|August 2012 •|
IN THIS EDITION
Food Industry Deals with Great Drought of 2012
July of 2012 is now officially the hottest month on record in the U.S. and it was one of the driest in history as well. August hasn’t been much better. Obviously, this does not bode well for the American farmer or the U.S. food industry.
As the world’s largest producer and exporter of staple grains such as corn and soybeans, the country is experiencing the most severe farm production shortfalls since the Dust Bowl days of the 1930s.
The Great Drought of 2012 will likely cost the U.S. food export industry billions in lost revenue. But unlike droughts in previous years, it should not cause a major disruption in worldwide food supplies.
While some of this season’s corn crop is probably lost for good, much of the soybean crop could be saved by late summer rain. But if the drought persists, the situation could get significantly worse.
Americans will face higher food prices at the supermarket next year, but the impact on overall inflation will be modest, the Kansas City Federal Reserve Bank said in a report.
It said the drought, which has cut corn and soy bean yields and sent their prices on the futures market soaring, could add 4 percent more to annual food prices over the next year, drawing parallels with a similar situation in 1988.
The drought will also affect meat and dairy prices as more than 70 percent of the beef herd is in states where pastures are rated as poor to very poor.
Heat stress has lowered milk production and rising feed costs are also pressuring hog and poultry producers, the Kansas City Fed said.
The near-term effect will be low meat prices as farmers bring their animals to the market a bit early to cut losses from the high cost of feeds. In the long-term, however, a shortage of animals for slaughter will push up prices.
"A second wave of higher food prices tends to emerge from rising meat prices. Historically, within a year of a drought, the initial influx of meat supplies disappears and smaller breeding herds produce fewer slaughter animals and meat supplies shrink," the Kansas City Fed said.
The ongoing drought will likely accelerate wholesale food price inflation, according to a spokesman for the National Restaurant Association.
Hudson Riehle, senior vice president of the NRA’s Research & Knowledge Group, noted that one-third of a restaurant’s sales typically go toward food purchases, so wholesale food costs are a big concern for many operators. In fact, he noted, restaurateurs rank food costs as the second biggest business challenge.
NRA research found wholesale food prices in June stood 2.2 percent above their year-ago levels, and have remained elevated because of continuing gains over the last two years. In 2011, wholesale food prices were up 8.1 percent, the highest annual growth rate in more than 30 years, on top of a 4.9-percent gain in 2010. This year’s drought, Riehle says, will only put additional cost pressures on food.
“With food costs rising, restaurant owners are adjusting their cost management strategies while managing consumer expectations of value at the same time," he said. "With a typical restaurant averaging pretax profit margins of 3 percent to 5 percent, operators will have to manage their escalating input costs to ensure those margins remain viable."
With the nation’s economic recovery still sluggish, consumers’ spending habits remain tentative, and restaurants are reluctant to raise menu prices.
"Raising menu prices in this moderate economic climate is always given careful consideration by restaurant operators, especially when consumers' cash-on-hand growth remains constrained and the operating environment is so competitive," Riehle said.
Scott Bergren, chief executive of Pizza Hut U.S., which is part of Yum Brands Inc., said the pizza chain hasn't raised prices in 2 1/2 years and doesn't want to start now.
Wendy's, the nation’s number two burger chain, said the drought is causing temporary relief in beef prices, as ranchers send cattle to market sooner. But the company expects beef inflation to return to double-digit levels next year, as higher feed costs ultimately result in a thinner herd of cattle.
John Schnatter, founder and CEO of Papa John’s Pizza takes the long view. "Every quarter has got a commodity problem," Schnatter said on a recent conference call. "It's just kind of human nature to think you know you won't have a drought or channel up on cheese, but there is always something going on that you got to navigate around, and that's just the nature of the beast."
New Study Shows Effects of Menu Labeling
A new research study out of Seattle shows that menu labeling laws are having an impact on what restaurants are offering to customers. Whether or not posting calorie counts has an impact on what people choose to eat appears less clear.
The research study examined Seattle’s new city ordinance that requires chain restaurants to post nutritional information next to each menu item. It’s similar to the provision in the Affordable Care Act set to go in force nationally next year requiring chain eateries with 20 or more locations to prominently post calorie info on printed menus and menu boards.
The study found that 18 months after the menu labeling law went into effect, calorie counts in those restaurants have dropped. Calorie counts fell an average of 7 percent in sit-down restaurants, with smaller declines noted at fast food restaurants. Calorie counts at pizza restaurants were unchanged.
Researchers attribute the changes to smaller portion sizes and to restaurants substituting lower calorie ingredients.
As far as whether menu labeling laws are getting people to eat healthier, multiple studies seem to indicate the new requirements are having a negligible impact.
Menu labeling has been a fact of life for Philadelphia restaurants for several years now, and research shows it doesn’t seem to be having its desired effect. In a presentation at the University of Pennsylvania's Leonard Davis Institute of Health Economics (LDI), Dr. Brian Elbel said that in the fast food venues and populations studied so far, menu labeling has had no significant impact on consumers' high-calorie food choices.
Dr. Elbel is director of New York University’s Nutrition and Obesity Policy Research and Evaluation Network. He’s been researching the subject since New York State began its menu labeling program in 2008. His studies of fast food restaurants in New York City and Newark, N.J., found that 28 percent of customers said they were “influenced” by the menu info. But analysis of menu receipts showed no change in the overall calories purchased.
"No matter how we cut this, no matter what we controlled for, no matter what sub groups we looked at, there was no difference in the total calories purchased," said Elbel.
Research conducted with 14-location chain Taco Time concluded that menu labeling had no effect on purchasing decisions. Another study with the Starbucks chain found that customers reduced consumption by an average of about 15 calories.
Elbel concludes that the menu labeling law just can’t compete with the multi-million dollar marketing campaigns waged by the major restaurant chains. "The influences against healthy eating are large, well funded and ubiquitous," said Elbel. "Everywhere you turn you're going to see another advertisement for another unhealthy product."
So far, at least, menu labeling efforts don’t seem to be putting much of a dent into the nation’s obesity epidemic. Whether that will change once the law goes into effect nationally…well, that remains to be seen.
Top Trends Spotted at the Summer Fancy Food Show
Foodies from across the country, as well as foreign lands descended on our nation’s capitol for the 59th annual Summer Fancy Food Show staged by the National Association for the Specialty Food Trade (NASFT). Next summer the show will return to its original home at the Javits Center in New York City.
An illustrious panel of food writers from media outlets such as The New York Times, In Style magazine, Better Homes & Gardens and others were asked to be on the lookout for the key trends spotted at this year’s gathering in DC.
At the conclusion of the show, the group came up with a top five, listed in no particular order.
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