I was struck before the holidays at the flare up again of the fight over food price increases and their connection to farm prices. The farm prices are connected to food prices - they are after all inputs into food prices. It is relatively clear, however, that this connection is tenuous and that the return to farmers plays a very small role in changes in most food prices.
The debate started as a result of Canada's Food Price Report for 2021. The report predicted food price increases larger than in the last few years and values that significantly outpace the general rate of inflation. One particular area of focus was bakery products with increases predicted to be between 3.5% and 5.5%. I agree with some of the predictions and disagree with others and won't quibble with them here (full disclosure: I was involved in earlier versions of the report but am no longer a partner). The report outlines several different potential contributors to price inflation which make a lot of sense. There are two quick references to farm prices (particularly wheat) or futures as potential contributors to price inflation. If farm and food prices both do indeed go up, the connection MIGHT play a role but I don't think that the report suggested that this was the only contributor and that it was a definitive fact.
Several farm groups, most notably the Saskatchewan Wheat Commission, criticized the report. They said that farm prices were relatively flat and that the connection between farm wheat prices and bread prices was weak. They are right. This is due to a couple of things. Most importantly, the cost of wheat in a loaf of bread represents a surprisingly small proportion of the total cost. The United States Department of Agriculture (USDA) estimates that the farm share of the US food dollar is approximately 14.6%. If you consider that bread is more processed than say, apples or lettuce, one would expect that the amount for wheat is lower. The USDA estimate that the farmer share of the food dollar for bread is 4% and for flour is 19% which highlights the impact of processing. If the price of wheat doubled and the price transmission was perfect (which it usually isn't) the price of bread would go up 4%. Wheat futures (contracts for wheat delivered in the future) are high (as was highlighted in the price report) for a variety of reasons but much can happen between now and when the new harvest comes off.
We looked at the price of wheat, bread and flour in Canada for the past four years (see graph below). It is worth noting that the price of bread has actually fallen slightly in the past four years and has been remarkably stable. Wheat prices have risen and then fallen again within a range of about 20% of the current price. It is worth noting that the correlation between bread prices and wheat prices is actually negative in this time period - bread prices moved in the opposite direction of wheat prices (we considered both same month and several months of lag). It is also worth noting that flour prices were not positively correlated to wheat prices over the same time period. This is simplistic analysis but does provide some insight into the lack of connection between wheat prices and bread prices.
The final point worth noting is that farmers are price takers. It is not greedy farmers who are driving up food prices. Market prices in Canada are influenced by many different factors within and outside of Canada. If wheat prices go up, farmers do better but they can't just decide to charge more. It simply doesn't work that way.
In the end, bakery prices may go up this year for many reasons. It is not likely to be due to wheat prices.
Keywords: food, food prices, bread, wheat, flour, prices, farmer share of food dollar
Recommended citation format: von Massow, Michael, and Nicholas Bannon. "Revisiting the Connection Between Wheat and Bread Prices". Food Focus Guelph (109), Department of Food, Agricultural and Resource Economics, University of Guelph, February 2, 2021.