This week wheat rose 12% in five trading days, its strongest week in four years, after the fighting in the Black Sea shut down almost every export port on both sides of it — Russia and Ukraine, two countries that between them ship about a quarter of all the wheat that crosses a border anywhere in the world. It sounds fairly dramatic: a very sharp rise in a very short time, and the world's raw material concentrated in a single pipe. Unsettling. So how much of that actually reaches our pockets?
To answer that, you have to look at what it costs to make a loaf of bread, and then at what it costs to buy one. The wheat sitting inside a loaf is worth about fifteen cents. We all know that is a very long way from the price we pay at the register. Which means almost everything you pay for in that final price is milling, baking, wrapping, trucking, the shelf the loaf sat on, the wages of whoever stocked it, the electricity in the oven, and everyone's margin along the way. A 12% increase applied to fifteen cents, then pushed through a great many other costs, stops being tangible long before it reaches you. We have seen this before: in 2022, after the invasion of Ukraine, the price of wheat roughly doubled, and the price of bread in Europe rose by a few percent.
So who does pay, and in cash? It cannot be that everywhere in the world this increase is simply absorbed as if it never happened. This is where we step into the geopolitics of economics. It is worth remembering that not every economy in the world is developed, liberal and running on a free market. In fact most of the world — in population terms, obviously, not in output terms — still lives in economies of a different kind. So here is one economy that feels the rise directly in the pocket, and immediately:
Egypt is the largest wheat importer in the world, and it — meaning the state itself, not factories, not businesses and not citizens — buys a large share of the imported wheat in order to run a subsidized bread program that feeds some seventy million people. A loaf sold at a price the state sets is not a product with a whole industrial chain behind it. The entire increase lands in one place, on the budget that funds it. So if the Black Sea closure continues, Egypt will have no choice — and back in 2024 it was already forced to raise the price of bread, for the first time since 1989.
If we widen the wheat story into a slightly more general picture, commodity prices — particularly the global ones, the ones that travel around the planet to be turned into products somewhere else — are a variable whose behavior can be extreme, while its effect on the end consumer, and on local economies, changes from commodity to commodity and from country to country, sometimes in ways you would not expect.
Take fuel on one side. Between the oil well and your car there is a relatively short production and distribution chain — someone refines it, someone hauls it, someone sells it — and so roughly half of what you pay at the pump is the cost of the crude oil itself. That is why when oil moves, the price at the pump moves within days, and we all feel it almost immediately. There is no chain there long enough to swallow anything. (The part that does stay still is the tax, a fixed amount per gallon that does not move with the market — so when oil gets more expensive, the tax actually softens the percentage. But perhaps another time.) Fuel is close to the only commodity where it is genuinely worth watching the raw material price in the news, because the change really will reach you, and it will reach you fast.
And on the other side of the arena, coffee. The U.S. Department of Agriculture measured this over years and reached a result: a 10% rise in the world price of coffee beans moves the bag of coffee on the supermarket shelf by about 3% — meaning 30% of the increase rolls into the final price. That bag also carries the cost of roasting, packaging, marketing and shelf space, but the beans are still a serious share of it. Now take those same beans and put them into a cup at a café, and there they all but disappear — because what you are buying there is mostly rent on a corner, the person behind the counter, milk, a cup and a dishwasher. When café prices rose this year, the beans added about a percent to that, and all the rest was wages, rent and equipment. The same commodity, two products, two different behaviors.
Want another interesting example? Meet our friend cocoa, which over the last two years travelled from around $2,500 a ton — the level the entire chocolate industry was built around — to close to $13,000. The average American chocolate bar rose as a result from $2.43 to $3.45. In percentage terms that is very incomplete pass-through relative to what happened to cocoa (the bar jumped about 40%, while cocoa rose 420%), but in pocket terms it is the only item on this list that people genuinely felt. The reason is simple: there are far fewer people standing in the way of a chocolate bar than of a loaf of bread, and cocoa is a large share of it.
To cope with that insane rise in the raw material, manufacturers shrank the bars and replaced some of the cocoa with other ingredients — meaning you paid the same, or in fact quite a lot more, and got less. A necessary trick, and one that shows how much manipulation a product can go through as a result of dramatic swings in raw material prices. And on the other side, once cocoa had made almost the whole journey back down, the price of chocolate in the supermarket did not come down with it right away, simply because the expensive raw material stays inside production for months more — in the factory and in the finished goods. Once again it was demonstrated that swings in raw material prices do not roll through to the end consumer, quickly or at all. Meaning us.
So the next time a headline tells you some commodity has spiked, the size of the jump is probably the less interesting part. What matters more is the question of how many hands stand between the raw material and the hand of yours that pays, and which of them has already locked a price in advance — meaning it settled today the price of what will only reach it half a year from now. The two answers together will tell you whether this touches you at all, and when.
Israel sits in a strange position, and it is worth saying plainly for American readers too. Most of the wheat arriving at Israeli bakeries comes from Russia, while the basic loaf — a relatively plain, common type of bread — sits under price control and is updated by a monthly calculation in a government ministry rather than by the market. On price, in other words, the Israeli reader is insulated even more than the American one. But a price control does not make the cost disappear, it only moves it: somebody still pays the gap between what the grain cost and what the shelf charges, and when a government is holding the shelf price down, that somebody is the public purse. Much like Egypt, only at a lower volume. Two letters ago I wrote about the American debt and argued that debt is always solvable, and that someone always pays for it — in taxes or in inflation. Here is that same mechanism, in a size you can hold in your hand. If you missed it, I would jump to it here.
Israel's real risk in this story is not the price at all. It is supply. A country that imports nearly all of its wheat, most of it from a single source now sitting inside a war, does not need to worry about a more expensive loaf. It needs to worry about whether it can produce that loaf steadily and in sufficient quantity for the whole of demand. Otherwise it, and its citizens, are in an entirely different kind of event — at least where bread is concerned.
See you in next week's letter, or during the week — if I can't help myself until then...