Where are the lower prices?

A closed Starbucks, taken by Nathan Borror

Oil prices have begun to fall slightly around the country, but in many places food prices remain the same, and companies such as Mars (makers of M&Ms and Snickers) are raising their prices just before the Halloween season.

And it isn't just the candy companies; Bloomberg reports that food inflation is accelerating at a pace not seen since 1980, due to the rising prices in meat, dairy, and oils. The increase will leave us with the highest jump in prices since the early 1990's, and by the next year prices will still raise another 4 to 5 percent.

With gas prices dropping, shouldn't food prices be falling? MSNBC asked that very question this week, and found that lower prices were not necessarily in our future:

Food inflation is to stay — and will probably get worse for some things.

That's because retail prices for cereal, eggs, cheese and meat generally lag by several months or longer world prices for wheat, corn and soybeans — the raw ingredients of so much of our food. Some food items may come down modestly as commodities prices cool off; others might not budge a cent and some may actually increase.

Already struggling with growing production costs, the food industry is responding to rising costs in a number of creative ways. The Wall Street Journal reports:

• Cargill Inc., of Minneapolis, in July introduced to supermarkets cheaper cuts of meat with fancy-sounding names like Maranada steak (flank steak), Marbello steak (skirt steak) and Cordelico sirloin (flap meat).
• General Mills Inc. says that by reducing the number of spice and ingredient pouches in boxes of Hamburger Helper -- and by halving the number of pasta shapes used in the product line -- the company has trimmed manufacturing costs 10%. The company is also replacing pecans with less expensive walnuts in its Pillsbury Turtle cookies.
• Hershey Co. is substituting vegetable oil for a portion of the cocoa butter traditionally used in some of its chocolates.
• Heinz is also cutting back on packaging and using more rail delivery to cut transportation costs. On Thursday, Heinz said earnings in its fiscal 2009 first quarter rose 11% to $229 million. General Mills and Kellogg Co. also have benefited from aggressive cost-cutting: Their stocks have risen 27% and 9.3%, respectively, in the past two years.

In the restaurant industry high food prices coupled with mandated increased in employee benefits have caused problems. Michael Bauer of the San Fransisco Gate asked the question, "What makes prices too high to dine at a restaurant, and how do consumers let the owner know?" I think he summed it up well in saying:

A lot depends on the ambiance, the intangible feeling diners get when they sit down, portion size and, most importantly, the execution of the food. If the food tastes great most people are willing to pay a premium; if it's mediocre the restaurant begins to lose its fans.

How are the high food prices affecting your business and daily life? Leave a comment and let us know.

Further Reading:

The Business Sheet on food prices to skyrocket for months.
Food Product Design on the largest food price increase in 20 years upon consumers.
SF Gate on commodity prices bruising some hedgers.

Weighing the good news against the bad.

Corn was on the rise this week- taking a 12% spike throughout the week before falling to a 6% gain by Friday. The oil price based increase came despite the good news from the USDA (via the Chicago Tribune): corn has recovered from the July flooding and will have a 3.9 bushel per acre increase from last year's yield.

Bloomberg TV had analysis on the news you can watch here. You can read their print version analysis of the news here.

The report continued the trend of tempering good news with bad news; the Consumer Price Index report was released stating that prices jumped twice the expected rate in July. US News and World Report analysts attempted to see the silver lining of the report:

Goldman Sachs economists called the CPI report "horrible" but noted that the drop in crude prices should slow the advance of energy-related inflation. They write: "The energy piece of this is quite likely to moderate in coming months given the developments in crude oil and gasoline prices (though part of that is seasonal). The food should also slow, but the timetable for this is less certain."

How are local restaurants surviving the downturn in consumer spending and the increase in costs? NWCN.com recently reported on the Newport Bay and Stanford's chains use of coupons to lure customers back in to the dinner hour:

The coupons were sent to 450,000 homes in the Portland area. Experts said a typical return would be around 4.5 percent. So far at Stanford’s, restaurant managers said they’ve seen a 12-percent redemption.

"The response has been unbelievable," said Ideson.

In other Pacific Northwest food news, OPB ran a great article about the increasing health of Oregon farms:

We've all heard about the decline of the family farm in the U.S. and the dominance of giant corporate farms. The trouble is, in Oregon that’s just not the case. In fact, according to the latest census figures, even though farm acreage in the state has dropped slightly, there are actually more farms now than there were a decade ago.

You can read the rest of the article here.

Further reading:

KTVZ.com on Willamette Valley Farmers seeing a windfall from wheat crops this year.

Farm & Ranch Guide on the volatility in the corn market.

MSNBC on retail sales falling for the first time in 5 months.

MarketWatch on the end of the week commodity round up.

Are we there yet?

At the beginning of the summer, doom and gloom reports that the US needed to brace itself for a prolonged chain of price increases, oil shortages, and other various economic hardships were on the frontage of every business section of every newspaper. This week the "commodity bubble" (whose very existence was as debated as the ethanol issue) was declared "burst" by Lehman Brothers analysts. The Los Angeles Times reports:

They concluded that oil’s dive over the last five weeks foreshadowed persistent softness in prices for at least the next year. "Is the bubble now over?" wrote Edward Morse, Lehman's lead analyst. "We believe almost certainly."

This decline in prices couldn't have come at a better time; on Thursday the EPA rejected Texas Governor Rick Perry's request to cut the ethanol mandate. No one was really paying attention to the news- with oil prices falling and a stronger dollar, Marketwatch reported that corn prices fell again to the lowest closing level since February 1st.

What other factors are causing this relief in commodity prices, and what could make them increase again? The Star Online offered up a few ideas:

Analysts say the biggest factor is the ailing U.S. economy. If growth picks up, unemployment falls and consumers start spending again, demand for energy, building materials and other goods will increase, straining world supplies again.

"But we're not expecting that to happen for at least a few quarters,'' said Cordier.

China could also be a catalyst. The country has restricted driving and closed factories to reduce pollution during this month's Beijing Olympics, and some people expect a bump in demand for gasoline, coal and other material once the Games finish.

Speaking of the Olympics, the Olympic Committee in Beijing ordered a decrease on the cost of coffee for journalists covering the games:

At the coffee bar inside the main press center, the price of a double espresso tumbled from RMB 23 (almost $3.40) to RMB 12 ($1.76) overnight.

China Daily also reported on the massive undertaking of feeding over 60,000 people a day in the Olympic Village. The dining hall, which is open 24 hours a day, goes through over three tons of rice and 4,000 liters of cooking oil every day!

Further Reading:

Huston Chronicle on Experts divided on which way prices will go next.
MSNBC on how rising prices and low paychecks are worrying consumers.
The Wall Street Journal on Oil down, Stocks up- but don't bet on it!
The Dallas Morning News on the EPA's rejection of Senator Perry's request to decrease ethanol production.
Crave on the use of RDIF to manage food at the Olympics.

Too little, too late?

The AP reports on the breakthrough in the salmonella case.

Restaurants, consumers, and the tomato industry had reason to breath a sigh of relief this week as two kinds of peppers found in Mexico were linked to the ongoing search for the source of the salmonella outbreak. While officials fell short of completely vindicating the tomato, they did report that no tomatoes have tested positive for salmonella. The cause of the outbreak is being reported as "contaminated irrigation water."

Mexico is denying that they are the source of the outbreak, saying that the positive tests were only preliminary findings. American produce industry executives expressed their dismay at a hearing on Wednesday. They argued that the investigation took too long to get to the "smoking gun." The LA Times reports:

Produce industry insiders, many also testifying at the Wednesday hearing, criticized what they called an expensive, inept investigation that had little transparency and failed to engage business owners.

One executive said his company, which ships tomatoes and other produce across seven states, had lost as much as $18 million since the outbreak began. Members of the Irvine-based Western Growers Assn. have collectively lost $13 million, said Henry L. Giclas, one of the group's vice presidents.

"I don't know how they could call it a breakthrough when our industry's already been broken," he said after testifying.

In other commodity news, corn prices dropped another 3.7%, with soybeans falling 2.8% for the week. While Congress failed to come to an agreement on what to do about oil prices and speculators, it was the weather that brought about the price decline. Thunderstorms rolling into the Midwest prompted the favorable prediction that despite the flooding earlier this year, corn production could still be on production schedule.

Cheaper corn might not directly translate to help for the suffering restaurant industry. The Chicago Tribune reported on the change in consumer spending habits:

In the restaurant business hard times have touched off a flurry of trading down to cheaper outlets.

That's a plus for McDonald's, which is testing a higher price for the double cheeseburger that anchors its dollar menu, and a minus for casual-dining chains. Bennigan's, for example, abruptly shuttered hundreds of its outlets last week.

At the same time, Americans are eating at home more regularly, a help to packaged-food companies at the expense of restaurants.

Further Reading:

San Fransisco Chronicle on criticism on US probe into the salmonella outbreak.
MarketWatch on corn prices creating a buying opportunity.
Seattle PI on the year long moratorium against fast food restaurants in Los Angeles.