Milling & Baking News - July 4, 2006 - 6

E D I T O R I A L

Striking differences in wheat and oil market factors

ow that price movements in wheat futures are
more and more attributed to investing in "commodities," grain-based foods purchasing executives find themselves needing to understand markets
that might once have been beyond their normal field of
interest. This is no easy task, especially since "commodity investing" is almost always made by transactions in
indexes, or baskets, of many different items. Fundamental to analyzing swings in index values and how they influence demand for an individual component like wheat
is understanding the danger of believing that the influences on prices of the individual commodities have even
the remotest similarities or relationships.
The complexity of what is at stake here becomes evident in examining one of the most popular indexes used
for investing in commodities, the Goldman Sachs Commodity Index. Currently, that index, which trades on the
Chicago Mercantile Exchange, has the following components, by per cent: Energy, 66.69; agriculture, 16.52;
industrial metals, 6.59; livestock, 7.53; and precious
metals, 2.68. Those components are updated yearly, but
even their maintenance for a full 12 months does little to
relieve the problem of trying to grasp the impact on the
price of wheat and flour of a hedge fund's decision to
increase its stake in "commodities" by buying a futures
contract reflecting an assessment of this index.
The spread of forces affecting each commodity making
up an index like this one is best illustrated by looking at
just two, oil in energy and wheat in agriculture. Wheat
price movements, save for the commodity-related transactions, are driven now more strongly by classic supplydemand fundamentals than almost at any time in recent
memory. As John A. Schnittker, the longtime consultant
to baking, told the recent meeting of the American Bakers
Association, flour users should not be concerned about in
Washington. That is particularly the case when it comes
to major farm legislation that will be considered next
year. He told the A.B.A. that little is at stake in program

changes that might affect wheat and flour prices. That is
hugely different from the not too distant past when farm
legislation and Department of Agriculture decisions were
the primary influence in wheat prices.
In contrast to the freeing of wheat from governmental
influence, students of international oil markets agree that
politics is the principal player in oil. Even when rising demand, especially in North America and in Asia, is cited,
an offset immediately arises in the form of a political decision to restrain energy use. On the supply side, oil is so
strikingly different from wheat that it seems impossible
that the two could be components of the same commodity
index. Three distinct differences from ordinary commodities define oil: It is an exhausting resource; production is
usually owned by national governments, and for most oil
exporting countries, oil is their overwhelming source of
national income. Unlike wheat, where earnings require
having a crop, advantage may be realized by not extracting oil and leaving it in the ground as an investment.
And on top of these unique oil market characteristics is the existence of the OPEC cartel. Eleven member
countries of OPEC supply 40 per cent of the world's oil,
and these countries purportedly have nearly 80 per cent
of the world's oil reserves. With a mission to coordinate
and unify the petroleum policies of member countries,
OPEC's effectiveness, even at times when its members do
not agree, is a force of tremendous power in comparison
to the highly competitive international wheat market.
With energy, mainly oil, representing two-thirds of
the value of the GSCI, it does little good to lament how
wanting to own or to sell this price indicator for petroleum might affect fluctuations in wheat. The power of
commodity investing has been on the horizon of markets for many years. That it now has emerged as a fullblown factor causing inexplicable price moves means
that analyzing what may influence commodity investors
has replaced government actions as the powerful force
to be reckoned with by wheat flour buyers.

Grape-flavored apples produce a daydream

zealot about eating grain-based foods had an unusual experience recently when his wife sought to
introduce a new product in the fruit category. After
all, the bread-eater also is a dedicated apple-a-day person,
and so something that had caught her interest in a grocery
store, an array of four luscious-looking apples in separate
compartments of a plastic package being sold at a price
of $6, seemed a natural for trial. Besides the special package and the price catching her eye, she was attracted by
the promise of a totally new taste, apples that have a grape
flavor. The new product's name, Grapple, also piqued her
curiosity enough to spur purchasing such an item.
When offered to the husband, he was fascinated to hear
what was at hand, wondering how such a marvelous bit
of biotechnology - apples tasting of grape - could have
escaped his notice, especially since he is an ardent believer
in what biotechnology ought to accomplish. Imagine the
disappointment that ruled when close examination of the
package and its contents label revealed the awful truth, that
Grapples are the product of a patented way of washing or
soaking apples, albeit excellent and juicy ones, in a grapeflavored wash. The taste of a Grapple proved to be very
much like the taste of grape soda from one's youth. That
the product was being promoted as a food that would have

bakingbusiness.com / world-grain.com

great appeal to children, and thus was one that could be
eaten with all the pleasure of a flavored confectionery and
all the healthful aspects of fruit, seemed remarkably naïve.
Before the truth was revealed, the grain-based foods
zealot had conjured up a range of possibilities of how
such flavor-enhancing biotechnology could be applied
to many different baked foods. He wondered if it would
be possible to bake bread from wheat that had been flavored to taste like peanut butter and jelly, to name only
one possibility. Having such a crazy dream dashed by
discovering the rather mundane way in which flavor is
transmitted to the Grapple did not do away with daydreaming about the ways in which biotechnology might
eventually work in a manner that would modify wheat
and wheat-based foods so as to improve their healthful
qualities and also their taste and utility.
Even as bioengineered crops gain increasing acceptance
around the world, particularly in developing countries,
their contribution to grain-based foods is far short of what's
believed possible. Ardent advocates of this science have
long considered it to be the path to improving the quality
of many foods. The answer is not in grape-flavored apples
or in bread similarly modified. But it does lie in this science
being allowed to achieve its potential. MBN
Milling & Baking News, July 4, 2006 / 7

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Milling & Baking News - July 4, 2006

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