(CP) Imagine a farmer, some seeds of grain and a Prairie field in spring.
How that wheat ends up in a loaf of bread – and why prices have soared this year – is an odyssey involving growers and grain handlers, rail cars and flour mills, and bakeries and supermarkets.
The journey of wheat from field to kitchen table offers insight into the global forces that influence the price of food and highlights how increasing costs are compounded along a supply chain.
Long before grilled cheese sandwiches and toast with jam, laboratory researchers work to perfect a single seed.
Scientists tirelessly research bug- and disease-resistant wheat strains to boost harvests and improve the quality, flavour and sustainability of crops.
“They’re developing varieties of wheat with protection against drought and insects and plant disease that are as high yielding as possible,” said Stuart Smyth, associate professor of agricultural and resource economics at the University of Saskatchewan.
Higher yields increase supply, in turn lowering prices for consumers.
“Like any commodity, wheat prices are based on supply and demand,” said Aaron Goertzen, senior economist and director at BMO Capital Markets.
“On the supply side, a huge amount is about how much is being planted and an even bigger factor is what the yield is likely to be.”
When a new wheat variety is developed, it goes to a crop recommending committee – a group of experts recognized by the federal government.
If approved by the Canadian Food Inspection Agency, seed farmers then grow the new variety of wheat, which is sold to farmers to sow in the spring.
In the Prairies, farmers like Jake Leguee plant Canada Western Red Spring wheat, a class known for its high milling and baking quality.
Leguee has had good luck with the Wheatland variety. While he’s managed to reuse seeds for the last couple of years, he plans to buy new seeds next year.
“In the spring, we’ll drive the semi over to the seed grower and pick up a load of fresh seed,” Leguee said.
That’s just one of dozens of costs that go into growing wheat and other crops like canola, durum, lentils, peas and flax on his 6,000-hectare farm in Weyburn, Sask.
“I have direct input costs like seeds, fertilizer and chemicals,” he said. “Then there’s crop insurance, fuel, repairs, maintenance, machinery, land and labour costs.”
Seeding usually starts in late April and by the end of May, Leguee has planted nearly a thousand hectares of wheat.
For the next 100 days, he works to keep weeds, disease and bugs out of the crop and fertilizes twice during the season.
It’s not all in his control: last year, a severe drought withered his crops. Across Western Canada, production of key field crops including wheat fell by more than 40 per cent compared with the previous year, according to Agriculture and Agri-Food Canada statistics.
The lower yields slashed supply, sending the price of a bushel of wheat soaring.
It’s a big part of why bread prices have climbed to new heights, and stayed high. As of November, prices for items like bread, rolls and buns were up 18.2 per cent year-over-year, according to Statistics Canada.
Even though growing conditions were better this year, last year’s drought left wheat stockpiles at rock-bottom levels, BMO’s Goertzen said.
“It takes time for supply to level out and prices to normalize,” he said.
But there are other factors and players along the supply chain that affect prices.
By the end of August, as wheat crops turn a golden yellow colour, farmers in the Prairies begin harvesting wheat.
Some is sold right off the combine to grain handlers. The price is spelled out in a contract beforehand using futures prices, a locked-in price for a commodity to be sold at a later date that’s determined by markets.
The rest is stored in bins on farms and sold throughout the fall and the following year at a spot or cash price – a market price for wheat purchased and delivered today.
But farmers don’t set the price.
“The market tells farmers what the price is,” said Smyth, the chair of Agri-Food Innovation and Sustainability Enhancement. “A farmer’s costs are independent of the price.”
Some years, that means farmers lose money on wheat, he said. Other years, they do better.
Farmers like Leguee can try to hedge their bets to get the most for their grain.
“I can choose to sell or not but I don’t get to set my price,” he said. “I could set a target price that’s maybe 50 cents above the market. The grain buyer might take it or might not, but then it will expire and I’ll have to try again.
“But at some point I just have to sell.”
The benchmark price of wheat is set on exchanges all over the world.
“There’s no central mechanism that dictates what prices are,” Goertzen said. “It is purely supply and demand. So it’s determined on a decentralized basis based on the behaviour of millions of different agents.”
The biggest swings in prices usually occur due to weather, like the drought that decimated crops in 2021.
But other factors play a role. Geopolitical conflict had a strong influence on wheat prices this year, for example.
“Russia and Ukraine are both major agricultural exporters. Together they account for almost 30 per cent of global wheat exports,” Goertzen said. “But much of that production has been disrupted due to the war.”
Between the drought in North America and the war in Ukraine, wheat supply plummeted in early 2022, he said.
“There’s a lot of missing grain,” Goertzen said. “It’s a global market and so the buyers that would normally buy wheat from Ukraine are increasingly moving to other markets and that lack of supply ultimately affects pricing in Canada as well.”
The price of a bushel of wheat hit $12.94 last March on the Chicago Mercantile Exchange, up from a low of $7.42 in January – a nearly 75 per cent increase. It has since dropped to about $8.60.
Once a farmer sells wheat to a grain handler, it’s sorted and stored in a grain elevator. Much of it is then shipped on rail cars to Thunder Bay or Vancouver.
The rest is typically trucked to local mills to be turned into flour for domestic consumption.
The mills then sell the flour under their own brand directly to consumers at stores. They also sell to grocers for sale under a private label or store brand, and in bulk to bakeries.
Higher labour, transportation, energy and input costs have made each step more costly, said Cereals Canada CEO Dean Dias.
While the cost of bread may have risen more than 18 per cent in the last year, he said no one is getting rich off the increase.
“If a loaf of bread is up 50 cents, that’s spread out over multiple stops along the supply chain and used to pay for everything from higher labour and transportation costs to higher input costs,” he said. “Everybody in the value chain needs to succeed to have a loaf of bread on the kitchen counter.”
Yet the further wheat travels from farms, the more opaque the price becomes.
In recent years, Canada’s big three grocery chains came under fire for a multi-year bread price-fixing scandal.
While the wrongdoing bred mistrust among Canadians, grocers say basic food items like bread have razor-thin margins. Instead, experts say they make money off the volume of food sold.
Still, grocers typically don’t provide detailed breakdowns in their financial reports, making it difficult to confirm what the margins on food basics really are.
In October, Canada’s competition watchdog launched a study to examine whether the highly concentrated grocery sector is contributing to rising food costs.
“Wheat markets are highly competitive and globally integrated,” Goertzen said. “But by the time you get down to the retail level, there’s a little bit less competition and probably more pricing power if you’re a major food retailer.”
Despite the higher cost of bread in 2022, it’s still one of the biggest bangs for your buck in the grocery store, Dias said.
“There’s a reason it’s a global staple,” he said.