The lingering effects of last summer’s drought — the largest in the U.S. since the 1950s — don’t appear to be dissipating any time soon. Quite the contrary, in fact, as many experts now warn of food price increases throughout this year.
Analysts with Great American Group Inc. report that overall retail food prices are likely to increase between 3 and 4 percent in 2013, which is above the historical average.
According to the National Climatic Data Center, about 55 percent of the country experienced at least moderate short-term drought in June 2012, for the first time since December 1956. It was compounded by a heat wave-laden July, which left farmers scrambling to save harvests.
The corn harvest in particular was dramatically reduced by the drought, affecting the cost of animal feed, which has spiked the cost of meat and dairy products. After reaching a high of $8.43 per bushel in August, corn prices softened in the remaining part of the year and into January 2013. Despite the recent decline, corn prices remain well above those of prior years.
To raise or not to raise prices?
In its latest Food Monitor (Inventory and Equipment), Great American Group notes that retail food prices have already been impacted by increases in commodity costs, with some operators wondering whether or not to pass those costs along to consumers.
“Commodity prices have been high for several months, and food retailers have been feeling pressure to pass along price increases to customers,” said Ken Bloore, chief operating officer for Great American Group’s Advisory and Valuation Services division. “Prices are expected to increase more significantly in the coming weeks and months.”
Some consultants, however, advise against increasing prices too much. Michael Shepherd, who owns three pizzerias in Ohio and Michael Shepherd Consulting LLC, said operators will risk losing customers if they increase prices too much while the economy is still slow.
Five or 10 years ago, this would have been a better option. Now, however, “it’s a whole new world,” he said.
“When people’s incomes are going down, your prices can’t keep going up,” he said. “Increasing sales volume to outrun your rising costs is a race you can never win. You’ll reach a point where you can’t squeeze any more from your customers, and when the economy goes south again, it’ll catch up to you.”
However, Darren Tristano, executive vice president at market research firm Technomic, said grocery prices are rising faster than restaurant prices, so “for consumers, restaurants are now actually a better value.” But while consumers may be more optimistic than they were last year at this time (by 4 percent), operators are feeling the commodities pressure and will have little choice but to pass along some costs.
“This year we expect a big spike in beef, so we’ll see more veggies and chicken, as well as operators who plan to take price increases. Fifty-four percent say they will raise their prices this year. They don’t want to, but most will have to,” Tristano said. He added that all eyes will be on McDonald’s. As the chain bumps its value offerings from $1 to $1.29, it makes other brands more comfortable to inch up prices as well.
Other factors at play in rising costs
The drought of 2012 isn’t the only driver of rising costs. Food prices were also impacted by the consumption of corn in the production of biofuels, as well as population growth and increased energy costs, according to Great American Group.
Also, gridlock in Washington, D.C. may exacerbate the issue, particularly with a possible sequester looming. The sequester (or the “second mini fiscal cliff,” according to CNN) dates back to 2011, when President Obama and Congress agreed upon certain budgeting cuts totaling $1.2 trillion to gain control of the nation’s debt. This agreement was made with a the idea that the government’s bills would be paid in the interim, but a compromise has yet to be made, which will force spending cuts to go into effect on March 1.
According to CNN, if these cuts aren’t averted by March 1, there will be a $51 million cut to food safety programs. This means food inspectors will be furloughed and meat and poultry plants could be closed for up to 15 days. Consequently there would be shortages of chicken, eggs, pork and beef, leading to price increases. U.S. Department of Agriculture Secretary Tom Vilsack told CNN: “Food safety could be compromised. There will have less food available — by as much as 2 billion pounds of meat, 3 billion pounds of chicken, 200 million pounds of eggs.”