Outlook '08

 
Jan. 9, 2008
Last year was a tough one for pizzeria operators. The skyrocketing costs of some key ingredients left many operators struggling to keep their businesses profitable. Meanwhile, energy and fuel prices continued to increase, creating more financial setbacks operators had to face.
 
Pizza Marketplace took a look at the direction commodity prices are projected to head in the upcoming year. While most of the forecasts are gloomy, there are a few bright spots.
 
Cheese
 
If there's one commodity that pizzeria operators eyed closely last year, it was cheese. The price of block cheese on the Chicago Mercantile Exchange started the year at $1.34 per pound and went up from there, topping $2.00 by June. After a short period of relief, they hit a high of $2.20 in November, but help may be on the way.
 
According to the United States Department of Agriculture's Livestock, Dairy and Poultry Outlook, increased milk production and the decreased use of fluid milk should make more milk available for cheese production, which will drive prices down. The USDA expects that the average price of cheese will decline to an average of between $1.60 and $1.70 per pound for the year.
 
Dairy industry observers concur with the USDA's projections.
 
"I am expecting 2008 block cheese prices to average $1.6467/lb., down 11 cents from 2007 forecast levels, with the peak price occurring in January at $1.895/lb.," wrote analyst Bill Brooks on the Dairy news Web site eDairyInc. "The low of $1.50/lb. is expected to occur in June."
 
Although the USDA projects milk production to rise about 3 percent in 2008, higher feed prices and increasing milk exports should keep cheese prices from falling significantly.
 
Tomatoes
 
Prices for California processing tomatoes are expected to increase this year, mainly due to water shortages. Rising tomato prices translates into rising prices for pizza sauce.
 
More than 90 percent of the country's processing tomatoes and about half of the world's total processed tomato tonnage comes from California, according to the California tomato Grower's Association.
 
California tomato growers have been signing contracts with processors such as ConAgra and Del Monte for $70 per ton, about 11 percent over what they received in 2007.
 
"(Growers') costs are driving that to a certain degree," said CTGA president Ross Siragusa.
 
Growers instead will look at crops like wheat and safflower, which have lower water requirements.
 
Energy
 
It's no secret that gasoline prices are expected to rise. According to the Energy Information Administration, the government entity that tracks energy prices, the retail price of gas is projected to average about $3.50 per gallon this spring.
 
Both gasoline and diesel prices are projected to remain over $3 per gallon in 2008 and 2009, according to the EIA. Gas is projected to average $3.14 and $3.03 per gallon in 2008 and 2009, respectively, and diesel fuel prices are projected to average $3.29 and $3.15 per gallon in those years.
 
The price of natural gas, the fuel that powers many pizza ovens around the country, is expected to increase about 6 percent in 2008, according to the EIA.
 
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 There's some good news on the horizon, though, when it comes to energy prices. Crude oil production is expected to increase starting in 2009, which should help drive prices down.
 
Softening the blow
 
While operators may not be able to keep prices from rising, there are a few things they can do to ease the pain.
 
The big boys, of course, have the purchasing power to negotiate long-term cheese contracts as a way to insulate themselves from price swings. Smaller players may be able to negotiate prices with cheese distributors in return for keeping all of their business with the same distributor.
 
Operators also can do an energy audit of their businesses. Things like turning off equipment during slow periods, turning down the thermostat or repairing worn refrigeration gaskets can help cut down on energy bills.
 
Many utility companies offer free energy audits for business owners looking for ways to save energy. In some cases, utility companies offer rebates or financing assistance in purchasing energy-efficient equipment.
 
And lastly, and most painfully, operators may need to look at their menus. If menu prices haven't changed in a year, it may be time to consider an increase.

Topics: Cheese , Going Green , Operations Management , Pizza Sauce


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