Costlier Bread in Japan May Curb Purchasing Power

Bread prices in Japan are set to climb for the first time in three years, eroding consumer purchasing power and potentially slowing the emergence of the world’s third-largest economy from recession.

Yamazaki Baking Co., the largest bread maker, will raise its prices by about 6 percent on average in July, the first increase since 2008. The government boosted selling prices of imported wheat to millers by an average 18 percent in April, the most in three years, spurring processors including Nisshin Seifun Group Inc. (2002) to boost flour costs by more than 10 percent.

Wheat as much as doubled in the past year in Chicago as Russia and Ukraine curbed exports after drought decimated crops, lifting global food costs to a record in February. Higher bread prices combined with more expensive coffee and cooking oil may reduce consumer demand in other areas, said Hidehiko Fujii, chief economist at the Japan Research Institute Ltd.

“Rising food costs mean consumers have to cut spending on other goods and services given their salaries haven’t gone up,” said Fujii. “That will boost deflationary pressure,” creating a problem for the Japanese central bank as there are few options left after near-zero interest rates and ample funding failed to lift the economy, he said in an interview in Tokyo.

Earthquake Damage

The economy shrank an annualized 3.5 percent in the three months ended March, underscoring the damage the March earthquake inflicted on capital spending and industrial production. It was the second straight quarter of contraction, typically defined by economists as a recession. The government determines a recession by having a committee of academics decide the timing of recoveries and retreats.

About 27 percent of personal spending is on food, said Tetsuro Shimizu, chief researcher at Norinchukin Research Institute Co. If food costs increase and discourage consumers from spending money on other products, that is negative for corporate earnings, he said in an interview.

Consumer prices increased an annual 0.6 percent in April, the first gain since 2008, after global energy and food costs gained. Nations will spend $1.29 trillion on food imports this year, the most ever and 21 percent more than in 2010, the United Nations estimates.

The country may increase wheat prices to flour millers by about five percent on average in October, the third-straight increase in just over a year, said Junichi Nakamine, executive director at the Japan Baking Industry Association.

Spring Wheat

The agriculture ministry, Asia’s largest wheat buyer as a single entity, controls overseas purchases and domestic sales of wheat to stabilize supply. It reviews the grain prices twice a year, based on purchasing costs in the preceding six months.

Japan paid 42,390 yen per metric ton ($525) on average for 475,873 tons of milling wheat from the U.S., Canada and Australia in May. The price was 2.7 percent higher than in April and 6.2 percent more than in March, ministry data show.

The increase was led by gains in the price of dark northern spring wheat from the U.S. and western red spring wheat from Canada after excessive rains hurt crop quality, reducing the availability of high-protein wheat.

North American grains, containing higher protein than other varieties, are used to make bread in Japan. Their prices are linked to futures on the Minneapolis Grain Exchange, which are at a premium to the Chicago market.

“We need the North American wheat to maintain the quality of our products,” Nakamine said in an interview. “We have no other options but to keep buying, even if prices increase.”

Coffee, Cooking Oil

Bread makers are joining coffee roasters and cooking-oil makers in passing on higher commodity costs to consumers. Key Coffee Inc. (2594), the second-largest roaster, raised prices by about 15 percent on average in March. Nisshin Oillio Group Ltd. (2602), the largest producer of cooking oil, increased prices in April for a second time this year.

Wheat traded at $6.5275 a bushel in Chicago at 1 p.m. in Tokyo. The price reached $9.1675 on Feb. 14, the highest level for a most-active contract since August 2008, before retreating on Russia’s announcement to lift an export ban on grain shipments in July.

Russia imposed the ban in August after drought slashed output. The nation may export 18 million tons of grain in the marketing year that starts July 1, regaining its position as the third-biggest wheat exporter, the local grain-trading unit of Glencore International Plc said on June 17.

Bread, Noodles

A resumption of shipments won’t alleviate tightness in high-protein supply, as the crop is unlikely to meet quality requirements from buyers such as Japan and concern remains about stable supply from the nation, said Charlie Utsunomiya, director at the Tokyo office of U.S. Wheat Associates.

“Demand for the U.S. grain will remain strong, sustaining hard wheat prices at high levels,” he said in an interview.

Egypt, the biggest wheat importer, will wait until Russia’s harvest starts in August to decide whether to resume buying from the country, Vice Chairman Nomani Nomani of the General Authority for Supply Commodities, said June 20.

Japan buys wheat to make bread from U.S. and Canada, and from Australia for noodle production. The government imported 3.18 million tons from the U.S., 1.09 million tons from Canada and 1.11 million tons from Australia in the year ended March 31.

Even as prices rose, Japan increased purchases as demand from end-users was expanding and supply from local producers was limited, said Shirara Shiokawa, director at the agriculture ministry’s grain trade division.

Food Hoarding

The ministry bought a total of 1.48 million tons of milling wheat through regular tenders in the three months through June, 15 percent more than in the same period last year.

The record March 11 earthquake and tsunami spurred consumers to hoard food, boosting sales of bread and noodles, Shiokawa said in an interview. The slowdown in Japan’s economy increased consumption of the staple as individuals reduced spending on more expensive items such as meat, he said.

Wheat supply from Japanese producers decreased as wet weather slashed domestic output by 15 percent on year to 571,300 tons in 2010, the lowest level in 12 years, Shiokawa said. It was the third straight year of decline.

Last year’s crop will fill less than 10 percent of Japan’s total demand for food wheat, estimated by the ministry at 5.74 million tons for the year ending March 31, 2012. Supply from local farmers may drop further as the government will restrict shipments tainted by radiation leaking from the crippled nuclear plant in Fukushima prefecture, Shiokawa said.

The country started testing local wheat for radioactive cesium this month by taking samples from silos in each production area. Wheat containing more than 500 becquerels of cesium per kilogram is barred from shipment, Shiokawa said.

Wheat produced by 10 prefectures near the stricken Fukushima Dai-Ichi power station, where testing is mainly conducted, represented 12 percent of Japan’s output in 2009. The prefectures include Fukushima, Chiba, Ibaraki, Tochigi, Gunma, Miyagi, Yamagata, Niigata, Nagano and Saitama.

To contact the reporter on this story: Aya Takada in Tokyo atakada2@bloomberg.net Yasumasa Song in Tokyo at ysong9@bloomberg.net

To contact the editor responsible for this story: James Poole jpoole4@bloomberg.net

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