Food Crisis: The Rising Cost of Wheat

Broadway Bagels, on Manhattan's Upper West Side, still sells a bagel for 75 cents, the same price as three years ago. That's despite the fact that the flour the store uses has tripled in cost. So why not raise the price? "There's only so high you can go," says a store manager who preferred to remain anonymous. His competitors don't quite agree. Two weeks ago Lenny's Bagels across the street raised its price from 85 cents to a dollar. And 20 blocks downtown, in a fancier neighborhood, H&H upped its price from $1.15 to $1.30. (Article continued below...)

So what does the price of bagels have to do with the cost of rice in China, or milk on Main Street? In New York, paying more than a buck for a bready nosh carries an economic punch in the gut similar to what world markets got when oil started selling for more than $100 a barrel. Symbolism aside, bagels are, in fact, a revealing example of rising food prices.

They're typically made from one kind of flour: high-protein hard red spring wheat, grown in North Dakota or Montana. After the durum wheat used in pasta, hard red spring wheat is the top of the line. It's also had the biggest price spike. For 50 years it traded at around $2 or $3 a bushel on the Minneapolis futures exchange, which specializes in hard red spring wheat. In September the price was $7. In February that price peaked for a day at $24, as the market panicked over low supply. "It wasn't clear whether there would be enough to finish out the year," says Bill Lapp, an agricultural economist in Omaha. The current price is down again, but only to $11.24. Flour prices followed wheat. Bagel-quality flour jumped from around $15 per hundred weight (a bigger measure than the bushel) last summer to $40 now.

The explanation is the classic: with global wheat stocks at a 60-year low, demand is threatening to outstrip supply. Further complicating matters is the flood of profit-hungry investors entering the grain exchanges. "Hedge funds think they're smart enough to come into the market and make a killing," says Brian Wright, a professor who specializes in commodity markets at the University of California at Berkeley. "And when the prices are high, tiny bits of news make a huge difference."

Fortunately, some of the bad news giving markets the jitters may be temporary. American farmers shifted acreage away from wheat in order to meet the demand for corn-based ethanol, but they are already reporting a shift back in response to soaring wheat prices. And while Canada, Australia, Argentina and Ukraine all had bad wheat crops last year, agriculture analysts say this year's harvests should benefit from weather that is forecasted to be better.

It better be, says grains expert Robert Bresnahan, president of Trilateral, a risk management firm, who estimates that the world needs five straight years of good crops to build up wheat stocks. "If we have crop failure anywhere in the world next year," Bresnahan says, "we'll have more political unrest and could have famine." What's clear is that the price spike revealed a long-term trend toward the Western diet—and food shortages. The developing world wants to eat like the rich, opting for meat, milk, and products made from wheat. That could cause some serious problems, since the typical Western diet puts much greater demand on land. A calorie from a cow or pig or lamb requires up to eight times as much acreage to produce as a calorie derived from grains, says Peter Timmer, a fellow at the Stanford University Program on Food Security and Environment.

Not everyone is losing money in the current crisis. After food giant Conagra tripled profits in its commodity trading business, the conglomerate sold the division last month for more than $2 billion. The company's milling division also enjoyed a brisk profit, even while the cost of the main ingredients was spiking. Some bakers, including Jim Greco, CEO of the national bagel franchise Brueggers, grumble that the millers passed along more than their own costs; defenders argue that millers are absorbing unprecedented volatility in wheat as well as higher delivery costs. (Flour travels by rail or in trucks running on diesel, which has doubled in price since 2006.)

While you wait to see if food riots and famine can be avoided, try to enjoy your (pricey) bagel.