Worsening crop conditions to take long-term toll on restaurants

In this weekly Commodities Watch column, John T. Barone, president and commodities analyst for Market Vision Inc., offers a snapshot of the state of commodities for restaurants.

On Friday, the USDA confirmed what everyone suspected: This year’s corn crop is now an “official” disaster.

The USDA dropped corn yields to just 123.4 bushels per acre (bpa), down from a pre-drought forecast of 166 bpa just two months ago. 2012-2013 U.S. corn production was cut by 2.2 billion bushels to 10.8 billion, the lowest since 2006-2007. The 2012-2013 corn price forecast was bumped by 39 percent, from $5.90 to $8.20 per bushel.

In wheat, both 2012-2013 U.S. supplies and projected ending stocks were raised, but tighter world wheat supplies and sharply higher corn prices caused the USDA to raise its 2012-2013 wheat price forecast by 22 percent from $6.80 to $8.30 per bushel.

In addition, the USDA lowered both yield and output for the 2012-2013 soybean crop. As a result, the 2012-2013 soymeal price forecast increased from $380 to $475 per short ton, and the soy-oil forecast rose from $.5450 to $.5500 per pound.

So what does this news mean for restaurants? Higher wheat prices for bread, pizza crust, pasta, flour tortillas, bakery products, etc., are obvious. But wheat is a small fraction of the overall cost of these items, so a 22-percent jump in wheat prices may only amount to a 3- to 5-percent increase in finished baked goods. The “sneaky” price increase will come from the big bump in corn and soymeal prices. That’s because they are the primary feed inputs for poultry, dairy cows, pork — and this year, cattle, because grazing pastures have also been toasted by the drought.

Livestock and poultry producers will quickly shift from profits to losses, and they'll react by cutting production. These production cuts, which are already beginning to take place, will not significantly impact restaurant costs until 2013. Part of the lag is that flock/herd reductions will take place over time, and the balance of the lag is related to contracts that most chain restaurants already have in place with their suppliers.

With beef, we will see what’s known as a “boomerang” effect. Currently, cattle ranchers are liquidating, selling off inventory and breeding stock at an accelerated pace. This is currently having the effect of inflating available beef supplies and, as a result, beef prices have been moving lower over the past month. But come spring of 2013, when seasonal beef demand kicks in, there will be hell to pay. The USDA says beef prices will be 4- to 5-percent higher next year.

Cattle futures prices for 2013 are averaging in the $135 range, versus $121, so far this year. We may see something along the lines of double the USDA estimate for beef-price increases in 2013.

Contact John T. Barone at jbarone@mktvsn.com.