- WHITE PAPERS
In December 1973, Johnny Carson, the famed late-night talk show host, threw out a joke about a pending toilet paper shortag. The next day, panicked consumers created an actual shortage. You see, toilet paper demand is VERY predictable. The problem was EVERY household went out the next day and bought a two-month supply. Demand remained the same so the shortage was really an inventory problem.
A British trade organization called the National Pig Association of the United Kingdom, predicted a bacon shortage and the following day, every U.S. News organization reported the shortage with words like "unavoidable" and "bacon-worship challenged." The truth is that the drought in the U.S. has reduced the corn per acre, thereby making corn more expensive. When the price of corn rises, the cost to feed animals rises.
This affects the price of meat in different ways in the short, medium and long terms. Most cows and pigs are "finished" in feedlots where operators buy yearlings to fatten them up and bring to market. As the cost of feedstock rises, the value of yearlings falls, since it costs more to raise the animal to slaughter. Less profit in the future reduces the price feedlot operators will pay for the yearlings. So in the short-term, an above average number of animals are prematurely slaughtered which creates an over-supply of cheap meat.
In the medium-term, however, this process leaves the market with fewer animals in the future, hence a "bacon shortage." This shortage drives up the price, reducing demand. In the long-term, 12-18 months, increased price signals farmers to produce more yearlings as the higher price will justify higher feed costs. Higher feed cost, creates more corn planting, bringing more corn to market to satisfy demand and two years from now, all is "normal" again. This is market capitalism at work.
The U.S. Government still mandates a certain percentage of corn for production of ethanol. Some of the higher corn cost problem could be solved if we stopped burning corn in our gas tanks and fed animals and hence ourselves. Therefore, an unintended consequence of government intervention in the market is to raise food costs while reducing gasoline costs ... a terrible trade-off, especially for poorer citizens. The NRA and other lobbying groups have already begun a discussion in Washington to reduce ethanol mandates.
So what can you do? Not much, pork, beef and chicken prices will rise next year. Keep your customers aware, manage your menu prices and promote items that use less animal protein. Consumers often forget that food is an actual living product, prone to weather and market conditions. In the U.S., we still spend less as a percentage of our incomes and eat the best, safest food in the world.
Wishing you success in pizza – Ed
Ed Zimmerman is a foodservice industry veteran and President of The Food Connector. His almost four decades of foodservice experience includes food manufacturing and distribution leadership, food industry technology, marketing services and restaurant and grocery operations management.