A rise in the bread price is no cause for panic, but an example of the cost of business.
DO you know what I like about markets, and agricultural commodities in particular?
It is the connections, the interplay between the big-picture events (Russia, drought, policy etc.) and their impact on the average punter on the street.
What goes on around the world can affect the basket of foods in the supermarket.
During recent years, food security has been raised as an issue for Australian consumers.
It is important to outline the reality that food security in the context of Australia is a misnomer.
The recommended calorie intake per day for a man is 2,500 kilocalories (calories) and for a woman is 2,000kcal.
From 2010 to 2019, Australia had a food supply of 3,412kcal per capita per day, substantially higher than the recommended calorie intake for a man or woman.
On a global basis, the average available food supply was 2,909kcal. We have enough calories to feed the country.
Modern consumers value having access to a wide range of produce year-round.
The impact of COVID-19 has reduced the availability of some products to consumers, but food security has not been affected.
Australia has faced logistical challenges, and at worst some consumers face food affordability challenges. Some products will not be available, but overall, Australia is well provided with calories.
To an extent, food affordability is becoming an issue for many in Australian society, but we are not food insecure as a nation.
What about our daily bread?
Let’s take a look at the relationship between wheat and bread.
Bread is clearly going to have a strong relationship with wheat; after all it is made from flour, which is made from wheat.
The chart above shows an index I have produced using data from the Australian Bureau of Agricultural and Resources Economics and Sciences, the Australian Bureau of Statistics and our own pricing data.
The bread price has generally increased over time, but not with the same volatility as wheat.
This makes sense, as climatic conditions affect wheat.
Bread is a consumer product, and wheat is only a proportion of the overall costs of production.
The relationship between bread and wheat pricing in the US is slightly stronger than in Australia.
In general, the most significant increases in bread pricing occur during times of higher annual increases in wheat pricing.
The correlation between US bread and wheat is 0.80 and between Australian bread and wheat is 0.67.
The correlation has declined significantly in Australia during the past year, as bread prices have shown a smaller rise compared to wheat.
It is important to note that price falls in bread are not as common when the wheat price falls.
This is especially so in Australia.
In a 32-year period, Australian bread prices fell in four years versus nine times in the US.
Just like sticky dough, the bread price is sticky.
Price stickiness is an economic term where prices have an aversion to downward change when there are changes to the cost of the inputs.
US bread has been cheaper relative to Australian bread for most of the past 30 years.
This makes sense if you have ever been to the US and tasted their bread.
In 2022, the increase in bread pricing in the US has been much stronger than Australia, which is closing the gap.
In reality, there is a relationship between bread and wheat pricing.
The consumer is going to pay more for bread, but at the same time farmers are paying significantly higher costs for all of their inputs.
When articles come out in the metropolitan press about the high cost of bread, I don’t think it is a high enough price increase to warrant panic.
•Andrew Whitelaw is co-founder and director of Episode 3 (EP3)
