Rising commodity costs have been a huge problem for restaurant operators over the past two years, but this year will bring some easing of pressure and less volatility.

Read more: http://nrn.com/article/commodity-inflation-improving-2012-even-better-2013#ixzz1usDZ5AJ2



Cattle on feed on March 1st totaled 11.68 million head, an increase of 2.4% from March of 2011 (11.39 million head). The 11.68 million head is also 2.9% higher than the 5-yr average of 11.35 million head. Placements of cattle into feedlots during February totaled 1.71 million head, a decrease of 10% from last year. With the latest reported overall cattle inventory at its lowest level since 1952, the lower placement number may portend decreasing cattle on feed numbers. It is difficult to imagine that the cattle on feed number can continue to outpace the long-term average when the universe of cattle available to feed is at historic lows. As far as the number of cattle on feed moving below YA and long-term levels, it seems to be a matter of when rather than a matter of if. It seems likely that we will begin to see levels move lower in Q2 and continue through the year.

Nation’s Restaurant News

“The 2011 market was an anomaly,” Maryanne Rose, chief executive of SpenDifference said. “Major poultry suppliers ran negative margins last year because of …

How to combat rising chicken wing prices

DENVER – SpenDifference, the rapidly growing supply chain management company that works with chain restaurants to save money, is joining forces with entegra Procurement Services® to offer clients greater cost savings on a broader array of contracted products.
SpenDifference provides purchasing and distribution support to such well-known chains as Taco John’s, Sizzler, Pizza Ranch, Big Boy and others. It provides mid-size restaurant chains a unique combination of buying power and expertise, while supporting strong adherence to product specifications. Entegra is a subsidiary of Sodexo, providing procurement management services for multi-unit clients in the hospitality and non-commercial industries.
The new partnership, effective February 1, 2012, provides SpenDifference clients with access to entegra’s more than 400 national supplier agreements, ranging from branded food products to paper goods and supplies. “SpenDifference provides a comprehensive supply chain solution to chain restaurants that are struggling with rapid inflation, lack of resources and limited purchasing scale,” said Maryanne Rose, SpenDifference president and CEO. “With this partnership, our clients will have access to an even broader array of products – leading to greater cost savings on quality products that are available for operators to purchase.”
Entegra Procurement Services is an integral part of a global procurement network providing services to over 16,000 sites in the United States. With more than $4 billion in food and related supply purchases in the U.S. alone, entegra provides competitive pricing, extensive product selection, leading brands and responsive service to the customers they serve throughout the country.
Dana Johnston, entegra’s executive vice president, said the two companies complement each other and are bringing a new standard to organized purchasing. “Entegra always strives to partner with industry leaders who create value for their clients and for the manufacturers with whom entegra partners. In partnering with SpenDifference, we believe we are contributing to a unique solution for mid-size chain restaurants that provides transparency while creating economic value and supporting the national deployment of brand specifications.”

About SpenDifference
Denver-based SpenDifference, LLC, partners with mid-sized restaurant companies, providing full-service supply chain services. SpenDifference delivers significant cost-savings, while ensuring clients’ product specifications are maintained. It currently manages more than a half-billion dollars annually in spending for such chains as Taco John’s, Sizzler, Smashburger, Pizza Ranch, Big Boy and others.

About entegra Procurement Services
Entegra Procurement Services, LLC provides procurement management services to a select group of clients across the United States, while ensuring that value is generated for clients and suppliers alike. Entegra is headquartered in Gaithersburg, Md.

PPI Food Detail for August 2011

CPI Food Detail for August 2011

 - CPI-Food gains 4.2% (vs. YA) during July

- PPI-Food gains 7.1% (vs. YA) during July

- Underlying commodity prices 15% above YA

- Chinese food prices up 15%

Consumer food prices (CPI-Food) rose by 4.2% during July (vs. YA) – the most rapid rate of gain in consumer prices since mid-2009. Gains in at-home food prices continue to accelerate at a more rapid rate (5.4%) than away from home prices (2.6%). Protein items (except chicken) continue to lead consumer food prices higher – beef prices were 9% higher and pork prices were 7% above year ago levels. By December of 2011, the CPI-Food is forecast to be 5.3% above year ago levels

Wholesale food costs (PPI-Food) rose by 7.2% from a year ago, the largest gain since September 2008. The upward pressure on costs continues, consistent with gains in the price of underlying commodities. The broad-based gain included sharp increases in wholesale prices for vegoil (+34%), coffee (+28%) and wheat flour (+20%). Gains in feed costs over the past four years is now translating into higher prices for protein (beef +14%, pork +12%) and dairy products (+18%)

The AES Food Input Cost Index is now 15% above a year ago and 45% higher than July 2009 levels. Prices in several markets reached a peak during the past 2-4 months, but the overall index has not declined. The markets continue to react to the combination of typical weather concerns as well as wild swings in the value of the US dollar. As long as corn and crude oil prices remain elevated, the downside potential for most commodities will be limited.

PPI –Food: The government’s report on wholesale prices is released around the middle of the following month, and reports on the change in a broad range of prices. During July 2011, the index of wholesale food costs rose by 7.1% from a year ago, the largest gain since September 2008. Of 22 items tracked and reported, eleven gained 10% or more from a year ago.

 The upward pressure on costs continues, consistent with gains in the price of underlying commodities. The broad-based gain included sharp increases in wholesale prices for vegoil (+34%), coffee (+28%) and wheat flour (+20%). The sharp gain in feed costs over the past four years is now translating into higher prices for protein (beef +14%, pork +12%), dairy (+18%) and egg (+19%). The notable exception is chicken – and the lack of price appreciation is resulting in significant margin pressure for producers.

Commodity Price Trends — The table below provides commodity price information as of August 15, 2011, along with historic comparisons. This gives an indication of commodity price trends, both short-term and longer-term. The AES index, listed at the top, represents an average of the items listed below, index to 2000=100.

 The AES Food Input Cost Index continues to record sharp gains from a year ago (+15% vs. YA, +45% vs. August 2009). Prices in several markets reached a peak during the past 2-4 months, but the overall index has not declined. The markets continue to react to the combination of typical weather concerns as well as wild swings in the value of the US dollar. After crude oil prices declined sharply last month (from $115 to near $90), the market has declined into an $80-90 range.

 The recent USDA crop estimates for corn, wheat and soybeans were bullish to prices. As long as corn and crude oil prices remain elevated, and we do not enter into a second recession, the downside potential for nearly all commodities will be limited.

CPI-Food –

The government reported consumer food prices (CPI-Food) continued to accelerate during July, rising by 4.2% versus a year ago – the most rapid rate of gain in consumer prices since mid-2009. Gains in at-home food prices continue to accelerate at a more rapid rate (5.4%) than away from home prices (2.6%).

We continue to believe that accelerating consumer food inflation is a direct response to a sustained multiple-year increase in the price of underlying commodity prices. Most notable is the sharp increase in the price of corn, a key underlying price driver for a wide variety of food products. This implies further acceleration in the rate of food inflation is likely during the next 6-18 months.

By December of 2011, the CPI-Food is forecast to be 5.3% above year ago levels. With the exception of 2008, this would be the highest rate of food inflation since 1982.

CPI-Food Index Values (with changes from YA during December)

 

At-Home vs. Away-From-Home Food Prices

 

Chinese Food Inflation – Consumer food inflation in China for July was reported at 15% (vs. YA), led by a 57% increase (vs. YA) in pork prices. Overall inflation was 6.5%, a rate higher than Chinese policy makers find tolerable.

You could raise prices. Some operators are choosing a different path.

With many commodity prices hitting new highs and food costs overall expected to rise by 3 percent to 5 percent this year, many operators recently raised the white flag in their battle to hold the line on menu price increases. Led by McDonald’s, which in late January announced it would take a 2 percent to 2.5 percent increase this year, other players soon followed, including Texas Roadhouse, Tim Horton’s, Buffalo Wild Wings, Applebee’s, Morton’s, Cracker Barrel, Panera Bread, Cheesecake Factory and Red Robin Gourmet Burgers.

The move isn’t universal, however. Many others remain committed to keeping higher menu prices off the table as a survival strategy despite climbing commodity prices. With the economic rebound taking longer than anticipated and rising fuel costs taking a bigger bite out of consumers’ disposable incomes, they see menu price hikes as simply too risky right now.

Martyrs? On the surface it may seem so, when you consider just how significant some of the increases in raw materials are and the fact that food costs almost without exception are expected to head higher still through 2011 and into 2012.

Take proteins. Cattle prices for 2011 compared to 2010 are expected to be up nearly 25 percent, hog prices will be up about 26 percent, turkey prices up about 12 percent and broiler prices up about 5.5 percent, according to Altin Kalo, commodity analyst for Steiner Consulting Group, Manchester, New Hampshire. Behind that rising tide, he says, is a volatile combination of sharply rising input costs (e.g., corn and soybeans for animal feed), bad weather in growing areas, soaring export demand and a global population that’s grown by a billion people over the past decade. (For more information see Foodservice Buyer.)

Beyond proteins overall, cheese and dairy prices are also up significantly. “Year to date (early April), we’re at $1.84 per pound on block cheese. This time last year we were at $1.40 per pound,” says Christopher Webb, director of commodity procurement at SpenDifference, a Denver-based supply-chain management firm that does outsourced purchasing for regional restaurant chains. “The price on Class III milk that goes into commodity cheddar is up from $13.31 last year to $16.88 now.”

Animal products aren’t the only ones spiking upward. During the first quarter, fresh produce skyrocketed—in some case up to 400 percent per case—due to weather calamities in key growing areas. While at press time they were coming back down to earth, Webb says produce prices will nonetheless rise overall this year beyond their normal weather-related swings. “For the first time in a long time, we’re seeing growers shift their acreage to commodity corn to take advantage of the strong market and record-high prices. You’ve now got third-generation potato farmers in Idaho switching to corn, for example, so produce supplies could be tighter than normal this year due to those types of shifts.”

Wheat, too, is on the rise. In early April, year-to-date bushel prices on the Chicago Board of Trade were $7.88 compared to $4.72 per bushel at the same time in 2010. While significant wheat acreage was planned this year, Webb said early-season weather had not been ideal and it was too early to predict what the rest of the year might bring.

That’s largely true in the case of corn, as well, which as of early April had more than doubled in price over the prior year and is the one commodity, along with fuel, that dramatically impacts virtually all others. “If we have a not-so-good corn harvest this year—not even a bad harvest, but just a so-so one—we’ll see very high prices for proteins overall going into 2012,” Kalo says. “In the case of cattle, you’re for sure going to see very high prices well into next year and likely beyond because the cattle production base isn’t there. It takes a good three years from the time you make a decision to expand your herd to the time that those calves are going to be ready to come to market. Hog producers aren’t expanding their breeding herds, either, because of high input costs, so you’re not going to see any meaningful increase in pork production through the first half of next year. When the corn harvest comes, that’s when we’ll get a good idea of what will happen for all of 2011 and beyond. But at least in the near future, there’s not much relief in sight.”

While some operators have thus far chosen to forgo raising menu prices, few in the current environment can afford to just sit tight and wait it out. Here’s a look at how five companies are working to beat the heat on commodity prices.

Café Rio Mexican Grill
Salt Lake City, Utah
40 units

Pain points: “Kind of across the board, but produce—lettuce, in particular—went sky high for a while,” says Dave Gagnon, COO. “We were paying two and three times per case more than we normally do, and when the price goes up on lettuce the quality usually goes down. Some of our proteins are up, too. And we just had a fuel surcharge kick in, which was worked into our contract if the price of gas hit a certain point.”

Coping strategies: Don’t raise menu prices; focus on doing a better job at the restaurant level; eliminate waste by prepping smaller batches throughout the day of fresh-made items; double- and triple-check information from
suppliers and work closely with them to make sure that if prices do rise, quality remains consistent.

Togo’s Sandwiches
San Jose, California
240 units

Pain points: “We started feeling it most in the fourth quarter of last year and we expect the pressure to continue through this year. It’s across the board in areas where we haven’t locked in a contract,” says Renae Scott, vice president of branding and marketing. “Avocados, which are a critical component of one of our top-selling items, are way up in cost, about 10 percent per sandwich.”

Coping strategies: Let franchisees substitute a turkey sandwich with cranberries for the one featuring avocado in daily specials promotions; redesign menu boards to showcase a new line of toasted subs with lower food costs; sharpen the pencil against packaging to find cost savings; work closely with suppliers to hold prices down; introduce “Classic Minis,” half-sized sandwiches with better margins; take a menu price increase of an average of 10 cents
per sandwich, but also decrease the price on a few to bring them under $4; purchase supplies from regional sources to save on transportation.

Millennium Restaurant Group
Kalamazoo, Michigan
8 units

Pain points: “Short-term it’s been borderline brutal in produce, with
simultaneous freezes in Florida, California, Arizona and even into northern Mexico. Usually there’s a field somewhere to shift to in the winter, but
with- out a field anywhere to shift to it was acute. But the longer term pain
is in beef and dairy. That’s where we see the biggest rising costs,” says Matthew Burian, chief procurement officer and director of food and beverage for the multi-concept group. “We’re seeing double-digit jumps on
some beef items and on cream.”

Coping strategies: Maintain current prices but focus on providing greater value via gourmet items, convenience, healthy options, great service; talk with vendors about sharing the biggest price jumps, such as the recent 400 percent spike in produce case prices; do more forward buying, particularly on chicken and ground beef; feature more local products, some of which offer cost savings and some of which don’t, but all of which guests associate with higher value.

Extreme Pizza
San Francisco, California
40 units

Pain points: “The two categories that we’ve noticed the biggest increases in are cheese and flour. They’re up by high double digits, 50 percent to 70 percent from what were almost historical lows the past year or so. While they’re not at all-time highs, they seem to be headed there,” says CEO Todd Parent.

Coping strategies: Release newly updated menu with no increases to base pizza prices and with decreases to some topping prices to help boost competitiveness and traffic; offset higher commodity costs with higher volume and better labor cost; focus on providing a great customer experience; keep the menu fresh; promote exciting new gourmet vegetarian items; negotiate with primary distributor to remove additional fuel surcharges; have more frequent conversations with all vendors to keep everyone on the same page.

Sizzler USA
Culver City, California
260 units

Pain points: Known for its steaks and bountiful salad bar, Sizzler is
working to manage increases in beef, produce and dairy, in particular, through SpenDifference, its third-party purchasing agent, according to
Mike Branigan, vice president of marketing.

Coping strategies: Plan key buys and lock in pricing well ahead of
commodity market swings; pool volume on some items through purchasing cooperative; maintain menu flexibility; create a new signature attraction with underutilized tri-tip sirloin steak; balance rising costs on beef and other items with switch to fresh preparation of soups; don’t wait until contracts
are about to expire to begin negotiating favorable renewals; maintain a holistic approach to menu pricing and how consumers use the brand.

Key fundamentals to follow over the next 60 days include a) the USDA initial 11/12 supply/demand projections (2/25), USDA’s Planting intention report (3/31), March 1 stocks (3/31), and USDA updated supply/demand reports (3/10, 4/8).

 Corn – The USDA further tightened the 2010/11 balance table

-          Ethanol use was increased from 4900 to 4950 mm (vs. 4568 YA), based upon November actual data and weekly implied usage information

-          Feed/residual left unchanged at 5200 (vs. 5140 mm YA) – the USDA probably won’t adjust this estimate until April (after March 1 stocks report)

-          Exports left unchanged at 1950 mm (vs. 1987 YA)

-          Total 10/11 US corn usage increased from 13430 to 13500 mm (vs. 13066 YA), resulting in ending stocks being reduced from 745 mm (5.5% of use) to 675 mm (5.0% of usage) — vs. 1708 mm (13.1% of use) last year.

 With this very modest change in the USDA estimate of demand (+0.5%), ending stocks are reduced to an extremely tight 5.0%, equal to 18 days of demand on September 1 – a stocks-use level matched in 1996.  We will have more adjustments to demand in the future, and some will be much larger than this month’s change – the implication is that prices will remain extremely volatile, and price upside could be dramatic.  Today’s 0.5% change in demand resulted in futures rising by 3.6% — in other words the price response (in percent change) was 7X the % change in USDA’s demand estimate. 

  Soybeans – The USDA made no adjustments to their 10/11 supply/demand:

-          Exports 1590 mm vs. 1501 YA

-          Crush 1655 mm vs. 1752 YA

-          Ending stocks 140 mm (4.2% of use) vs. last year’s 151 mm (4.5%)

 Weekly pace data on export shipments and sales, as well as the monthly crush data, are the key demand metrics to monitor.  USDA left total South American soybean production unchanged – increasing the Brazil crop from 67.5 MMT to 68.5 MMT, while reducing Argentina’s crop from 50.5 MMT to 49.5 MMT.

 Soymeal – Domestic use remains forecast at 30.5 mm tons (off 0.4% vs. YA), and exports remain forecast at 9.2 mm tons (-18% vs. YA).  Monthly crush data and weekly export sales/shipment data will dictate changes going forward

 Soyoil – The USDA’s forecast of 10/11 ending stocks was reduced by 100 mm to 2573 mm (vs. 3358 mm YA), reflecting forecast exports be revised up to 2800 mm (vs. 3357 mm).  Food use remains forecast at 14.20 B (vs. 14.18 B YA), and biodiesel remains forecast at 2.90 B (vs. 1.68 B YA).  The sharp rise in biodiesel use is predicated on big gains in usage during the coming months, as YTD biodiesel usage (through December 2010) is 70% below YA.  Usage to meet biodiesel mandates during 2011is the key unknown for the US soyoil balance table.

 Wheat – The 2010/11 balance table for all US wheat was left unchanged in the USDA’s February update:

-          Imports unchanged 110 mm (vs. 119 mm YA)

-          Exports unchanged at 1300 mm (vs. 881 mm YA)

-          Food use unchanged at 930 mm (vs. 917 mm YA)

-          Feed/residual unchanged at 170 mm (vs. 150 mm YA)

-          End stocks unchanged at 818 mm (vs. 976 YA)

 Modest by-class adjustments were made:

-          HRW end stocks left at 313 vs. 385 YA (dom use -10 mm, exports +10 mm)

-          SRW end stocks up 10 to 211 vs. 234 YA (dom use +10 mm, exports -20 mm)

-          HRS end stocks unchanged at 173 vs. 234 YA

-          White end stocks reduced 10 to 73 vs. 80 YA  (exports +10 mm)

-          Durum end stocks unchanged 48 vs. 35 YA

 Weekly crop conditions will begin to tell more about the potential of the winter wheat crop, and thus influence prices.  Beyond that, export sales and international events (Egypt is the world’s largest wheat importer) will drive prices.  While winter wheat acreage estimates were released in January, the first official USDA estimate of spring wheat acreage will be released on March 31.

 Note on 2011 Acreage – Market attention to the “need to buy acreage” during 2011 has intensified in recent weeks, and will continue to be an important driver of prices over the coming months.

 Based upon current prices and a state-by-state analysis, acreage planted to major crops during 2011 is projected as follows: corn 90.0 mm (vs. 88.2 YA), soybeans 79.0 mm (vs. 77.4YA), winter wheat 41.0 mm (vs. 37.3 YA), spring/durum wheat 15.3 mm (vs. 16.3 mm YA) and cotton 12.0 mm (vs. 11.0).  Note that the sum of above four crops is expected to rise by more than 7 mm acres, and the sum of corn and soybeans is projected to rise by 3.4 mm to the highest level on record.  Even after considering the gain from more double-cropping (SRW-soybeans), the larger universe of acreage that is required will be challenging to reach, and implies strong and very volatile prices during the coming year.

 -          Bill Lapp

Advanced Economic Solutions

•  - CPI-Food gains 1.5% (vs. YA) during Nov, with further gains expected
•  - PPI-Food gains 3.5% (vs. YA) during Oct, led by protein, dairy and softs
•  - Underlying commodity prices continue to rise sharply, now 19% above YA
•  - Global Food Prices rose 4% from last month and are 25% above YA Consumer food prices increased during

December by 1.5% (vs. a year ago. While historically the CPI has normally increased at a greater rate than the PPI-Food, this marks the 13th consecutive month that the CPI has lagged the PPI. At some point, likely over the course of the next 12-18 months, the higher costs being recorded at the wholesale level will translate more rapid rates of consumer food inflation.

Wholesale food costs remain both volatile but also relatively strong — the PPI-Food rose by 3.6% during December (vs. a year ago); this is consistent with the sharp gains in commodity food prices – the AES index as of early January was 19% ahead of year ago levels, approaching the record levels seen during 2008.

Globally, the UN reports that food prices during December were 25% higher than a year ago, and rose by 4% between November and December to record levels. While food inflation December remains relatively tame within the US, it is clearly a focus in developing countries such as China.

The trend in US food inflation rates during 2011 is expected to be higher – the CPI-Food is forecast to rise by 3.5-5% next year, while the PPI-Food is expected to gain 5-7%. Higher commodity prices have created a “cost bubble” within the US food system, and there is evidence that the costs incurred by food manufacturers and food service operators are likely to be passed on to consumers during 2011.

PPI –Food: The government’s report on wholesale prices is released around the middle of the following month, and reports on the change in a broad range of prices. During December 2010, the index of wholesale food costs rose by 3.5% from a year ago, outpacing the rate of food inflation at the consumer level for the 13th consecutive month . Based upon historical precedence, at some point during the next 6-12 months, these increases in wholesale costs will be passed on to consumers, implying higher rates of consumer food inflation during 2011.

The sharp rise in protein prices (except for chicken) are the most notable trend that has persisted – this is discussed in greater detail in the commodity section. Note that significant negative margins for the chicken industry at present are occurring (revenue near $.58 per pound vs. cost of production $.74). Thus it is likely that production cutbacks will tighten supplies and the wholesale prices for chicken should be expected to accelerate during the coming year as well.

Increasing “soft” commodity prices are translating into rising wholesale price for categories such as refined sugar (+14%) and coffee (+14%). Soyoil futures have increased by more than 50% since July, and the consequence is that the PPI for vegoil was 16% above a year ago during December.

Based upon sharp gains in most of the underlying commodities, the underlying strength in wholesale prices is likely to persist (if not accelerate) over the coming months.

The AES Food Input Cost Index is now 19% above a year ago, approaching record levels reached during 2008. The increase in the price of commodities listed below is consistent with the upward trend in commodity prices outside of agriculture (energy, metals, etc.). The “macro story” behind higher commodities is a weaker US dollar (aided and abetted by the Fed’s quantitative easing policy), as well as strong economic growth in China and other developing economies.

More specific to food commodities, an underlying driver behind the gains in most agricultural commodities has been increased corn prices. Corn is dominant among grains/oilseeds, and higher corn prices attract acreage away from other crops. At the same time, higher corn prices means higher feed costs for producers of proteins, dairy products and eggs. Growing ethanol demand and downward revisions to the US corn crop have resulted in corn prices surging to over $6, a gain over 69% over the past six months. Until the fundamentals change and corn prices retreat, there is limited downside for many of the commodities listed below.

Wheat prices have risen sharply since July as well, first driven by production shortfalls in Russia and subsequently by rising corn prices. Soybean oil prices are also up 50%, reflecting strong Chinese import demand (for both vegoil and soybeans) as well as increased use of US soyoil to produce biodiesel.

Protein availability in the US has shrunk sharply — since 2007 per capita meat supplies in the US have declined from 221 pounds to 206 pounds. Producer have reduced production during this period in response to weak domestic demand and rising feed costs. At the same time, rising exports and reduced meat imports have limited the available supply. The net result has been increased livestock prices during 2010 (live cattle +15%, live hogs +34% and broilers +7%) with additional gains expected during 2011.

Dairy prices rose sharply during 2010 – the average price of milk (farmer price) rose by 27% during the past year — butter prices rose by 40% during 2010, while cheese prices increased by a more modest but still sizable 17%. While milk output rose by 2% during 2010, exports of dairy product surged (+82% milk equivalent).

The net of these above trends (plus rising soft commodity prices) is that the gains we have seen during the past year are more likely to persist (or strengthen) than to reverse. Rising feed costs, strong demand from China, a weak dollar to encourage export demand, and at least modest continued improvement in consumer demand — combined, these all suggest more upward pressure on commodity prices during 2011 and beyond.

Advanced Economic Solutions – Bill Lapp