Posts Tagged ‘2014 forecasts’

3 Factors Affecting the Price of Commodities for Restaurants in 2014

May 23, 2014

With the exception of beef, the beginning of 2014 initially looked like it would be a fairly moderate year in terms of rising commodity costs. The last few months, however, have seen record highs in several staple commodities, causing many restaurant operators to have concern over additional inflation in the coming months. Although the U.S. Department of Agriculture forecasts that overall food inflation this year will be between 2.5% and 3.5%, sharp spikes in certain commodities may have restaurateurs looking for other options to offer on their menus and setting up strategies to control costs. Here is an overview of a few factors effecting the cost of commodities in 2014.

Global Demand Drives up Commodity Costs

So far in 2014, U.S. exports are rising and global demand is continuing to drive up the cost of commodities—cheeses, in particular, have hit record highs. For example, the price of Chicago Mercantile Exchange block cheddar cheeses is typically below $2 per pound, but has already soared to more than $2.40 a pound in the first quarter of 2014. Of course, as the climate changes and the world struggles to feed its swelling population, global demand will continue to be a major factor in the cost of commodities.

Drought and Disease Continue to Spike Commodity Prices

Drought and disease have already made their mark on this year’s commodity prices. An outbreak of PEDv (porcine epidemic diarrhea virus), which kills whole litters of piglets, recently drove pork prices to record highs. Since it takes pigs about six months to grow to slaughter weight, it is estimated that the disease will most affect pork inventory this upcoming June through September.

The drought in Brazil has spiked the cost of coffee, sugar and soy products. Coffee has been particularly effected. A drought condition known as Coraçao Negro (“black heart”) causes the beans, which are normally green, to become black and shriveled, and has already been found in some of the drier, northern regions of the country. The effects of the drought are unlikely to reflect in 2014 wholesale coffee prices but are showing in commodity costs. It’s possible that commodity coffee future prices could rise to over $3 per pound if the August harvest in Brazil is poor. Drought in California has further raised the price of feed, which, in turn, is pushing more beef and dairy producers to slaughter their cattle rather than pay to feed them.

Beef Prices Will Continue to Soar

Drought has been wreaking havoc with the price of cattle feed such as corn and hay for the last several years. Dams have dried up, pastures have withered away and with the impossibly high cost of feed, many ranchers have been left with no other option than to liquidate their herds. As a result, the U.S. cattle supply is currently at the lowest level that it has been since 1951. In February of this year, the retail value of “all-fresh”USDA choice-grade beef jumped to a record $5.28 per pound. This same grade of beef cost $3.97 as recently as 2008. Even though conditions in some parts of the cattle producing regions of the U.S. improved in 2013, it is unlikely that the cost of beef will go down anytime soon. Many ranchers may not be in a position to increase their herd numbers after so much liquidation, and those that can still have to wait the two years that it takes to bring a calf to slaughter weight.

Restaurant operators know that food prices are anything but predictable. When spikes in commodity prices occur, the best you can do is have management strategies in place that will help you control your costs and retain your profit margins.