Getting a bead on where prices are headed
Among the dark clouds of recession, restaurants have so far found at least one silver lining: the cost of basic foodstuffs.
Like synchronized swimmers, a wide range of commodities has dived collectively from record highs of a year ago. As of April:
- Corn futures traded at $4 a bushel, down from $8 in the summer of 2008;
- Beef cattle, which had peaked at $105 per hundred pounds, averaged $84;
- Soybean oil dropped to 33 cents per pound, from a top price of 71 cents in March 2008;
- Milk plummeted from a high of $21.43 per hundred pounds to an April average of $10.46.
But how long will prices stay earthbound? Not much longer, predict commodities analysts and the U.S. Department of Agriculture. Recession has kept a lid on farm prices, but as a recovery begins, expect the lid to come off - especially for beef, pork and chicken.
"If there is a recovery in the economy, we probably will see meat prices rising," says Dan Basse, president of AgResource, an agricultural economics forecasting firm in Chicago. "We could see the beef sector reaching new highs."
At the Livestock Marketing Information Center in Lakewood, Colorado, director James Robb forecasts cattle prices will jump 8 to 11 percent in 2010. He expects skinless boneless chicken breasts to go even higher-up 30 percent this year and 25 percent next. "On a per-pound basis, wholesale," he says, "they could be significantly more expensive than hamburger."
The news is a little better for grains like corn, wheat and soy. Many analysts expect today's prices to be stable over the coming decade. Unfortunately, they're stabilizing at twice their historical levels. From 1974 to 2006, corn averaged a mere $2.35 a bushel.
Behind their gloomy forecasts, say analysts, lies the iron law of supply and demand. Supplies of key commodities should tighten over the next few years, while demand expands. Here's why:
Ethanol. Thanks to a federal push for renewable fuels, a third of the nation's corn supply goes into its gas tanks. Demand has slackened, as Americans cut back on driving. But it could surge this year, if the Environmental Protection Agency allows gas refineries to blend in 13 percent ethanol instead of the current 10 percent. "That decision has the potential to increase ethanol consumption by 20 or 30 percent from the day before," says William Tierney, former principal grain economist for the USDA.
Costly corn feed drives up meat prices, but it drives up other food prices, as well, says David Maloni, principal of food economics firm American Restaurant Association in Sarasota, Florida. "Because corn prices got so inflated, farmers pulled acreage from other crops. The corn acreage in Idaho surpassed potatoes last year, for the first time ever."
Culling critters. American farmers are shrinking their stocks. The USDA forecasts head of beef cattle to drop 6 percent by 2012, while the inventory of hogs falls 3 percent. Production of chickens, which turn over more quickly, is predicted to drop 2 percent but start recovering in 2011.
That's because farms are stuck in a squeeze, between high feed costs and low meat prices. Profit margins on beef cattle fell from 21 percent in 2007 to 2 percent in 2008. Chicken producers lost 2 cents for every pound they sold, while hog producers lost 15 cents. "Prices are incredibly depressed, and there's a tremendous sense of despondency among producers," says Joel Karlin, commodity manager for Western Milling in Goshen, California.
Global gluttony. Even in a worldwide recession, China's economy should grow 6.7 percent this year and India's 6.3 percent, according to the International Monetary Fund.
"With the growing urbanization of China and India, middle classes are forming there," says Basse. "There's an additional consumption of calories, which is setting the stage for more acres of livestock."
That means higher exports of U.S. meat. The USDA expects U.S. beef exports to soar from 7.2 percent of domestic production this year to 11.4 percent in 2018. Pork exports will rise from 19.5 to 21.1 percent over he same period.
How can restaurants control food costs in the next few years? Maloni advises watching commodity prices closely and signing supply contracts when they're favorable. "It's not about locking in a price ahead of time as much as it is locking it in at opportune times. Monitor the market diligently or have somebody do that for you."
Be ready to adjust your menu, adds Robb. "Some chains, every few years, fundamentally change prices on their menus, and many have inserts that change on a monthly basis. It's about being aware, through the management chain, that these things are volatile. You need planning for flexibility."