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Bread prices to increase due to US drought, but who will absorb the cost?

Australia’s largest baker has confirmed that the price of bread will increase due to the US drought.

Goodman Fielder’s managing director Chris Delaney said the increase in grain price as a result of the drought in the Midwest of the United States  and that “the consumer would have to pay for that increase',” meaning higher shelf prices for shoppers.

Now that the US corn harvest is forecast to collapse by 100 million tonnes to 274 million tonnes due to the drought, prices will increase throughout the rest of the manufacturing process.

The price of wheat, often used as a substitute livestock feed grain, has also suffered as a result of the unseasonable weather.

Since May, the price of Australian east coast milling-grade wheat has increased by almost half, from $214 a tonne to $310 a tonne.

Experts predict it could remain around $300 a tonne by the end of the year.

The company has also revealed it regrets its choice to manufacture $1 bread for the Coles private label, as it is already unprofitable.

Like so many other industries, including the dairy, produce and food manufacturing, the bread sector is suffering the impacts of being forced to sell their products at prices less than the cost of production for the sake of supermarket private labels and their war on price.

“Dollar bread is at a loss,” Delaney said.

''This was not a good investment and I wouldn't do it again if I had a choice.”

Countless industry insiders and experts have labelled the current private label environment as unsustainable, as farmers and manufacturers leave their sectors because they can’t break even, let alone make a profit.

While Goodman Fielder says the flow on effects of the grain price increases will flow on to consumers, it remains unclear whether the supermarket giants will actually change the shelf price.

They could absorb the costs within their own businesses, but if past experience is any indication, that would be unlikely and it would be more probable that the bread companies and others impacted by the cost increases would absorb the costs within their already struggling structures as Coles continues to sell bread for $1.

Delaney said clauses surrounding rises and falls such as grains allowed commodity prices to be factored into product pricing, but Coles’ response to questions by Food Magazine about the cost absorptions and private label pricing came in the form of one sentence that would seem somewhat threatening to suppliers.

"Coles is happy to review any supplier requests for cost price increases that can be appropriately validated,” the Coles spokesperson said.

When pushed further for comment the response was “sorry, not appropriate to speculate on outcomes.”

The baking company’s private label contract with Coles is up for renewal in the first half of 2013.

 Goodman's private label contract with Coles will be renewed in the first half of next year.

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