Food futures: Buy now, pay later
Locking in food prices can be a losing venture or a saving grace.
February 18, 2009 by Valerie Killifer — senior editor, NetWorld Alliance
Betting on food futures is as much a gamble as taking $200 toLas Vegasto play the slots. Sometimes you win, and sometimes you lose.
Einstein Bros. Bagels won the futures game in 2008, having locked in wheat prices a year ahead of the record increases that pummeled the restaurant industry.
It may be time to place another bet.
While the costs of grains and vegetable oil are on the way down, meat costs are increasing, with dairy products expected to follow suit.
According to the National Restaurant Association, wholesale food costs are expected to go up 2.9 percent in 2009. Although that number is significantly lower than the 8-percent hike food costs took in 2008, operators should continue to take a hard look at when, and for how long, they should play the market. "Locking in, while not even at a great price, at least gives you a point of reference to know your downside exposure," said Craig Dunaway, president of Penn Station East Coast Subs. "If you lock in at a high price, at least you know what that price is."
Supply and demand
Who sets those costs is one factor operators need to consider when hedging their bets, as haggling over locked-in prices can last from six weeks to six months, given the differing mindsets at the table.
"I think it's smart to negotiate and not let the supplier dictate price," Dunaway said. "They're trying to maximize the cash they get, and as a chain, you're trying to minimize what you pay. I'd rather control my destiny than have a supplier/vendor control it."
When Burgerville CEO Jeff Harvey goes into negotiations, he's mindful of more than cost, quality and supply consistency. Because he relies so heavily on local suppliers, he strives to pay them prices that enable them to stay in business.
At times, some of Burgerville's prices have ended up higher than the market average.
"We haven't gone back to renegotiate, because of this mutual commitment we've got,"Harveysaid. "If you're in a business where the supply chain is important, a good supplier is one you want to be around for years, so it's smart business to pay."
Every quarter to six months, Burgerville officials meet with both national and local suppliers to swap business updates, and then the pricing conversation begins.
"But whatever we decide as the price is going to be the price for the year,"Harveysaid.
For businesses that buy a year or more ahead, the risk naturally increases for operators and suppliers alike.
"The period of time creates the ‘risk' factor. The longer you go out, the more risk the supplier wants to factor in the price. The shorter the period, in theory, the less risk there is," Dunaway said. "I think you really, really need to understand (futures) to be successful, and with the volatility, you can lose your shirt."
What's driving the increase?
In spite of some declining commodities costs, prices are still above historic norms from almost all food inputs that a restaurant uses, said Bill Lapp, principal of Omaha, Neb.-based Advanced Economic Solutions.
A major catalyst for the increases has been the advent of a biofuels production mandate.
"We're absorbing a lot of the production of grains worldwide into energy channels rather than food channels," Lapp said. "While the economics are not favorable for the biofuels producers, mandated increases in their production will keep the pressure on in the coming years, unless those policies are reversed."
Lapp said restaurant operators will have to continue working with suppliers to moderate cost increases, and if they can't offset those costs by locking in prices, consumers will feel the effects.
