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Flour prices are rising by 35% to 40% from today. The flour mills warned bakeries about the hike during the last two weeks.

The sudden jerk in prices results from spiking flour prices in world markets, by about 30% in the last month, while in parallel the dollar has rebounded against the shekel.

Wheat prices jumped to a 12-year high because grain inventories around the world shrank, and on news that harvest delays are expected in the U.S. - the world's largest wheat exporter.

Also, growing demand for wheat in China as the economy there booms has added pressure on prices.


The bakeries have advised the Industry and Trade Ministry that they cannot continue to produce price-controlled bread if they do not receive immediate approval to raise these prices by at least 8%.

The types of bread under price supervision include plain white bread, plain brown bread (lehem ahid) and regular challah - whole or sliced.

Trade Minister Eli Yishai is expected to hold an emergency meeting in his office today. The ministry officials realize that bread prices must rise, the question is by how much.

Bakery owners hope that Yishai's political social-welfare agenda will not prevent him from approving the price increases. They claim to have enough flour to bake bread only until Tuesday.

The flour mills threatened the bakeries that any bakery that does not agree to the new prices will have its flour supplies cut off, Yohanan Aharonson, the head of the Bakers Association, told TheMarker.  "The increase in flour prices will bankrupt the bakeries. They must receive a significant price rise in supervised bread," explained Aharonson. "Otherwise, they will not produce it. They have reserves of flour for a day or two, and in exceptional cases three," he added.

World wheat prices rose from $180 to $240 a ton in the last month. According to the state's formula for setting bread prices, it should increase the cost of price-controlled bread by 6.5%. However, 2.5% of this is supposed to go toward efficiency measures - allowing for only a 4% increase for bakeries.

But the last increase came in May 2006 when the ministry allowed only a 7% increase instead of the 15.3% rise calculated from its formula for such an increase.

According to Aharonson, the 8.3% was supposed to be made up by a requirement that bakeries could not sell price-controlled bread at a discount. In practice, he says that in the case of dark bread, the price is unrealistic. Other products subsidize it by about 30%.

Analysis: Are the flour mills a cartel?
 
It is doubtful whether anyone thought that the flour mills would actually present an ultimatum to the bakeries, saying: pay us another 40 percent or you won't get any more flour.

It is clear that the flour mills must be compensated for the rise in wheat prices, and the bakeries must be the ones to do so.

However, this means the bakeries must be compensated as well. The Trade and Industry Ministry is aware of this, but the emotional baggage connected to a rise in bread prices usually has a political price, too. Therefore the decision on the matter is not only economic.

For a long time plain bread has been a symbol of a benevolent social-welfare policy. It is seen as the staple food for the weaker classes and any increase in its price is considered a blow to the poor. Industry and Trade Minister Eli Yishai comes from Shas, which identifies itself as representing the weakest classes of society. Therefore, raising bread prices will be even harder for him - and his agenda is clearly a social one.

Yishai will have to maneuver between his instincts and the need to allow the bakeries to make reasonable profit - in addition to worrying about the jobs of bakery employees.

But in addition to the question about the price of bread, there is another, similarly interesting aspect to this affair.

Are the flour mills operating as an illegal cartel by coordinating prices?

There are a number of such mills in Israel, owned by a few families. How is it that at least four such mills sent letters with exactly the same message: Pay 35-40 percent more from July 1 or you will not receive any more flour?

The mills and flour prices were removed from state price supervision two years ago. The ministry hoped at the time that competition would open up as a result, while the bakeries were worried about price fixing - an illegal cartel. At the time, the ministry warned the mills about the matter.

At first glance it seems that the bakeries' fears have come true. This is a good reason for Antitrust Commissioner Ronit Kan to start examining the issue, even if a formal complaint is not filed.

After all, what are the chances that a bakery owner will complain if he is threatened that the flour mills will cut off his supplies?