As a new buyer getting into the world of ingredients and commodities, it can be tough. There are a ton of things to learn and a fairly steep learning curve if you don’t have any prior experience. My goal is to take some of that confusion away. I plan to do that by starting a series called Commodity Pricing Calculations. The first post in this series will cover converting wheat to flour by using a pricing formula.
Truth be told, the process of converting wheat to flour is fairly simple. In modern times, you simply temper wheat, which means to add back a bit of moisture so that the wheat is between 13% to 15% moisture. Once tempered, you create a wheat blend that matches desired quantitative aspects like protein, falling number, stability, etc. Once the blend has been created you feed the wheat through a mill and sift numerous times depending on the product you are making.
Converting wheat to flour with a pricing formula is not that much more complicated. Take the formula below as an example. It is simply walking you through the pricing components involved with the steps I mentioned above. To dive into a bit more detail, let’s review the formula component by component.
The futures component of the flour pricing formula is exactly what it looks like, futures. These can be Kansas City, Chicago, or Minneapolis futures contracts and are the components that you would hedge if you plan to.
Basis can be thought of as the localization factor of wheat. The basis represents the value that you are paying to buy a certain grade of wheat, in this case milling grade wheat, in a specific market. These values vary a bit from commodity to commodity. For example, Kansas City Hard Red Winter basis is all traded “KC Gateway” or for delivery in Kansas City. Chicago Soft Red Winter is much more regional and is traded based on the local supply and demand.
The conversion is how efficiently you are converting wheat to flour. In this instance I used 2.3, the standard for bread flour. The 2.3 conversion means that it takes 2.3 bushels of wheat to manufacture 100 pounds of flour. Another standard conversion is 1.7 for whole wheat – since there is no millfeed, less is lost in the manufacturing process and it takes less bushels to make 100 lbs of flour.
When manufacturing bread, or white, flour the bran is separated from the flour and sold separately. This is millfeed, or feed. Feed is quoted in dollars per ton and is a credit that you receive back in the milling process. As I mentioned above, there is no feed in whole wheat flour since the entire wheat berry is used in processing.
The feed multiplier converts the units from dollars to ton to dollars per hundredweight, or 100 lbs. 0.019 is fairly standard across the industry, although there is some evidence that efficiencies have been improving.
The block value is essentially everything left over. Some buyers are able to separate these values out, others are not. In general, the block contains milling margin, packing, enrichment, overhead, etc.
Find this post interesting? Check out others in my Commodity Pricing Calculations Series below:
- Commodity Pricing Calculations: High Fructose Corn Syrup
- Commodity Pricing Calculations: Corn Syrup
- Commodity Pricing Calculations: Soybean Oil
- Commodity Pricing Calculations: Oil Share
- Commodity Pricing Calculations: Crush Margins
- Commodity Pricing Calculations: Ethanol Crush