Food costs continue to elude stability

 
March 5, 2014 | by Alicia Kelso

Keeping up with food costs is a bit dizzying in the current market. Cheese prices are nearing all-time highs, while a shrinking beef supply also threatens the balance sheets. And then there is coffee, produce, pork, etc.

Here is a glimpse at what is happening, and what is expected to happen in the near term.

Beef prices 

Perhaps the biggest inflationary expectation comes from beef. A recent analysis from CattleFax projected prices to increase from 10-15 percent in the U.S. due to a shrinking cattle herd. According to a Bloomberg survey, the cattle herd in the U.S. dropped to a 63-year low last year. Higher grain prices last year made the issue even worse.

In 2013, ground beef was up about 5 percent. Experts agree that elevated prices aren't going anywhere. Kevin Good, a senior analyst at cattle research firm CattleFax, told MarketWatch that higher prices should continue into 2016.

MarketWatch reports this could especially be a concern for restaurant operators who don't have an ability to pass on their increased costs to consumers.

However, a poll by NPR-Truven Health Analytics shows that consumer demand for beef is falling — nearly 40 percent of Americans say they eat less beef than they did three years ago — so a shift in menu mix could be a solution.

Dairy/cheese

In addition to beef prices rising, milk and cheese are also trending up, in large part to higher demand from Asia, said Ken Bloore, chief operating officer of Great American Group's Advisory and Valuation Services Division.

To put cheese in context, prices last week were averaging $2.20 on the Chicago Mercantile. A year ago, they were about $1.60.

Produce

California's ongoing drought this year will most certainly spike produce costs. The state's governor Jerry Brown called the current water shortage the worst in modern history, and signed a $687 million relief package last week.

The crisis has big implications for restaurant operators' bottom lines. In January, the USDA released the following statement:

"Severe weather events could potentially drive up food prices beyond the current forecasts. In particular, the ongoing drought in California could potentially have large and lasting effects on fruit, vegetable, dairy, and egg prices."

According to Restaurant Hospitality, California produces:

  • 95 percent of all broccoli and celery
  • 95 percent of tomatoes used for canning or processed items
  • 90 percent of leaf lettuce
  • 83 percent of Romaine lettuce

Pork

Pork prices may also experience quite a lift in the near future, with hog futures hitting an all-time high driven by a new virus that has killed more than 4 million pigs in at least 25 states. According to the National Pork Producers Council, the number of porcine epidemic diarrhea virus cases has "surged" so far this year.

Consequently, it's estimated that consumers will pay about 3 percent more for pork this year, Bloomberg reported.

Mark Schultz, an analyst with Northstar, told Bloomberg that the virus will have a "much greater" effect on costs this summer, as slaughter rates continue to decline and supplies shrink.

Coffee

And then there is coffee, Arabica to be exact. The Motley Fool recently reported that the cost of Arabica beans (used by Starbucks, Dunkin' Donuts, McDonald's and numerous other brands) is "shooting through the roof."

In November, the commodity was trading around $1 per pound. Analysts now predict it to go as high as $2 in the coming months. The increase is mostly due to a drought in Brazil that came when the beans were in early development. Brazil produces about one-third of the world's coffee.

When coffee prices jumped in 2011 and 2012, Starbucks offset the cost increase by cutting elsewhere in the business. However, The Motley Fool reports, Green Mountain's margins were hit.

To navigate cost pressures, Dunkin's Purchasing Cooperative already has most of the brand's coffee locked in for the year. During the company's earnings call in February, CEO Nigel Travis said the company has guided its franchisees to "move pricing on differentiated products, rather than on products that could be compared."

"We'll continue to offer great value on our beverages. And if coffee prices spike, we will once again follow the same approach," he said. "I would remind you that there's more in a cup of coffee than just coffee.

Reasons for optimism

Extreme weather and livestock viruses aside, there is some positive news in the commodities market. U.S. farmers, for example, produced a record corn crop in 2013, causing corn prices to fall — a trend that has continued and could result in lower prices for some foods as the year progresses.

Also, according to Great American Group's Food Monitor, gross margins have remained stable for some companies and have decreased for others, depending on inventory mix.

"Many of the companies that primarily sell beef and dairy products have experienced falling margins due to the rising prices and delay in passing along such increases to customers," Bloore said.

Looking ahead, Great American Group predicts a moderate level of food price inflation through year-end, given current livestock inventories, weather trends and commodity prices. However, a reoccurrence of drought conditions or other severe weather events in key growing areas could result in significant increases in overall food prices.

Photo provided by Wikimedia.


Topics: Equipment & Supplies , Food & Beverage , Food Cost Management , Operations Management , Trends / Statistics


Alicia Kelso / Alicia has been a professional journalist for 15 years. Her work with QSRweb.com and PizzaMarketplace.com has been featured in publications around the world, including Good Morning America, Voice of Russia radio, Consumerist.com and Franchise Asia magazine.
View Alicia Kelso's profile on LinkedIn

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