"There is no shortage of lower quality wheat, and in London feed wheat futures in London are languishing. Traders say new supplies of grain have been pouring in from "non-traditional" sources such as Ukraine, Russia, Kazakhstan and Pakistan since last year. But the millers that supply the bakers need high-quality, protein-rich wheat for bread- making."

By Adrienne Roberts
Financial Times, London
September 11, 2002

A world shortage of high quality wheat has forced prices to six-year highs. Millers are struggling to find the wheat they need for bread flour, and there are fears that the squeeze will feed through to bread prices.

US wheat production has slumped to a 30-year low this season, and the Canadian crop looks to be its smallest since 1974. Prices for high- quality spring wheat on the Minneapolis spot market have shot up by more than 60 per cent since June.

On Monday they soared to six-year highs, breaking through $5.00 a bushel, compared with about $3.00 a bushel in June.

There is no shortage of lower quality wheat, and in London feed wheat futures in London are languishing. Traders say new supplies of grain have been pouring in from "non-traditional" sources such as Ukraine, Russia, Kazakhstan and Pakistan since last year. But the millers that supply the bakers need high-quality, protein-rich wheat for bread- making.

With the three highest quality producers, Canada, the US and Australia, all hit by bad weather conditions, "diminished supply has got everybody scrambling to find quality", said Peter Jones, wheat director at Rank Hovis, the UK miller.

"Prices have gone ballistic. If you can buy it, you're lucky," said Mark Hughes, wheat director at Allied Mills in the UK. This year there is a further complication for European millers.

Germany, the best quality supplier in Europe, is in trouble. Rains that started about six weeks ago are still continuing in some regions, with humidity damaging both yield and quality.

"What we are seeing is a shortage of baking-quality wheat and rye on the market in some parts of Germany," says Franz-Josef Arens of the German Millers' Association.

"This is forcing millers, who normally seek to purchase their grain from surrounding areas, to turn elsewhere for their supplies."

Feed wheat is now fetching less than Euro100 a tonne, with milling wheat trading at a 20 to 30 per cent premium. German flour millers raised their flour prices by Euro 40 a tonne this week and French millers are said to be planning a rise too.

Against this backdrop, many millers take a dim view of plans by the European Union to change its wheat import regime in an attempt to reduce the flow of cheap Black Sea wheat.

Initial proposals by the Commission refer to a 2.2m tonne quota system under which importers would pay a tariff of Euro 42 a tonne within their quota and Euro 95 if they exceed it.

This would be a bombshell for the millers: over the past two years the wheat import tarriff on high quality wheat has been set at zero.

"In their current form they're pretty frightening proposals. If we see enormous import taxes that don't exist in the current regime, that's going to be inflationary," said Mr Hughes.

"We're ready to accept that some of the low quality wheat shouldn't be allowed in in the way it has, but we're saying: don't cut off our access to the good quality as well," said Mr Jones.

Europe's trading partners are none too happy either.

Allen Johnson, who heads the US delegation to the World Trade Organisation negotiating on opening up international trade in agriculture, said last Wednesday: "We believe this is the wrong message, the wrong direction, at the wrong time."

Millers are reluctant to predict what the price of flour could reach by the beginning of next year, but the situation "getting worse by the moment", says Mr Hughes.