The Big Chill
The coldest air in almost 20 years has swept the nation this week with 90% of the country being issued freeze warnings. Combine record snow falls from Storm Hercules last week, a vicious cold snap and the Farmer’s Almanac’s 2014 forecast for a colder and snowier winter than the average, and we have a recipe for rising commodity prices now and well into the spring.
Food and commodity prices are driven by basic supply and demand and tend to be inelastic – once they rise, they are slow to fall below the increased level. This means that prices continue to go up, driving up operating costs.
These price increases can and will affect all aspects of the restaurant business, and operators must pay close attention to commodity prices and availability. Now is the time to start planning for your spring menus and pricing levels, so as not to be caught off guard.
Here are 4 possible increases to watch out for:
Meat Prices – According to Bloomberg, “Cattle futures reached $1.371 a pound this week, the highest since Chicago trading began in 1964.” This increase in futures pricing is due to several factors, most of which is uncertainty in yield levels at slaughter houses. In colder months, and in harsh weather, livestock need more feed to keep warm, increasing livestock farmers’ operating costs. Since livestock use more of their energy to stay warm in these conditions, they do not gain as much weight, resulting in a decrease in supply.
Dairy Prices – Dairy cattle, like beef cattle, will also use more energy to stay warm and have lower weights. Lower weight dairy cattle produce less milk, which in turn lowers supply and raises prices. Additionally, the on-going debate in the US Congress over the Dairy Policy portion, of the yet-to-be passed Farm Bill, is causing more uncertainty in the dairy market. Unless a new Farm Bill is passed before March 1, 2014, the odds are dairy prices will fluctuate significantly until the un-subsidized dairy market can settle into normal supply and demand patterns.
Produce and Grain Prices – A deep freeze obviously harms produce crops. Usually, these disruptions in the planting and growing seasons are contained in a few specific regions of the U.S. This week all 50 states issued an unprecedented number of freeze warnings, affecting all regions of the U.S. In Florida, the world’s second largest citrus-producing region after Brazil, this week’s freeze potentially harmed up to 15% of the citrus plants. This can have resounding impact for pricing going forward.
Wheat futures on the Chicago Board of Trade climbed as much as 1.2% this week, Bloomberg reports: “ 'As much as 15% of winter-wheat plants in the Great Plains face damage’, as stated by Kyle Tapley, a senior agricultural meteorologist at MDA Weather Services in Gaithersburg, Maryland.” This has implications for all grain-based products well into the spring and summer months. Expect increases in raw cereals and flours and possible increases from your Bakery and Bread suppliers.
Energy Prices – Energy prices are on the rise due to demand and scarcity. When the temperatures drop, demand for energy increases as we turn up the thermostat, while production of gas, oil and coal slows and can even stop, driving up prices. Increased energy prices affect all other commodity prices, as it is more expensive to bring those products to market. Additionally, increased energy costs affect restaurants by increasing the costs of product delivery and fuel surcharges, heating your restaurant space, heating your hot water and using your kitchen appliances.
During a cycle of limited energy supply and increased energy prices, farmers who grow corn may get a better price for their limited crop selling it for Ethanol production rather than feed. This in turn can drive up the price of feed and the cost of raising farm animals, pushing meat and dairy prices up, as well as cutting the supply of grain on the market with the price impact there as well . . . It is all connected.
As a business owner, you must be aware of all of the external economic forces that affect your business and be able to plan for them. As we head into this very cold and snowy winter, keeping an eye on costs and energy usage, and appropriately adjusting your menu and offerings, to maintain your quality and profitability will be a must for operators.
Don’t know where to begin? 4Q Consulting can develop customized operational guidelines to help you manage your costs through all stages of your business. Email us today for a free business consultation at www.4qconsult.com.
All original content copyright Noelle E. Ifshin, 2013-2014.