A loaf of bread costs around 25 percent more than a year ago, with much of the increase occurring in the past six months (see our commodity price tracker for details).

However, working out whether the cause is higher costs (of wheat, milling and baking) or higher manufacturer/retailer margins is far from straightforward.

Price of wheat

Figures from Federated Farmers show that wheat makes up around 16 percent of the price of a loaf of bread. Much of the wheat in our bread is grown here. Some is also grown in Australia or, occasionally, North America.

The price that local millers pay for wheat delivered to their mill - whether it's grown locally or not - reflects trends in world prices. Last year, because of the Australian drought, there was a sharp spike in the international spot-market price for wheat. (The spot market is where harvested wheat that's not under contract is offered for sale.)

A spokesperson for Goodman Fielder (the owner of Champion Flour mills) said spot-price changes didn't affect millers immediately. Millers will buy a significant quantity of wheat under year-ahead contracts with farmers. This means the price of much of the wheat used to make last year's bread was set in 2007 - when price levels were more moderate. And the price of much of the wheat being used now was set early in 2008, before the big spike in spot prices.

Without details of actual costs, it's impossible to know if the millers are charging fairly for flour. However, it seems the threat of customers importing flour directly might be enough to keep the two companies that dominate flour milling in New Zealand - Champion Flour and Weston Milling (owned by the Australian food firm George Weston Foods) - from being too greedy with their pricing.

Direct importing

Charlie Daily of Wholly Bagels told us that when the local price was too high his company directly imported premium flour. Charlie says he's sure he's getting flour as cheaply as possible, but his flour is still costing around 40 percent more than nine months ago. Wheat and flour are bulky to ship. Charlie said the rebound in petrol prices, the weak Kiwi dollar and other inflationary pressures seemed to be working to keep flour prices high.

Flour of course is only part of the bread story. When it comes to the bakery business in this country, we find things are carved up between two big firms - Goodman Fielder and George Weston Foods.

These are also the two companies that dominate our flour milling. Both make bread under household names: Nature's Fresh, Freya's, Vogel's, Molenberg, Country Life and other Quality Bakers brands are Goodman Fielder; Tip Top, Ploughmans and Burgen are George Weston Foods.

Change to house brands

We couldn't find out how well George Weston Foods was doing in New Zealand; but until recently Goodman Fielder seemed to be doing fine. It had a good run late last year as the darling of the sharemarket, outperforming other companies. But in February Goodman Fielder reported that customers were migrating to cheaper supermarket house brands and that its margins were coming under pressure - including those of its fresh bakery business, which provided around one-third of Goodman Fielder's revenue.

Are the two food giants gouging their bread-buying customers? Based on NZX Agrifax's commodity price figures we believe the cost of spot-market wheat has fallen by as much as 23 percent since September and the cost of contracted wheat has increased by up to 20 percent. During this period the retail price of flour has fallen nearly 3 percent. And the price of bread? It's up a staggering 18 percent. No wonder customers are voting with their wallets.

Given that the worst of last year's wheat-price bubble may be yet to have an impact on millers' costs, more bread price increases may be on the way. One thing's for sure, though ... while you can jump from one baker to another, it's a bit harder to drop bread altogether when the price goes up. That's something the bakery business will be counting on this year.

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