Edit
Food

How high can food costs go?

What’s behind higher prices—and what’s ahead?

One month this spring, Mario Marovic was paying $20 for a case of limes. The next month, he was paying $100. It was a squeeze for Matador Cantina, his Mexican restaurant in Fullerton, Calif., that goes through 10 cases a month. So when his general manager brought in a bag of limes from his in-laws’ backyard, Marovic had an idea: ask his diners to be his produce suppliers.

“We started talking to customers, saying, ‘By the way, these margaritas are being made from locally-grown limes, picked from someone’s backyard,’” he says. He offered them a deal: Bring in a bag of limes and get a 25-cent cocktail. Over four months, at least 100 customers responded, saving the restaurant a few hundred dollars a month.

The so-called “limepocalypse” turned out to be short-lived, mostly a product of heavy winter rains in Mexico, which supplies 97 percent of U.S. limes. But the trouble isn’t just with limes. This year, restaurants are facing a perfect storm of food price inflation, from the center of the plate to the salad bowl.

Within the past 12 months, according to figures from the U.S. Department of Agriculture, retail prices for beef, pork, chicken and milk all have hit record highs. Next up, say forecasters: many varieties of produce, as a historic drought starves California growers.

“There’s a definite pattern of accelerated food price inflation overall,” says Hudson Riehle, senior vice president of the research and knowledge group at the National Restaurant Association. While overall consumer prices have risen 2.1 percent in the past year, beef was up a full 10.7 percent and pork 12.2 percent. Wholesale prices, the ones that restaurant buyers often pay, were rising even faster. In the NRA’s most recent operator survey, Riehle says, members named food costs as their No. 1 challenge.

Of course, spikes in food prices have always been a fact of life for restaurants. Besides, what goes up must come down, right?

This storm might not blow over so quickly, say commodities experts. They expect many foods to ease down over the coming year. But they don’t foresee a return to price ranges of the past 30 years. Instead, they see long-term changes in the markets for many staples, with potential to affect what restaurants put on their plates.

“We are in the midst of a structural upward shift in commodity prices,” says David Maloni, principal with commodity-analytics firm American Restaurant Association. Food prices, he says, “are likely not going back to the levels we saw before 2007. They’re establishing a new normal.”

They’re also becoming more volatile, says Arlin Wasserman, Sustainable Business Leadership Council chair for the Culinary Institute of America’s Menus of Change Initiative. He cites his own study of corn prices. From 1990 to 2006, most years had no weeks in which prices moved more than 10 percent, up or down. In 2007, there were eight such weeks, and each year since has topped that number.

“Volatility is a bigger problem than just higher costs,” says Wasserman. “It makes it difficult to know what your food costs will be when you’re setting up your menu.”

What’s behind the changes in food markets, and what might the future hold? Observers cite three Cs—corn fuel, China and climate change—as the main antagonists impacting the food restaurants buy and shrinking the supply.

Corn, dogged

Corn derivatives such as sweeteners and animal feed go into many of the foods that restaurants put on their tables. Now, another corn product is going into gas tanks. A 2007 federal law required that by 2015, U.S. gasoline be blended with 15 billion gallons of ethanol, an alcohol distilled from corn. This year, the USDA estimates the biofuel will reap 37 percent of the nation’s crop.

As ethanol has picked up steam, so has the price of corn. For two decades, it rarely topped $2.50 a bushel. In recent years, it’s seesawed from a yearly average of $3.39 in 2007 to $6.67 in 2012.

“The move towards the use of corn for fuel was really the start of the structural change in American agriculture,” says Timothy Richards, agribusiness chair at Arizona State University in Tempe, Ariz. “And $2.50-a-bushel corn we’ll never see again.”

Corn also influences meat prices. In 2012, the soaring cost of feed, together with a scorching Midwestern drought, forced cattlemen to trim their herds. “The cattle numbers are similar to what they were in 1951,” says USDA agricultural economist Annemarie Kuhns. “That’s very small, considering how population and demand have both increased since then.”

At the same time, consumer demand has been recovering from the recession, says Jim Robb, director of the Livestock Marketing Information Center in Denver. “Put supply and demand together, and you get these record high prices.”

With better corn harvests expected this year, ranchers have started rebuilding herds, but it’s a slow process. Says Robb, “It could well be 2017 before we see supply-side driven relief on what restaurants pay for beef items.”

China rising

“In emerging economies, in Southeast Asia and India in particular, as the standard of living rises, the first thing people add to their diet is more protein,” says John Barone, president of commodity analysts Market Vision in Fairfield, N.J.

Of the world’s top ten beef importers, half are developing countries: Vietnam, South Korea, Venezuela, Mexico and Egypt. To help meet demand, U.S. exports have exploded over the past decade, from $809 million in 2004 to $6.2 billion last year. Over the same period, pork exports have more than doubled.

Among developing nations, China’s the champ at moving markets. When Chinese consumers heard reports of milk contaminated with melamine, they turned overseas. From 2009 to 2012, their imports of milk powder grew at a clip of 32 percent a year, helping drive worldwide dairy prices to all-time highs. This year, as China has reversed course and restricted imports, dairy prices have dropped 28 percent.

“China is a force to be reckoned with,” says Barone. “When they need something, they spend government money. If they need corn, they’ll just buy it and put a floor under the market.”

A hostile climate

While rain made lime prices rocket this spring, the culprit is more often the absence of rain. The years 2008, 2010, 2011 and 2012 saw historic droughts around the country, with the 2012 drought touching 80 percent of America’s agricultural land.

This year’s California drought could hike retail prices for lettuce 34 percent and avocados 28 percent, according to research by ASU’s Richards. Meanwhile, Brazil’s worst drought in decades drove up Arabica coffee beans 70 percent from December 2013 to May 2014.

Such extreme weather events could be the tip of a melting iceberg. Many forecasters expect storms and other phenomena to get more frequent and more extreme as the earth’s climate gets warmer. Says Wasserman, “A host of conditions we thought of as stuff that happens sometimes now happens frequently.”

Some restaurant companies are starting to take note. In their latest annual reports, Chipotle, McDonald’s and Tim Hortons all mention business risks from climate change, alongside less exotic ones such as financial markets and lawsuits.

Starbucks is going a step further. It’s setting up six farmer support centers in coffee-growing regions, and it’s testing 30 new coffee strains for resistance to coffee rust fungus, a disease that’s spreading as high altitudes get warmer. “This becomes even more important when farmers experience fluctuating weather conditions that are a result of a warmer climate,” says Starbucks spokesman Haley Drage.

Looking ahead, computer simulations by the International Food Policy Research Institute predict corn prices, in constant dollars, could rise 101 percent by 2050, with 68 percent of the increase due to climate change. Some places, such as Europe, might produce more as they get more rainfall. But others, including the U.S., are likely to produce less, as crops such as corn and wheat exceed their ideal temperature ranges.

“The general trend will be yield reduction as temperature increases,” says Tim Thomas, research fellow at IFPRI. “If you have very hot days, yield growth is going to decline for every day that’s extreme.” Prospects could improve, he says, if researchers can develop more heat-resistant varieties of those crops.

If there’s any good news on the horizon, it’s that for now, forecasters think many commodities may have peaked. The USDA is predicting a record corn harvest of 13.9 billion bushels, and prices have dropped 32 percent over the past year. By next year, poultry and dairy prices could follow. Pork could take a little longer, threatened by a virus that’s wiping out whole litters of piglets.

Cost corrections

For the rest of this year, at least, operators will have to find ways to weather the storm. For most, one response is off the table: higher menu prices. “Generally speaking, operators are very reluctant to raise menu prices,” says Bob Goldin, executive vice president of restaurant research firm Technomic in Chicago. “They know their consumers are price-sensitive and economically constrained.”

Instead they are trying to stabilize their costs, or cut them, by changing what they put on the plate. Here are some strategies:

Expanding contracts. With four restaurants in Toledo, Ohio, Mancy’s Steakhouse tamed price increases by negotiating a 12-month contract with its top meat purveyor. “In April, we locked in certain items,” says owner Gus Mancy. “Then, we were able to look a year down the road.”

Redirection. Some operators who find themselves losing money on their signature menu offerings are distracting diners with new items, such as chicken, that happen to have lower food costs. For Cory Wilk, that means adding more beef, surprisingly. His two CityRange Steakhouse Grills in Greenville, S.C., are running specials with secondary and tertiary cuts: marinated flank steaks, a fillet tail from the end of a tenderloin and a thick, rounded sirloin called a baseball steak. He’s also listing a drop steak, an 8-ounce piece that’s left over when a packer cuts a whole-bone rib-eye for a competing steak house. Says Wilk, “We can take advantage of some other cuts that are still very good quality but don’t meet their specs.”

At 12 locations of Stonewood Grill & Tavern, based in Ormond Beach, Fla., President Jeff Ash is moving in the opposite direction. He’s beefing up his nonbeef menu, adding two chicken dishes and a shrimp scampi. Together they’re attracting 10 percent of his sales mix.

Going small. Mancy’s does its own butchering. That makes it easy to cut petite steaks alongside the traditional slabs. Says Mancy, “We have three new steaks on the menu that are a little smaller cut than you would typically have found the last few years.” Next to a 14-ounce New York strip on the menu, he added a 9-ounce Manhattan fillet, cut from the center of the strip loin. Beside a 16-ounce rib-eye is a 12-ounce cut, paired with thin potato fries.

Bye bye, beef. At Parson’s Son BBQ in Jonesborough, Tenn., Tom Harwell committed barbecue heresy: He took beef brisket off the menu. With brisket flats jumping 68 percent in the past year, he was going in the pit every time he sold a slice. “We simply decided it was better to turn away a certain number of people than to keep them and, basically, lose money,” says Harwell.
Pork and chicken are a different story. When Harwell opened two years ago, food inflation already was taking off, and he intentionally priced those meats higher than his competition. “Whenever the prices did go up, I was still making a profit margin I could live with,” he says.
Stonewood Grill also has dumped a couple of high-dollar steaks. “It’s been a real crazy ride here on the escalating prices of beef,” says Ash. “It reminds me of what happens with gasoline. Every time you hear about the next jump, it makes it more challenging. I think, ‘How can I offset that?’”


Food Commodities Outlook: The next 12 Months


Beef

U.S. herds are down to 88 million, the lowest level since 1951. Cows only have one calf a year, so rebuilding could take until 2017.
Price Outlook: Going up

Pork

Porcine Epidemic Diarrhea virus could wipe out 10 percent of U.S. pigs this year. Herds should expand next year—if the epidemic is halted.
Price Outlook: Going up, then down

Chicken

Consumer demand is boosting prices, as families switch from pork and beef. But flock sizes could catch up this fall, thanks to lower prices for feed.
Price Outlook: Going down

Dairy

Exports to Asia are driving up prices. But the U.S., Europe, Brazil and New Zealand are ramping up production.
Price outlook: Going down

Trending

More from our partners