Prices for milk, beef, sugar on the rise

Prices for milk, beef, sugar on the rise

By Julie Jargon and Ilan Brat, Dow Jones News Service

6:51 PM EDT, November 4, 2010

An inflationary tide is beginning to ripple through America's supermarkets and restaurants, threatening to end the tamest year of food pricing in nearly two decades.

Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months. And food makers and retailers including McDonald's Corp., Kellogg Co. and Kroger Co. have begun to signal that they will try to make consumers shoulder more of the higher costs for ingredients.

For food executives, how quickly to pass along higher costs presents difficult choices. Missteps could be costly when the economy remains weak. Many Americans, nervous about high unemployment, have pledged allegiance to their pennies and are willing to trade down on brands, switch supermarkets, opt for Burger King over Applebee's, or stop dining out altogether to save money.

"The big challenge will be, how much can we swallow and how much can we pass along?" said Jack Brown, chief executive of Stater Bros. Markets, a 167-store grocery chain in Southern California.

Stater Bros. has seen the prices it pays for cereal rise 5 percent in recent months. The chain has passed about half the increase on to consumers while making up for the rest by trimming other expenses, such as what it spends on cell phones and delivery truck tires.

Kraft Foods Inc., Sara Lee Corp. and General Mills Inc. already have said they'll raise prices on certain items. Starbucks Corp. backtracked on an August announcement that it would hold coffee prices steady, saying in September it would boost prices of larger and hard-to-make drinks. This week, cereal maker Kellogg hinted that it will be raising prices, without disclosing specifics.

Grocery chains Safeway Inc. and Kroger have said they'll pass supplier increases along to consumers.

Domino's Pizza Inc. is letting consumers decide whether they're willing to pay more. The company is offering two medium, two-topping pizzas for $5.99 each but has recently offered the option of converting one of them to a premium pizza, with more toppings, for an extra $2 — a price increase, in effect.

BJ's Restaurants, a casual-dining chain, plans to raise prices early next year by about 2.5 percent — but only after upgrading its table settings and decor. "In this business, you can't just raise prices without improving the overall dining experience," BJ's chief financial officer Greg Levin said in October.

Costs are being driven by growing demand for meat in China, India and other emerging markets. That's driven up grain prices, which in turn boost the cost of chicken, steak, bread and pasta. Grain prices also have been nudged higher by drought in Russia, planting problems around the world and speculative trading.

Food prices are rising faster than overall inflation. The consumer price index for all items minus food and energy rose 0.8 percent over the year to September, the lowest 12-month increase since March 1961, the Bureau of Labor Statistics said. The food index rose 1.4 percent, however. The U.S. Agricultural Department is predicting overall food inflation of about 2 percent to 3 percent next year.

The current pressure is nothing like it was in October 2008, when food prices were rising at an annual rate of 6.3 percent and some hard lessons were learned when producers passed along those costs: Shoppers switched to private-label products.

For now, Weis Markets Inc., a 164-store grocery chain based in Sunbury, Pa., is holding firm. For the past two years Weis has maintained a "price freeze" on 1,500 staple items. "If we can hold on to the lower prices until the end, and be the last to move up, it's worth being patient," said chief executive David J. Hepfinger.

Wal-Mart Stores Inc. executives told investors last month that they expect "very moderate" inflation next year. For now, Jack Sinclair, Wal-Mart's executive vice president of grocery merchandise, said it would be "difficult" to hike retail prices because demand remains weak.

McDonald's chief financial officer Pete Bensen recently told investors he expects costs to rise 2 percent in the U.S. and 3 percent in Europe next year.

"The question will be exactly at what point will we be able to take some of that pricing," he said, adding that the burger chain is likely to raise menu prices sometime next year. The last time McDonald's raised menu prices in the U.S. was in the fourth quarter of 2009, with a 1 percent increase over the year-earlier period.

Worries aren't all on the low-end. Gibsons Bar & Steakhouse, a three-unit chain in the Chicago area, said that in the last four months, the price it pays for a New York strip steak rose to $23 per pound from $19 per pound. It's reluctant to pass that cost along. "I think there's a ceiling on how much people are willing to pay for a meal and for an individual piece of steak," said Gregg Horan, Gibsons' director of operations.

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Dairies brace for higher prices

by Cindy Snyder Ag Weekly correspondent

Thursday, November 4, 2010 12:23 PM CDT


TWIN FALLS - Idaho's dairy producers are bracing for higher feed prices after a government forecast shaved a half billion bushels off the 2010 corn estimate.

USDA forecasters cut nearly 7 bushel per acre off the projected U.S. corn crop, for a national average of 155.8 bu. per ac. That's the largest yield reduction cut ever made surpassing the 4.5 bu. cut made in 1995. While that adjustment was enough to catch the market's attention, what it did to the the rest of the corn balance sheet is gut wrenching for livestock producers.

Ending stocks are forecast at 902 million bu., down 214 million from the September estimate. If the estimate holds, this will be the lowest carryout level since 1996-97.

This brings the stocks as a percent of use to 6.7 percent, only slightly higher than the the 5 percent seen in 1995-96 - even though the 2010 crop is still projected to be the third highest on record. USDA now estimates the 2010-11 corn price will average $4.60 to $5.40 a bu., well above the previous record of $4.20 during the 2007-08 marketing year.

And that's what's got livestock producers scared. Grain prices are expected to remain strong all winter as the battle for acres unfolds. At least one analyst says another 6 million acres of corn may be needed next year just to repair the corn balance sheet.

Kelly Olson, administrator for the Idaho Barley Commission, points out another troubling number in the report. USDA forecasters put demand for ethanol (4.7 million bu.) at about the same level as feed usage (5.4 million bu).

"With ethanol, we've created demand for almost a second livestock sector in this country," Olson said. "And ethanol demand is not going to get any smaller."

The federal Environmental Protection Agency released its new Renewable Fuels Standard in mid-October which calls for use of 15 percent ethanol blends in cars by 2015.

"Ethanol has been the game changer for corn," Olson said. "Ethanol demand is almost price inelastic."

That price can still ration demand was evidenced when several ethanol plants filed for bankruptcy after corn prices spiked in 2007-08, but Olson points out that the industry had undergone rapid expansion just before corn prices skyrocketed.

The industry is sized to match its demand more closely this time.

INDUSTRY WEAK

The rally comes at a difficult time for Idaho's dairies. The milk industry was just starting to repair its balance sheets after 18 months of low milk prices. Feed prices surged in 2008, just before the world recession began and dried up world demand for dairy products. As demand fell off, milk prices sank below the costs of production.

Milk prices are up about 30 percent from a year ago, and dairies were beginning to repay debts incurred during the prolonged period of low milk prices. But a return to higher feed prices threatens that recovery.

If corn futures are trading at $6 per bu., southern Idaho dairies are paying about $7 per bu. when basis, transportation and grinding are included. The December corn contract was trading around $5.77 per bushel in early November.

Unfortunately, most dairies in southern Idaho did not hedge their corn needs last summer when December corn futures were trading around $3.75 per bu.

"At the time it was logical not to hedge," said Rick Naerebout, with Western Dairy Business Solutions. "The new crop estimate was for the biggest corn crop ever and it looked three-fifty was going to be the top of the market. Most people thought corn was going to be three dollars (per bu.)."

In other years with similar projections and similar growing conditions, crop estimates have grown as acres are harvested, and price falls as corn piles grow. Most dairymen decided to wait to lock in their commodity needs expecting prices would come down.

Instead, corn prices took off in mid-September and the USDA's October corn forecast added fuel to the rally.

As long as milk prices remain above $15 per hundredweight through the end of 2010, dairies should be able to absorb the higher feed costs and continue to service their debt. But if milk prices fall to $14 per cwt. - as forecasted for all of

2011 - and feed prices remain strong, dairies won't be able to cover their cost of production.

Dairy profits are tied heavily to the cheese market. Block cheese prices have increased 37.25 cents per lb. since the end of June. But last Friday, the spot cheese price fell by

3 cents to $1.74 and prices slipped another 2 cents on Monday. Traders quickly factored the lower cheese price into milk prices, and the November Class III milk contract lost 55 cents on Friday to close at $15.55 per cwt.

"With six dollar corn on the corn, dairymen can't make money at fourteen dollar milk," Naerebout said. "Two-thousand eleven is going to be a rough year for dairymen."

HAY HIGHER

While the USDA's projection sent the corn futures market up sharply, feed prices had already been edging upward since late summer. Most dairies had contracted their corn silage needs before the rally in corn futures started. Overall, corn silage prices are comparable to last year, but hay is going to be more expensive.

Dairy quality hay supplies are tight thanks to a cooler than normal summer delayed first cutting and wilted hay yields throughout the entire season.

Favorable weather late

in the season allowed growers who got a fourth cutting to put up excellent quality hay, but there's just not much of it. Dairy hay is selling for $155 to $170 a ton, but many expect it to hit $200 by the end of the year.

According to the Agricultural Marketing Service, good quality hay in Idaho was selling for $130 to $160 a ton in late October, up from $100 to $135 a ton last year.

Dairies have been buying hay hand-to-mouth and higher corn prices are likely to spillover to the hay market as well. Feeding high quality hay can allow dairies to cut back on the quantities of other commodities in the ration, but "commodity prices are still going to sting," Naerebout said.

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