYSE:SLE) and Campbell Soup (NYSE:CPB) are both producers of baked goods, especially bread. Wheat flour is the main ingredient in most baked goods. Sara Lee had acquired instruments to hedge against rising wheat prices, but prices rose above expected increases. Kellogg (NYSE:K), General Mills (NYSE:GIS), Kraft Foods (NYSE:KFT), PepsiCo’s (NYSE:PEP) Quaker Foods, and Nestle (Public, VTX:NESN) are all major producers of breakfast cereals, most of which are made partly from wheat. Kraft Foods and PepsiCo’s Frito-Lay are the largest multinational snack companies. Many of the products manufactured by these companies, including corn chips, cookies, and crackers, are made primarily of grain products. Nisshin Seifun Group (JP:2002) and Yamazaki Baking (JP:2212) are considering raising prices for consumers to offset increases in wheat prices. Nissin Food Products (JP:2897) may raise prices on its popular noodle products for the first time in 17 years because of wheat price hikes.
Take a look at the following charts / maps regarding wheat production on a global basis.
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Wheat Supply and Demand
Global Distribution of Wheat