Pasta panic strikes Italy

The price of wheat is up 60% this year, and in Italy they're taking to the streets over the cost of tortellini, writes Fortune's Peter Gumbel.

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By Peter Gumbel, Fortune

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The tortellini belt at Barilla's factory in Parma, Italy, the largest in the world
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A sheet of lasagna at the Barilla factory in Parma
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Eating spaghetti at a restaurant in Milan

(Fortune Magazine) -- Something unusual is going on in the pasta section of the largest supermarket in Parma, Italy, these days. All the pasta is still there, stacked on both sides of a tennis-court-length aisle in the center of the store. The dizzying choice, too, is the same as in many Italian supermarkets: dozens of shapes, sizes, and colors, ranging from banal penne and rigatoni to lumachine, shaped like tiny snail shells.

What's new are the big signs fluttering above the aisle and affixed to the partitions at the Ipercoop market, a short drive from Parma's city center. In capital letters, they declare, WE ARE NOT MOVING.

The movement in question has to do with the price of pasta, which has jumped about 20% this year for some varieties, touching off a nationwide protest. But the story behind the price hike is a global saga involving agricultural policies, commodity-market speculation, the growing use of ethanol as an alternative fuel, and Australian drought.

Italian pasta producers have taken great pains to justify the increase by pointing to the soaring cost of wheat, which has increased by 60% over the past year. That's an excuse the conspiracy-crazed Italians aren't buying.

"Yes, the price of wheat has risen, but it has simply gone back to 1985 levels. So who's been profiting from low prices these past 20 years?" asks Rosario Trefiletti, president of the Federconsumatori consumers' association in Rome.

Trefiletti's association, along with three others, has been so incensed by the price hikes - according to their calculations, spaghetti is up by an average of 27% this year - that they called a pasta strike in September. For one day consumers were urged not to buy pasta (although in a country that consumes more than five times as much pasta per head as the U.S., nobody said anything about not eating it).

"It was a huge success," Trefiletti says. It has certainly brought results. The government, which knows a good populist issue when it sees one, began holding talks with producers, farmers, and consumer lobbyists, who are calling for tougher controls and price safeguards for food staples. "The government can't impose lower prices," says Carlo Pileri, who heads another consumer group, "but it can do moral suasion."

Then came the regulators. On Oct. 23, Italy's antitrust agency announced it was launching a formal investigation to determine whether Italian pasta producers have been engaging in illegal price fixing. The producers vehemently deny the charge, but they and Italian retailers are clearly on the defensive. Hence the big signs at the Parma Ipercoop promising not to raise prices on the store-brand pasta, at least until the end of the year.

For Guido Barilla, chairman of the eponymous $3.4 billion Parma-based family company that is the world's largest pasta producer, this Italian melodrama is missing the point. Barilla raised prices 15% this year, and for him it's self-evident that higher wheat prices have to feed through to consumers at some point. Pasta is a low-margin business, and flour is one of just two principal ingredients, along with water.

"Wheat makes up 60% of the price," he says, pointing to a box of penne on a table. What irks him is not so much the public fuss in Italy, which he dismisses with a shrug, but one of the reasons prices are rising in the first place: the growing use of agricultural crops to make ethanol and other alternative fuels. "Agriculture for energy is an extremely stupid thing," Barilla says. "It's very inefficient."

Italians aren't alone in this struggle. Rising bread and flour prices have sparked protests across drought-stricken Morocco, where the wheat crop dropped by 76% this year. Public disturbances have also been reported in Yemen, Niger, and the Ivory Coast.

And it's not just wheat that's soaring. Milk prices are at record highs, and rice is up too. Jacques Diouf, the Senegalese head of the UN's Rome-based Food and Agriculture Organization (FAO), spoke last month about the risk of upheaval across the developing world. "If you combine the increase of oil prices and the increase of food prices," he said, "then you have the elements of a very serious crisis in the future."

Governments from Cairo to Dhaka are looking to head off that prospect by offsetting higher wheat costs however they can. In September the Egyptian government jacked up its bread subsidies by 50%, to $2.5 billion.

In richer countries, too, the hikes are spurring authorities to action. In Japan, where the government is the sole importer of wheat, bread prices have gone up for the first time in two decades. Russia, Ukraine, and Kazakhstan have imposed restrictions on their wheat exports to ensure that their domestic markets don't lose out in the rush by traders to make money abroad.

And in September the European Union reversed a 20-year-old policy that required farmers to leave 10% of their land fallow. The aim of abandoning the so-called set-aside policy is to spur a quick boost in production of wheat, oats, and barley.

The big winners in all this, at least for now: American wheat farmers. Production is up about 14%, while exports, aided by the weakening dollar, are expected to rise more than 25% this year. Stocks are at their lowest level since the late 1940s. Best of all, prices have jumped to an average yearly price of $249 a metric ton for hard red winter wheat, more than double what it was in 2000.

"The early-season pace of wheat export sales and shipments has been blistering," reports the USDA's October Wheat Outlook. At the Washington, D.C., trade group U.S. Wheat Associates, spokesman Steve Mercer points out that "we were the only ones who had wheat to sell for a while this year."

The boom could be short-lived. FAO wheat expert Abdolreza Abbassian warns that a flurry of production increases by farmers trying to take advantage of the price rises may soon make itself felt. "It could all lead to a short-term glut," he says. Indeed, wheat futures have eased since peaking in late September.

Wheat experts point to four factors that have combined to propel prices higher. The first and most significant is to be found in Australia, one of the world's biggest wheat producers, where two harvests in a row have been ravaged by drought at a time crops in other big exporting nations, such as Argentina and Canada, have been less than stellar.

Second, stocks of wheat are at the lowest since 1983, a consequence of changing agricultural policy in both the U.S. and the EU, which no longer encourage excess production or subsidize exports as much as they used to. Commodity market speculation is also rife, as hedge funds and others bet heavily on rising prices created by worldwide demand.

And finally there's Barilla's gripe: the growing use of crops for fuel. Wheat isn't directly affected; in the U.S. it's mainly corn that is used for ethanol, while in Europe soy is converted into biodiesel. But there is an indirect effect on wheat as farmers switch to more lucrative crops. That's a stance actively encouraged by the Bush administration and the EU.

Barilla thinks that's crazy. For one thing, it requires a huge and expensive use of water. It will require a big increase in the amount of food produced in the future. And he worries that the quality of the crops will drop. "This policy will have a tremendous effect," he frets. His skepticism is shared by the International Monetary Fund, which took the U.S. and European biofuel policies to task in a recently published report, arguing that they are "sustaining inefficient production patterns."

Sitting in his taxi outside Parma's Ipercoop, white-haired Andrea Pattacino doesn't quite know whom to believe. He talks darkly about "speculators" driving up pasta prices and worries that it will hurt poor families. But he also points out that a few pennies on a bag of pasta that costs less than $1 a pound isn't going to break the bank. "We Italians are masters of subterfuge," he says. "There's always speculation."

Walk into Carmela Ugo's pasta and bakery store on Garibaldi Street in the center of town, near the 12th-century pink-marble baptistery, and she'll give you a completely different take. She took over the store 32 years ago and caters to a steady stream of regulars who come in to buy the prosciutto- and Parmesan-filled cappelletti it takes her four days to make, or the less laborious Parma specialties such as tortelli stuffed with herbs, pumpkin, or potato.

"We're trying to resist raising prices," she says. "The danger is that the more they go up, the less people buy. But so far they're still buying." She stops to serve a customer a slice of focaccia for lunch before getting on to her pet peeve, the pasta strike.

"It was one of those stupid Italian things. Just blown up by the media," she says. "If you're going to strike, you need to stage one like we had in the 1970s. Back then, pasta stores and bakeries closed down altogether for the day." She beams. "Now that was a real strike."  To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.