Wheat Supplies & Exports Have Little Effect on Price of Bread

Transcription

1 Wheat Supplies & Exprts Have Little Effect n Price f Bread tem Type Article Authrs Cable, C. Curtis Jr.; Menzie, Elmer L. Publisher Cllege f Agriculture, University f Arizna (Tucsn, AZ) Jurnal Prgressive Agriculture in Arizna Rights Cpyright Arizna Bard f Regents. The University f Arizna. Dwnlad date 29/04/ :19:17 Link t tem

2 Wheat Supplies & Exprts Have Little Effect n Price f Bread by C. Curtis Cable, Jr., and Elmer L. Menzie* A three -year grain sale agreement with the U.S.S.R. was annunced by U.S. gvernment fficials n July 8, This agreement created cnsiderable late- summer and early -fall activity in U.S. grain markets. Dmestic prices fr sme grains increased appreciably, and these increases further kindled the cntrversies relative t causes fr rising U.S. fd prices. Fr example, the market price fr wheat in the U.S. rse frm $1.32 per bushel n July 15 t $1.51 n August 15.' Apparently, because f this relative sudden and sharp increase in wheat prices, newspapers and ther news media carried stries n the likelihd that retail bread prices wuld rise significantly in the U.S. Suppsedly, the higher wheat prices were caused by a feared shrtage f wheat resulting frm the sale agreement with the U.S.S.R. Budget- cnscius cnsumers reacted negatively t the prspects f higher bread prices, and t the reprted reasns fr justifying the increase. Hwever, as wuld be expected, mst U.S. grain farmers reacted favrably t the grain sale agreement. Will the grain sale agreement with the U.S.S.R result in a severe wheat shrtage in the U.S.? And, is the recent July -t- August increase in wheat prices a sund ecnmic justificatin fr an appreciable increase in retail bread prices? n an attempt t answer these questins and prvide sme insight n the issues invlved, this article ( 1 ) summarizes the prvisins f the grain -sale agreement and the reprted sales as f mid -September, ( 2) analyzes the impact f these sales n current U.S. wheat supplies, and ( 3) discusses the histrical relatinship between wheat supplies and U.S. retail prices fr flur and bread. The Grain Sale Agreement This agreement prvided that ( 1 ) the U.S.S.R. wuld buy, frm private U.S. grain dealers, $750 millin in grains ver a 3 -year perid, ( 2 ) $200 millin wrth wuld be purchased in the first year, (3) the U.S. wuld extend credit up t the ttal amunt f the purchase but n mre than $500 millin wuld be utstanding at any ne time, and (4 ) interest wuld be 61/8 percent and repayment f principal and accrued interest wuld be made in three annual installments. Accrding t a news release,' at the time f the annuncement f this agreement, the U.S. gvernment expected mst f the purchase wuld invlve feed grains. Althugh the U.S.S.R. had a pr wheat crp, U.S. fficials apparently did nt expect large purchases f wheat. Hwever, by the end f the first week in September, the U.S.S.R. had purchased abut 400 millin bushels f wheat, and ttal purchases apprximated $1 billin. Obviusly, the rate f purchase is abut fur times that anticipated by U.S. negtiatrs. Changes in Wheat Supplies and Uses On July 1, the beginning f the wheat -marketing year, the U.S. had abut 865 millin bushels f wheat n hand ( Chart 1 ). This was the secnd largest "beginning stcks" since 1964, and was equal t dmestic needs fr apprximately ne year. n additin t these stcks, the indicated 1972 U.S. wheat crp f almst 1.6 billin bushels is the third larg n recrd. As shwn in Chart 1, the tw largest crps wenb in 1968 and 1971, and there has been a prnunced but irregular upward trend in prductin since the early 1960s. Hwever, during mst f the past quarter -century, U.S. wheat prductin has fluctuated between abut billin bushels annually. Adding prductin, and a small vlume f imprts, t the stck n hand gives the ttal available wheat supply fr the year. This supply reached an all -time peak f mre than 2.6 billin bushels in the early 1960s, then declined steadily t abut 1.8 billin bushels in Since then, hwever, annual supply has increased fairly steadily t abut 2.4 billin bushels at the beginning f the present wheat- marketing year. U.S. dmestic use f wheat this year is expected t ttal slightly mre than 800 millin bushels, which is dwn frm last year's use f almst 900 millin bushels ( Chart 2 ). Uses fr fd are expected t remain at past year levels f millin bushels, and seed at abut 60 millin bushels. Wheat fr feed, which fluctuates mre than ther uses, is expected t drp belw last year's high because f adequate supplies f feed grains and relatively higher wheat prices. Exprts f U.S. wheat, which have fluctuated substantially during the past years, are expected t rise abve last year's 632 millin bushels. Hw much they will rise, hwever, is still in dubt. n the August Wheat Situatin, exprts were prjected at 800 millin bushels.' But, the very recent "mre- than -expected" wheat *Marketing Specialist, Cperative Extensin Service, and Prles( f Agricultural Ecnmics Department, respectively. 6

3 purchases by U.S.S.R. may increase this year's exprts t an all -time high f mre than ne billin bushels. Adding strength t prspects fr increased U.S. exrts are increased requirements in Eastern Eurpe and China, and lwer available supplies frm Canada, Australia, and Argentina. Chart 1. Stcks n Hand, Prductin and Ttal Supply f U. S. Wheat, '. was abut 121/2 cents by 1971 the price had dubled t 25 cents ( Chart 3). Fr the same perid, the average retail price fr 5 punds f general purpse white flur increased frm 48 cents t 60 cents ( Chart 4 ). n cntrast t these steadily rising retail prices fr bread and flur, U.S. wheat prices have been relatively unstable, but at a fairly cnstant level fr the past 25 years. The farm value f wheat used in making a 5-pund bag f flur has held fairly steady near the 20 -cent level since 1947 (Chart 4) Chart 2. Dmestic Use, Exprts and Ttal Disappearance f U. S. Wheat, J 2000 W N J /500 W total DSAPPEARANCE Z O J J_ /955 /960 /965 YEAR BEGNNNG JULY Ttal supply includes stcks n hand and prductin, plus imprts which have been 5 millin bushels r less annually since 1962, and have nt exceeded 32 millin bushels since Surce: U. S. Dept. f Agric., Fd Grain Statistics Thrugh 1967, Statistical Bulletin 423, Ecnmic Research Service, April, 1968; and apprpriate issues f Wheat Situatin, U. S. Dept. f Agric. Assuming U.S. exprts in ttal 1.2 billin bushels, which is 50 percent greater than the prjectin in the August Wheat Situatin, and 800 millin bushels are used dmestically, ttal disappearance will reach an all - time high f 2.0 billin bushels. Deducting this amunt frm the prjected supply wuld leave stcks f abut 400 millin bushels as f July 1, This wuld be the smallest "stcks n hand" figure since 1952, but wuld still be sufficient t fulfill abut 6 mnths f dmestic requirements. This quantity is nly slightly less than the stcks n hand at the beginning f the wheat -marketing year, and exceeds stcks available during Steadily Rising Retail Prices fr Bread and Flur Average retail prices fr bread and flur have risen st yearly during the past quarter-century. n 1947 e average retail price fr ne pund f white bread CD 2 /000 :71 J DOMESTC USE. v / A i... f.../ ` \/ \EXPORTS - i A. i Nt i. A A / \ /. ^ A t l i i. i i. it /945 /955 /960 /965 YEAR BEGNNNG JULY l i t /970 Surce: U. S. Dept. f Agric., Fd Grain Statistics Thrugh 1967, Statistical Bulletin 423, Ecnmic Research Service, April, 1968; and apprpriate issues f Wheat Situatin, U. S. Dept. f Agric. D Retail Bread Prices Reflect Wheat Supplies? Cmparing the data in Charts 3 and 4 with data in Chart 1, a number f bservatins can be made relative t supply -price relatinships between wheat, flur and bread. During the past 25 years, stcks and ttal available supplies f U.S. wheat have ranged frm relatively high t relatively lw, and have either been rapidly increasing r declining ( Chart 1). Hwever, during this perid, the farm value f wheat used in a 5 -pund bag f flur has fluctuated but remained near the 20 -cent level ( Chart 4). n cntrast, there has been an irregular but a very prnunced upward trend in the retail price fr a 5 -pund bag f flur ( Chart 4). There were shrt -term perids when the farm value f wheat in flur, and the retail flur price were bth rising. Hwever, there were ther shrt -term perids when the retail flur price was rising while the farm value f wheat was hlding steady r declining. Thrughut this 25 -year perid f relatively large up- and -dwn changes in wheat stcks and supplies, the retail price f a 1 -pund laf f bread rse steadily higher (Please turn page) 7

4 ( Chart 3). n cntrast t this year -t -year rise in bread prices, the farm value f flur used in ne pund f bread fluctuated slightly but remained very near 21/2 cents. Obviusly, then, retail bread prices were rising even during shrt -term perids when the farm value f wheat was declining. The questin these bservatins raise is, "Since wheat is the majr raw material used in the manufacture f bread and flur, why are nt changes in wheat supplies and the farm value f wheat mre clsely reflected in retail prices fr bread and flur?" Chart Retail Price, Farm Value f Wheat, Flur and Other ngredients, and Farm- Retail Spread fr A Pund f White Bread, U. S., flur and fr all ther cnsumer prducts must cver ALL csts fr raw materials plus prcessing and distributing the final prduct. f cnsumers will nt p a retail price which cvers these csts, including prfifug the prduct will sn be discntinued. Althugh wheat is the majr raw material used in flur and bread, the value ( cst ) f the wheat is relatively Chart Retail Price, Farm Value f Wheat, and Farm-Retail Spread fr Five Punds f General Purpse White Flur, U. S., RETAL PRCE /71, :,.:.., RETAL PRCE FARM -RETAL SPREAD 20 /0 /0 FARM VALUE OF WHEAT' FARM VALUE, WHEAT FLOUR,... /955 /960 /965 /970 CALENDAR YEAR 1Grss farm value has allwance fr by- prducts. Surce: Frrest E. Sctt and Henry T. Badger, Farm- Retail Spreads fr Fd Prducts, Miscellaneus Publicatin 741, Ecnmic Research Service, U. S. Dept. f Agric., January, What Des Retail Bread Price nclude? There is a basic reasn behind the steady increases in retail bread and flur prices, which was ignred in the abve cmparisns. This was purpsely dne t illustrate a cmmn errr made by a majrity f cnsumers, farmers, pliticians, ther public fficials and the public in general. The abve cmparisns failed t recgnize the crnmn- sense, ecnmic fact that retail prices fr bread and. i l. /955 /960 /965 /970 CALENDAR YEAR 1Grss farm value less allwance fr by- prducts. Surce: Frrest E. Sctt and Henry T. Badger, Farm -Retail Spreads fr Fd Prducts, Miscellaneus Publicatin 741, Ecnmic Research Service, U. S. Dept. f Agric., January, small cmpared t the ttal f all ther csts fr materials, prcessing, distributing, and displaying these cnsumer prducts. Fr example, the farm value f wheat used in a 5 -pund bag f flur has accunted fr nly abut 20 cents f the ttal retail price ranging frm 48 t 60 cents, ver the past years ( Chart 4 ). The cst ( price) f the wheat has remained fairly stable, whereas the retail price fr flur has risen t cver cst increases fr ther items. The farm value f wheat used in a pund f white bread has remained fairly stable at abut 21/2 cents since the late 1940s ( Chart 3 ). But, the retail price has dubled in rder t cver cst increases fr ther prdui ( Turn t page 15) 8

5 Chart 6. Fresh Fruits and Vegetables. Changes in Retail Price & Per Capita Cnsumptin in U. S. Since Chart 7. Prcessed Fruits and Vegetables. Changes in Retail Price & Per Capita Cnsumptin in U. S. Since RETAL PRCE 200 -RETAL PRCE /BO - -- PER CAPTA CONSUMPTON /BO - -- PER CAPTA CONSUMPTON / /60 /40 - /20 / /00 u. BO _-_` - -'-- O /00 O ó / /960 hlds, and further increases in percentage f meals served in public establishments, the cnvenience f prcessed fds will encurage their use. Als, the current cncern abut the "rising cst" f fd may further discurage the use f the relatively higher priced fresh vegetables. Labr requirements fr prductin & harvesting f many vegetables has ulated imprts especially fresh winter vegetables frm Mexic. Favrable weather, adequate prductin resurces and a substantial supply f relatively lw -cst labr prvides Mexic with sme strng cmpetitive advantages ver U.S. grwers. ncreases in yield per acre, and in a minr way the increases in imprt, have made it pssible t increase pr - ductin frm a declining acreage. Overall, then, there is n apparent and immediate need fr mre U.S. farm land t be planted in vegetables. /965 / O ' ', /955 t is pssible, because f changes in cst and efficiency between areas, that vegetable acreage may mve frm ne state r regin t anther. Als, the increased experimentatin and develpment f vegetable prductin in greenhuses and similar facilities may further reduce land requirements fr sme crps. Hwever, it is nt expected that these develpments will have an appreciable e f feet n land requirements in the next ten years. The steady upward trend in per capita cnsumptin f prcessed vegetables, and the steady declining trend in use f fresh vegetables has many implicatins and presents sme challenges fr U.S. vegetable prducers. Fr example, can prducers f fresh vegetables reduce the rate f decline in U.S. cnsumptin f their prduct? Hw? Can the cst f prductin and marketing be lwered by adptin f Wheat Supplies & Exprts... ( frm page 8 ) tin and marketing inputs. The value f wheat accunted fr 23 percent f the retail price f a 1947 laf, but by 1971 wheat accunted fr nly abut 10 percent. Cnclusins Retail prices fr bread and flur may be raised in the near future, and "justified" n the basis f "larger than expected" exprt sales. Hwever, the at f wheat has nt been the majr erminant f retail bread prices fr at least 25 years, and is becming less and less imprtant. Als, there has been little evidence f any severe shrtage f wheat in the U.S. in the past 25 years. Therefre, it is nt t surprising t find but little apparent relatinship between retail bread prices and wheat supplies and prices., /960.. '1/ /965 /970 mre efficient methds, and thereby lwer retail prices? Wuld greater prmtinal effrts t encurage use f fresh vegetables pay ff in mre net dllars? D freign markets ffer any ptential fr increasing sales and prfits fr U.S. prducers f fresh vegetables? Perhaps fresh vegetable grwers have the answers t these and similar questins, and have cncluded that the dwnward trend in per capita cnsumptin fr mst fresh vegetables is inevitable. f s, will the increase in ppulatin ffset the decline in per capita use, and thereby maintain ttal fresh vegetables sales near the current level? f the current level f sales and cnsumptin f fresh vegetables cannt be prfitably maintained, many present -day grwers may sn have t shift their prductin frm fresh t prcessed market utlets. Wheat supplies, stcks, exprts and ttal disappearance in the U.S. and wrldwide- alng with gvernment prgrams have been the majr determinants f wheat prices. An almst entirely different set f factrs have been majr determinants f retail bread and flur prices. There is little evidence t indicate that there will sn be an appreciable change in this situatin. Ftntes 1 U.S. Dept. Agric., Agricultural Prices, Statistical Reprting Service, August 30, New Yrk Times News Service, Tucsn Daily Star, September 10, U. S. Dept. Agric., Wheat Situatin, Ecnmic Research Service, August,