Unfavorable weather is threatening wheat crops in several parts of the world and if conditions continue, consumers may have to pay more for their favorite breakfast cereal and other wheat-based products.
Wheat prices spiked in recent weeks after heavy rains damaged the wheat crop in the U.S. and a drought in the Ukraine - one of the world's lowest cost suppliers - ruined a large amount of the crop there. Analysts say the weather conditions and the resulting supply losses could keep wheat prices rising.

If higher prices stick, that could force companies such as Minneapolis-based General Mills Inc. and Battle Creek, Mich.-based Kellogg Co. to pass on the increase to consumers who would have to pay more for cereal and other foods made with the grain.

'The higher costs that you're seeing today are not likely to flow through their inventory this quarter but several quarters out,' said Deutsche Bank analyst Eric Katzman.

The price of wheat has risen 10 percent since May 21, settling at $5.272 a bushel Tuesday on the Chicago Board of Trade. The price jumped as high as $5.36 a bushel at one point as investors registered concerns that the U.S. winter wheat crop is not as healthy as expected.

According to a U.S. Department of Agriculture weekly crop conditions report Monday, the amount of winter wheat crops in good to excellent condition dropped 4 percent from a week earlier. Darrel Good, an agricultural economics professor at the University of Illinois, said Monday's report 'certainly is a barometer' of the potential size of the year's wheat crop.

Food companies typically arrange contracts to purchase ingredients such as wheat or corn at a predetermined price. This practice, also known as hedging, can protect companies from volatile price swings in the market.

But, if the amount of harvested wheat is lower-than-expected, prices could stay high for a sustained period of time and manufacturers may feel pressure to boost their own prices, said Katzman.

'When the volatility is high over a long period of time as opposed to two weeks, then the difficulty is when are we going to raise prices?' Katzman said.

There's a chance that manufacturers will be faced with that question as two of the world's largest wheat exporters, the Ukraine and Australia, contend with extreme weather.

A drought in the Black Sea region of the Ukraine that began in January has damaged supplies so badly the Ukraine government last week said it would consider halting exports as of July 1 to rebuild its own stockpiles. Drought conditions lasting more than a year have sliced Australia's wheat harvest.

The U.S., meanwhile, has suffered flooding and rust, a red-orange fungus that damages plants, in wheat producing states such as Kansas, Oklahoma and North Dakota for at least a month.

If conditions don't improve, trading on the wheat market 'will continue to be very volatile,' said Darin Newsom, senior analyst at agricultural research service DTN. The droughts in the Ukraine and Australia, he said, could be particularly damaging long-term.

'It's going to tighten the world situation,' he said, resulting in higher prices for the grain.

Grain prices will most likely continue to rise at least for the next few months, Good said. The market could stabilize once Australia's wheat crop is harvested in the fall. Then the exact size of the worldwide crop can be determined and prices may plateau or soften as the market adjusts, he said.

Cereal makers, though, maybe not be able to wait until later in the year to make pricing adjustments, particularly since they are already feeling the affect of higher prices for other commodities. Rising demand for corn-based alternative fuel ethanol has led to an increase in corn prices. The higher raw material costs led Kellogg to raise prices by about 2 percent in September.

General Mills, meanwhile, said Tuesday it will raise prices on its line of 'Big G' cereals beginning June 25, citing raw material costs as one factor.

The company said consumers will actually see lower prices per box, but boxes for well-known brands such as Cheerios, Wheaties and Total will be smaller.

Katzman said investors have been anticipating that the companies will respond to higher commodity costs by boosting prices.

'The market is assuming these companies are all being affected by these raw material costs in the same way,' Katzman said.


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