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In face of drought, agribusiness opts for cheap grain imports

(Friday Oct. 4, 2002 -- CropChoice news) -- The following information, all courtesy of the Agribusiness Examiner, includes a Wall Street Journal piece and responses it elicited from A.V. Krebs, editor of the Agribusiness Examiner, and farmers and ranchers.

BAKERIES, FOOD COMPANIES BLAMING DROUGHT CROP DAMAGE, FORCASTS HIGHER CONSUMER PRICES, INCREASE OF CHEAP IMPORTED GRAIN SCOTT KILMAN & PATRICIA CALLAHAN , THE WALL STREET JOURNAL: The crop damage caused by the drought is beginning to force some U.S. food companies to raise prices and others to take the unusual step of importing grain.

Great Harvest Bread Co. franchisees are beginning to raise retail prices of some loaves by as much as ten percent, or about 30 cents. "It's getting hard to find good-quality wheat," said Janet Tatarka, director of franchise services for the Dillon, Montana., chain of 167 bread shops. "And honey prices are ridiculous, too," she adds.

The executives of Heinemann's Bakeries Inc., a closely held Chicago baker, are facing the highest flour costs in the company's 73-year history. The bakery, which uses 4.2 million pounds of flour annually, might have to pay 13 cents a pound once its current supply contract expires in November. The company has been paying 9.3 cents a pound.

If prices don't weaken soon, "we'll maybe pass on some of the cost to consumers, and some we'll eat," said Paul Krug, inventory-control supervisor.

The price of the variety of wheat used to make bread, mostly grown on the Great Plains, has soared 63% so far this year. A drought has helped to cut the production of all types of U.S. wheat this year to the lowest levels since 1972. Droughts in the wheat-growing belts of Canada and Australia also are helping to slash world reserves by a whopping 20% from just two years ago.

The situation grew more severe when the U.S. Agriculture Department Monday cut its August forecast of U.S. wheat production by another four percent to 1.62 billion bushels, which is 17% less than last year's U.S. harvest. The move prompted grain traders to predict that U.S. wheat reserves --- the amount left over before the start of next year's harvest season --- will drop to the lowest level in 24 years.

"The food companies which haven't already locked in a supply of wheat are in for a brawl," said Daniel Basse, president of AgResource Co., a Chicago commodity advisory firm.

Wheat is the crop hardest hit by the drought, which has persisted for several years in some parts of wheat-growing states such as Kansas, Colorado and Montana. Compounding the problem, the drought invaded other parts of the Midwest a few months ago, reducing the potential size of the corn and soybean crops there.

In another headache for the food industry, grain companies are beginning to detect a potent carcinogen called aflatoxin in the new corn crop. The toxin is excreted by a soil fungus called Aspergillus flavus, which flourishes during hot and dry weather.

The scope of the outbreak, which won't be clear for weeks, will further reduce the amount of good quality grain available to food companies. The U.S. Food and Drug Administration bans the use in human food of any corn that contains more than 20 parts per billion of aflatoxin. Many dairy and livestock producers also avoid suspect corn.

The supply of good quality grain is getting so expensive that some U.S. firms are discovering that it is temporarily cheaper to import from across the Atlantic Ocean, a role reversal for the world's biggest crop exporter.

Smithfield Foods Inc., the nation's biggest pork processor, said Monday it is part of a consortium importing 25,000 tons of low-quality wheat from the United Kingdom. The wheat, which is slated to arrive by ship in Wilmington, North Carolina, this month, will mostly be used to fatten livestock.

Many of the nation's largest food companies are temporarily shielded from the drought because they lock in the price at which they buy crops for a year or longer. But many of these contracts will expire by next spring. If the drought hasn't eased by then, and grain prices remain high, then they, too, will see their commodity costs climb significantly.

"We aren't protected forever," said Frank W. Coffey, the chief financial officer of Interstate Bakeries Corp., which has brand names that include Wonder, Hostess and Dolly Madison.


Scott: Read your WSJ article on grain prices going up. So the Chicago baker is paying the highest price for flour in 73 years --- the price has increased from 9.3 cents per pound to 13 cents per pound --- 3.7 cents. Do you think there's more than a pound of flour in a one pound loaf of bread? In other words, a one pound loaf of bread only needs to go up 3.7 cents to cover the increased cost. Would the consumer even notice? Especially on one of the designer loaves at $2 or more a loaf. Why didn't you bother to include this reasoning? The price of a loaf of bread has obviously inflated over the years at a much higher rate than wheat. In fact the wheat price has actually gone down over the years when the price of bread doubled.

Similar stories are common about the "poor candy makers"--- Mars, Hershey, Cadsbury, etc. A candy bar has easily less than five cents worth of sugar in it, yet it costs me 69 to 79 cents in the store. Those poor candy makers!

Did you ever think to mention those "poor farmers" who have been getting closer to bankruptcy every year and their ever declining communities?

--- George Naylor, Churdan, Iowa farmer and board member of the National Family Farm Coalition.

Scott: I am a cattle producer. I raise cows and grow 'stockers' on California rangeland. For the Wall Street Journal, your article on U.S. wheat and grain industry economics fell way short of complete. The institution of highly subsidized grain producers in the U.S and Europe have served to distort not just grain production, but also the livestock industry and now the fuel industry (ethanol).

For livestock, cheap subsidized grain has helped pork and poultry out-compete beef --- cattle being produced substantially on grassland and pork and poultry being produced almost completely on feed grains. The artificially low prices of grain have caused other countries to counter with subsidies of their own, even third-world countries, thus furthering the glut and destroying economically logical food production systems in both developed and third-world nations.

Further, subsidized grains have served to strongly assist in the consolidation of grain and meat industry agribusiness to the point that we in production agriculture now face an oligopsony of mind numbing proportions and near infinite political influence.

You have already heard from those who take issue with [bread] baker's proposals to substantially raise the price of bread based on proportionately insubstantial raises in their wheat-flower input costs.

As a daily reader of WSJ's editorial page for 38 years, I have grown to be highly critical of the hypocrisy and anti-logic found in today's world of corporate and political spin. I have always relied upon your publication to present objectivity and to cut through hype. This article did not quite reach that level of traditional reporting.

--- H. Clay Daulton, Madera, California cattle producer

Farmers, Ranchers and Consumers: Scott Kilman and Patricia Callahan need to hear your thoughts on the price of bread as compared to the low price of wheat at the farm gate. Big processors and retailers have the Wall Street Journal's global voice to condition people to accept higher food prices and to provide cover for their corporate wrongdoing.

Who's speaking for the farmer who is receiving the lowest share of the consumer food dollar in history?

Who's speaking for the consumer who is paying record high prices for food while U.S. farms and ranches go out of business?

Who is speaking for the taxpayer who is funding a farm bill that guarantees permanent farm poverty and a growing dependence on imported food?

Who is exposing the legislators that cater to big corporate interests while ignoring the interests of their constituents in supporting farm programs that fail to protect open, competitive markets, and that fail to provide a dependable and safe domestic food supply?

Who is speaking for the foreign farmer whose grain is being stolen by this same Wall Street global food cartel?

Who is speaking for the farms, rural communities, and main streets around the world that are being pitted and leveraged against one another, strip mined, and laid to waste by companies like Cargill, ConAgra, Tyson/IBP, and ADM?

Scott Kilman can be contacted at: scott.kilman@wsj.com

Patricia Callahan can be contacted at: patricia.callahan@wsj.com

--- Mike Callicrate, St. Francis, Kansas feedlot owner


PAUL DYKES, BELFAST TELEGRAPH: Farmers staged a "bargain market day" in Belfast [Ireland] recently to show the wide gap between prices they receive to produce food compared with the prices charged by the big retailers.

Ten different items of farm produce were sold to passers-by at "giveaway" prices, with the mark-ups shown for processors and retailers further along the food chain. "We want the public to see the large mark-ups compared with the prices farmers receive," Joe McDonald from the Ulster Farmers Union said.

The protest market day in Castle Place enabled canny shoppers to buy produce such as milk, eggs, bacon, and potatoes at bargain "farmgate" prices." "For example, 1kg of bacon cost on average 83p to produce. Farmers received on average 81p, while the average supermarket price was 9," Mr McDonald said "A medium chicken cost the farmer 49p a kg to produce, yet the average supermarket price was 2.13."

He said farmers were frequently selling commodities at prices that barely covered the cost of production, which was totally unsustainable for farming families. The UFU is campaigning against a rural exodus and says that farmers must get a better deal from the food chain if they are to stay in business.

UFU president John Gilliland said the situation must change. "For the past five years farmers have been earning less than the minimum wage and working on average of almost 70 hours a week." The very poor prices we are receiving from the food chain is a major factor in the collapse in farm incomes.

"Consumers will be able to see clearly the price difference between food production costs, the farm gate price, and what the consumer actually pays for a range of local produce". The City Centre event is part of the UFU's CARE campaign, a Campaign Against a Rural Exodus.