Chicago, Sept 7 - Michael Weber has coped with the rising cost of milk, shortening, cooking oil, and nuts that his bakery needs to make its popular breads and cakes, raising prices only once in the past two years.
But surging wheat prices that have sent flour costs sharply higher are now putting a fresh squeeze on his 77-year-old bakery's margins. He is reluctant to raise prices again, fearing that could chase away customers, but if wheat prices remain near historically high levels above $8 a bushel, he may have no choice.
"We're in a very ethnic, blue-collar, hard-working neighborhood so we try not to squeeze our customers when we get squeezed," said Weber, the third-generation owner of Weber's Bakery on Chicago's southwest side.
High flour prices alone have pushed some of his input costs up 25 to 30 percent.
Exceptional export demand for U.S. wheat, along with export restrictions and weather-related crop shortfalls elsewhere, have helped send prices to historically high levels. That has put wheat on a growing list of high-priced commodities that have fueled a global wave of food price inflation.
Wheat futures at the Chicago, Minneapolis and Kansas City exchanges have nearly doubled from a year ago, hitting all-time highs this week. Wheat prices in Europe are near record highs.
The main culprit in food-inflation has thus far been corn, which is a key feedstock for the livestock, poultry and dairy industries. Decade-high corn prices early this year amid strong demand from ethanol producers encouraged a huge increase in U.S. corn planting, some of it at the expense of wheat and soybean acreage.
By some economists' estimates, food prices could rise by 5 percent or more on average this year, compared with the normal food-inflation rate of around 2 to 3 percent.
PASSING ON HIGHER COSTS
U.S. food companies, already struggling with higher energy, transportation, packaging and labor costs, have adjusted to the higher-than-expected input costs by raising prices or reducing package sizes.
Sara Lee Corp. and bakery company Flowers Foods Inc. reported stronger-than-expected quarterly profits in August as price increases helped offset higher ingredient costs.
Retailers have also started passing on the higher wheat costs in many products to consumers, with more price increases likely on the way, economists said.
"On the least-differentiated products like generic flour, a lot of it has been passed through already," said Michael Swanson, agricultural economist at Wells Fargo.
"But in some of the more differentiated products like prepared bakery goods, high-end goods, so far they've absorbed most of that increase because they try to keep their prices more stable over time," he said.
White bread has traditionally been an item that some grocers price at a loss to draw customers into stores to buy other more profitable items.
However, consumers have developed a taste in recent years for whole-grain or specialty breads which cost more to produce. Many stores are reluctant to price those loaves at a loss, and consumers should expect to pay around 25 percent more for those products, economists said.
Restaurants are also feeling the pinch of higher wheat prices, although the jump in corn prices certainly triggered more pain by pushing up meat prices, economists said.
"So far, restaurants have been very slow to change their prices. It's gotten to the point where there's going to be no other option than for restaurant chains to accept some of these passed-through costs," Swanson said. "I think we will see some menus re-priced after this."