WHEAT UPDATE FROM RONSON FOODS

March 4, 2008


The World Wheat Crisis of 2007 has carried forward into 2008. World demand for grains will continue well into 2009. After several years of a rather boring, non-fluctuanting price range for US wheat we are seeing this rather boring commodity escalate in price. What causes this escalation that has affected the US pricing for flour, breads, eggs, cheese, poultry, pork, beef, and certainly pasta? There are several factors that enter into the equation. .

WORLD DEMAND:
Countries such as China and India are enjoying a surging economy that produces a growing lower middle class that are demanding better food. Wheat not only for bread and pasta, but also for animal feed as well. India was a net importer of wheat for the last two years. This 2008 Indian crop might not be enough to meet their domestic needs and may end up buying wheat from the USA this year. Those countries, such as the USA and Canada that have abundant supplies of wheat are finding their inventories in high demand, and at high prices, throughout the world. Right now the US stocks of wheat is at a 60 year low as we see US wheat making its way throughout the world. Currently world stocks of wheat are down to less than 30 days supply.

CROP FAILURES:
Australia has had two crop years in a row that failed due to weather conditions. European wheat crops also came in short and could not meet the high demand. The result is very high pricing per bushel of wheat. Southern Hemisphere crop production has lagged behind their domestic needs. For years many African countries have been net importers of wheat. It is interesting to note that in developing countries the percentage of household income spent on food ranges between 60-70 percent. In developed countries it is much less at between 10 -12 percent. As crops fail in developing countries and prices escalate, the ability of an average household to feed itself is in jeopardy. This is truly a global economy where what happens in Argentina, India, or Australia does have an effect on the USA.

GRAIN COMPETITION:
Grains are competing for acreage. The production of corn has increased due to the FED mandate that Ethanol be used in 25 % of our gasoline. US farmers are now making a very healthy living (as they should) growing grains. Soya, corn, sorghum, and wheat all compete of the same place in the ground. As a result, all grains have increased tremendously. The Minnesota Board of Trade quoted winter red wheat at $24.00 last week. Yes, $24.00 a bushel for a product that fetched $5.00 a year ago. Futures are selling for $15.00 a bushel as the new crop time approaches this July. The same product was selling for approximately $5.00 last year. The EU has a similar issue saying that 10 percent of transportation fuel must come from biofuels by 2020. During 2007 farmers sold a rather large percentage of their wheat to be made into biofuels instead of selling direct to the mills for pasta. Several Italian pasta producers have been forced to close their production facilities simply because they cannot obtain the needed wheat.

DOLLAR EXCHANGE:
The US dollar is now at 1.52 against the euro. The rate was 1.46 in November. That’s a 4.11 percent decline in the purchasing power of the dollar. This is putting great pressure on imported products from Europe, especially Italian Pasta. Virtually all exporting European packers will only contract in euros as dollar contracts are no longer accepted. That causes the exchange rate impact with higher pricing for all European products. This also adds to the cost of crude oil.

FUEL:
WOW, crude oil at $104 a barrel! This has a major effect on transportation, factory production, fertilizer, ocean steamship transportation, inland transportation, and US transportation. I read a report that the additional cost of fertilizer (oil based products) will cost a farmer approximately $1.00 more to grow a bushel of wheat in 2008.

PROSPECTS:
It appears that prices will continue to increase world wide for at least the next seven to nine months. Then the new US and Australian crops will be harvested. Prices should go down at that time, but not to the levels of 2006. The financial new channel, CNBC, reported that all commodities have had dramatic price increases. The first six days of March saw wheat increase by 27%. This is way too much speculation. The bottom line is that we will need a very good crop in 2008 and 2009 before pricing and availability will revert back to normal.




Patrick M. Redfern
Ron Son Foods, Inc.