Pricey Wheaties: Grain prices surging on emerging market demand

Posted Feb 14th 2008 4:00PM by Joseph Lazzaro
Filed under: International Markets, China, Kellogg Co (K), Sara Lee Corp (SLE), General Mills (GIS), Commodities, Oil, Agriculture

First oil. Then copper, then lumber, and coal. And now grain.

The solid economic growth in the world's emerging markets that's caused oil / coal and commodities prices to surge is now fully hitting the grain market.

So much so, that some food producers are calling on the U.S. government to restrict exports due to soaring prices for grains they use to make cereal and other foods. Meanwhile, some farmers are asking the U.S. Government to ease restrictions to enable farmers to plant more acres, The Wall Street Journal reported Thursday [Subscription required].

For food producers, the issue involves limiting a major operating cost. During the past year, spring wheat has risen to an astounding $17.63 per bushel, up from about $4.90 a year ago. Flour, which used to cost about $15 per 100 pounds, now sells for about $45-48 per 100 pounds. Food producers say prices are increasing so fast, they can't pass along price increases quick enough to keep up.

Meanwhile, growers of wheat, corn and other grains want to ease decades-long restrictions that require farmers to keep certain acreages fallow for conservation reasons, The Journal reported.

A globalization trend

Economist Glen Langan told BloggingStocks Thursday the sharply higher grain prices reflect one of the most prominent trends of the early globalization era: strong demand from emerging markets, particularly from Asia, that's driving the price of commodities and raw materials substantially higher.

"We've seen what's happened in the oil and coal markets, as well as copper and lumber, and now the demand effect is hitting the grains. Higher grain costs, like higher energy costs, will force U.S. inflation higher," Langan said. "Typically, the price hikes would not affect American consumer decisions as much, but because Americans are already dealing with high energy costs, they will."

Upside, downside

From a U.S. macroeconomic standpoint, Langan said there's an upside / downside to the higher grain prices, even while a larger, structural condition begins to come into focus for leaders of world's major economies.

"On the one hand, the upside to grain's higher price is clearly better than, say, the jump in oil's price, because it's good news for America's farmers. They'll see record revenue in the years ahead," Langan said. "On the other hand, it means that cereal and food companies like General Mills (NYSE: GIS), Kellogg (NYSE: K) and Sara Lee (NYSE: SLE) face a much tougher operating cost environment. And many U.S. consumers will invariably switch to cheaper breakfast and food forms if prices continue to rise. There's only so much Americans are willing to pay for a box of Wheaties."

"And even more disconcerting is this trend in which demand for commodities and raw materials is so strong as emerging markets develop, it's driving up costs in the U.S. and Europe even while these zones deal with the problems accompanying sluggish economic growth," Langan said. "It's an issue that will receive more public policy attention if current trends persist."

Tags: Asia, bread, breakfast, ceral, Cheerios, China, copper, corn, Corn Flakes, CPI, emerging markets, featured, General Mills, GIS, global economy, global growth, inflation, K, Kellogg, lumber, oil, Sara Lee, SLE, soy beans, wheat, Wheaties