The Worth of Wheat - after Inflation
- Monday June 23 2008
This analysis featured in the June 23, 2008 issue of the HGCA's MI Prospects, Volume 10, Issue 26
While there has understandably been a lot of publicity given recently to record wheat prices, it is important to note that inflation has eroded the real value of everything and wheat is no exception.
It has long been recognized that price alone is a poor measure of the health of an industry. By deflating wheat prices by the RPI (Retail Price Index), the buying power of wheat returns can be gauged.
In nominal terms, this year’s prices are indeed at record levels, having advanced beyond the levels of the original EU CAP in the mid-1980s and early 1990s (Graph 1). But when prices are adjusted for inflation a different picture emerges. This is done by multiplying current prices by the average monthly RPI for the 2006/07 crop year and then dividing this by the RPI for the relevant historical year.
continue
Based on this adjustment, real prices do not appear to have recovered to mid-1990s levels, and are well below even the low levels of the 1930s. In real terms, prices were four times as high after the Second World War as they are now.
But inflation-adjusted prices are not necessarily a good measure of the welfare of the industry, which has benefited from significant technological advances. Improved yields have had a substantial impact on gross returns per hectare. When average prices are multiplied by annual average yields, a rather different picture emerges. Current gross returns exceed those of the 1930s and match the immediate pre-EU period (Graph 2). However, they still do not measure up to the 1980s, or the immediate post-war era.
continue
Note that wheat prices used are from HGCA Corn Returns. The monthly Retail Price Index, produced by Office of National Statistics, was averaged for the same 12 month period as wheat prices were. Yields were those surveyed by the Ministry of Agriculture and its successors. The 2008/09 wheat price and RPI is the average of the first six months of the crop year.
David Walker 001 780 434 7615
top of page