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OPERATIONS: Pizza toppings price trend shows no sign of reversing

What does the stoppage of beef exports to Japan have to do with the pizza business? A lot, if you're talking toppings prices.

April 24, 2005

Outside of banana peppers, mushrooms and onions, there's hardly a topping on the make line whose price hasn't pierced record levels sometime in the last 12 months.

The agricultural damage done by four Florida hurricanes pushed tomatoes and green peppers to an unimagined height of $55-per-case in some areas, while 2004 beef and pork toppings prices increased an average 20 percent over 2003.

But while veggie toppings prices have returned to more normal averages, the costs of beef and pork haven't declined and likely won't — ever, some say. Multiple factors including Mad Cow scares in the United States and Canada, strong export demand for pork and the lack of a net increase in the country's beef supply — despite growing domestic demand — will keep prices on the upswing for the foreseeable future.

Relative

What's Important Just one case of Mad Cow found in the United States in December of 2003 has had a profound influence on beef prices, and thus toppings prices. By banning U.S. beef imports, many Far East nations have increasd U.S. pork imports significantly. Pressure on all American meat supplies will keep meat pizza toppings prices high for some time to come.

to beef, researchers at Citigroup Smith Barney believe "cattle prices appear poised to move generally higher over the next several years (and) we would argue that it is unlikely that prices will return to levels" prior to 2003.

Where's the beef?

Odd as it may seem, the high consumption of beef by Americans is affecting prices of other food commodities. When beef prices increase, consumers usually seek alternative proteins, such as pork and poultry, which affects supplies of those products accordingly.

But the simple forces of supply and demand don't explain current beef prices adequately, said Don Seaton, trading manager for Burke Corporation, a pizza toppings manufacturer in Nevada, Iowa. Current U.S. beef prices are the product of multiple influences, not the least of which was the discovery of a case of Mad Cow in the U.S. in December 2003. Almost immediately, Japan and several other foreign countries cut off U.S. beef imports, leaving producers unable to sell to their most profitable markets.

The loss of the Japanese market dealt a profound blow, Seaton said, because its customers regularly bought the most expensive and highest-margin meat cuts. Unable to reap those historically high profits, beef producers had to increase prices on less costly cuts to balance the profit scales in the domestic market.

"Those higher-priced cuts are the ones that really help carry ... the packing industry," Seaton said. "So when you lose a market like Japan, you have to maintain higher costs to keep yourself in a profitable picture."

Beef supplies had already begun tightening in the wake of Canada's own Mad Cow discovery in May of 2003, which cut off cross-border exports to U.S. packers. But according to Citigroup Smith Barney, the shrinking supply problem has brewed for decades. "(T)here has been no net increase in (the beef) supply in nearly 30 years," read its March 2005 restaurant food cost report. The primary issue behind increasing beef prices, the report continued, "is not imports or exports, but supply."

As is the case with any commodity, when the market loses its supply-to-demand balance, price volatility is the result. Seaton said that describes the state of the beef industry today.

"The market is pretty well unbalanced right now, so it's always changing," he said. Meat packers, he added, have become highly skilled at stemming or increasing the flow of product to the marketplace in order to affect prices. "They're not afraid to adjust their kills very quickly, and they have to do that because their profitability changes so fast."

The domino effect on pork

Fearful of Mad Cow and unable to import American beef, Far East nations increased imports of U.S. pork, which tightened supplies in the U.S. Pork supplies were pressured even further by American consumers seeking alternative proteins in the face of rising beef costs.

According to the January 2005 Pork Outlook report published by the USDA's Economic Research Service, pork prices likely will continue rising because pork producers aren't increasing supplies. "Many analysts expected that the high hog prices enjoyed by producers in 2004 would cause them to gear up to expand production in 2005. Instead ... the anticipated expansion ... is not yet under way."

Authors of the January report were optimistic that beef supplies might increase in the first quarter of 2005 and lead consumers to buy more beef. But by March, the researchers changed their tune. Not only were first-quarter pork exports 25 percent higher than the comparable period in 2003, "high beef prices in particular — from lower supplies of cattle — will support domestic pork demand for the next year or two."

Seaton concurred on all counts, saying pork producers are slaughtering the same number of hogs weekly they did nearly a decade ago, but now they're enjoying much higher prices.

"In 1998, we had trimmings that cost sometimes in the single digits and the teens. But now we're in that 60 to 70 cents range for lean trim, and in that 35-40 cent range for fat pork," he said. "That's purely a function of export demand. You still have people to feed worldwide, and pork seems to be the meat of choice at this point."

Affect on pizza

Toppings price increases hardly compare to cheese price increases, but when pressed against already razor-thin margins, a boost of 15 percent to 20 percent ($8 to $10 for a case of pepperoni, for example) is noticeable.

Traditionally resistant to raising pizza prices, many operators are addressing the problem more directly by increasing prices on meat toppings added a la carte. However it's done, a menu price increase of some sort appears necessary if current forecasts are accurate.

Seaton said he doesn't envision prices dropping anytime soon, rather he expects volatility to rule the day for a long time to come.

"Markets and the things that affect them are changing all the time now, and all that has to enter into your decision making," he said. "Sometimes you think something significant is happening in the marketplace, you get a little bullish on something, and then three days later you're bearish. That's just the way it's been for the last year and half."