Falling flour prices a bright spot for pizzeria operators

Falling flour prices a bright spot for pizzeria operators
Tags: Dough, Operations Management
April 13, 2009 - Richard Slawsky

Analysts are predicting that wheat prices, which hit record highs last year before falling dramatically, will likely remain soft for 2009. And that's good news for pizzeria operators.

Wheat prices are directly related to the price of flour, the main ingredient in pizza crust. And lately, wheat prices are about a third of where they were in April 2008.

"Prices are likely to go to early 2006 levels, if not even lower," said Chris Shanahan, a research analyst with the food industry division of San Antonio, Texas-based business research firm Frost & Sullivan.

"Last April and May, wheat prices hit an all-time high and they have been falling ever since," he said.

Hard red spring wheat, the type of wheat most commonly used in making pizza flour, has been hovering around $6.75 a bushel on the Minneapolis Grain Exchange for much of 2009.

This time last year, the price of hard red spring wheat topped $24 a bushel, which meant that on top of record prices for cheese and fuel, operators were coping with flour prices that had tripled compared to where they were just a few months earlier.

Scott Anthony, owner of Fox's Pizza Den in Punxsutawney, Pa, saw the price he pays for a case of 24 16-ounce dough balls rise from $17.50 in April 2008 to $21 the following month, while a case of 24 22-ounce dough balls rose from $21.50 to $27.00 during the same period.

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Nearly every operator experienced similar price increases. Nick Sarillo, owner of Nick's Pizza & Pub in Crystal Lake, Ill., saw his flour costs hit record levels last year.

"The price has come down about 20 percent for us, and we got better pricing through another vendor," he said.

And Adam Goldberg, who operates the Fresh Brothers pizzerias in Manhattan Beach and Redondo Beach, Calif., has seen the price he pays for a bag of flour fall nearly 25 percent since he and his family opened their Manhattan Beach restaurant last year, down to about $15.40 for a 50-pound bag compared with nearly $20 in the spring of 2008.

"Fortunately for me, I came into it when the prices were high and I based my prices accordingly," he said. "Now I'm really benefiting from that."

Short term savings

Last year, the United States produced about 2.5 million bushels of wheat, less than 10 percent of global wheat production. Even so, the U.S. exported about 980,000 bushels, or about 40 percent of domestic production.

Changes in U.S. farm policies in the 1990s meant that the amount of land devoted to wheat farming fell by about 30 percent from an annual average of 85 million acres in the early 1980s to an average of about 60 million acres in 2008.

That lower production coupled with increased demand for wheat from developing countries like China and India were partly responsible for last year's dramatic run-up in prices, Shanahan said.

The main culprit, however, was the rising cost of oil. Farmers planted corn in order to take advantage of increased demand for ethanol as a fuel, diverting farmland that normally would have been used for planting wheat. Higher fuel prices also drove up the cost of everything from running a farm tractor to transporting wheat to market.

As oil prices fell, though, demand for ethanol dried up, causing farmers to switch back to crops such as wheat.

"That is probably the biggest reason why prices collapsed," Shanahan said. "The ethanol bubble burst last year with the dramatic fall in crude oil prices."

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Unfortunately, though, the respite from high flour prices may be short-lived. According to Shanahan, the combination of high fertilizer prices and low wheat prices means that many growers either switched to higher-profit crops or simply let marginal farmland lie fallow. That may mean higher prices down the road.

"We are expecting that in 2009 the number of planted acres relative to last year and the year before is going to be a little lower, and that means that in 2010 we may see some spiking," Shanahan said. "I think that in 2010 we are going to see a progressive upward trend in wheat and flour prices."