Calm before the storm on food price front

Don't panic.

That's what food retailers and restaurant operators are saying about the pending jump in food price inflation due to the drought.

Food prices are expected to trend higher in 2013 because of this year's drought, which has cut deeply into yield projections on corn, soybeans and other staples of the national food supply. And Jim McVeigh, owner of Sav A Lot grocery at 1625 J St. SW in Cedar Rapids, foresees increases in the price of green beans, corn, meat and some other food items.

"I'm sure things are going to go up a little bit. But as long as it doesn't get to a massive shortage we will be OK," McVeigh said.

One of his greatest concerns about the situation is that consumers and businesses will make matters worse by hoarding, he said.

McVeigh said he attributes recent increases in egg prices to hen deaths caused by the heat, and monthly increases of 7 to 10 cents per gallon in milk over the past several months - cows give less milk when stressed by higher temperatures - have been consistent with past seasonal trends.

Mainly, he advises customers worried about food prices to chill.

"I tell people not to get too worked up about that stuff," McVeigh said. "Most of it's media hype."

In fact, consumers are benefiting indirectly right now from the drought through falling prices on certain meat items, especially pork. Livestock producers often cull their herds during periods of high grain prices to avoid being caught in a cost squeeze between the rising price of grain and the prices they can get for their livestock.

That causes the price of livestock to fall.

Mark Martin of Nelson's Meat Market in Cedar Rapids said the cost of poultry has taken a little jump recently, but consumers are getting a break on some prime beef.

"Right now, we're enjoying a pretty good respite for prices because they (livestock producers) are dumping cattle at a pretty good rate," he said.

Martin's main concern is that supplies of the highest grade beef, his store's specialty, will fall short  because producing it requires livestock producers to feed the animals longer and use more grain.

"I've talked to my suppliers and said, 'We've been buying from you for 20 years, and we always pay our bills on time - keep that in the back of your mind if supplies get tight,'" he said.

At the Lighthouse Inn in Cedar Rapids, one of Iowa's oldest restaurants, lower beef prices have been a plus for business in recent months. Longer term, the Lighthouse's Steve McAtee said, "It's just a matter of time before we feel that" food price inflation.

McAtee expects higher prices to hit around the end of the year, or early 2013.

John Huntington said the price of some pork items has fallen in purchases by his Huntington's Restaurant and Lounge in Marion - but reports he's heard of lower beef costs haven't materialized.

In fact, in more than 33 years managing restaurants, Huntington said he's ridden out several periods of food inflation.

"It's always a concern because we hate to raise prices," Huntington said.

Profit margins in the restaurant business are already low, Huntington said, making it difficult for restaurant operators to absorb cost increases without raising prices. Raising menu prices can drive away business, Huntington said, depending on the economic climate.

One local restaurant, Capone's, closed this past Monday, leaving a sign on its door saying "Closed due to the economy." Huntington wouldn't be surprised to see others close in the near future.

The price of corn is the main issue in food price inflation, Huntington explained. Corn is an ingredient in most prepared foods, due largely to such ubiquitous corn-based ingredients as corn starch, corn oil and high fructose corn syrup.

The price of No. 2 yellow corn for September delivery at Cedar Rapids area terminals Wednesday, for example, was close to $7.60 per bushel, while the price of soybeans Wednesday was a lofty $16.25 per bushel.

Fortunately, grain prices historically are a minor part of the overall cost of food, with the majority of the finished product cost coming from processing, packaging, distribution, marketing and profit margins.

Bill Aossey of Cedar Rapids-based food distributor Midamar Corp. blames speculation rather than market fundamentals for much of the increase in grain prices.

Aossey noted most of his customers expect food prices to increase, and large national restaurant chains have already begun preparing for it.

Big chains have greater control over food price increases through national purchasing contracts for hundreds or thousands of restaurants, he said, but local independent restaurants and other retailers lack the resources to blunt the impact of food prices.

Small grocers don't have the credit lines or cash to advance-purchase large quantities of food items, Aossey said, and don't have the storage space to inventory extra items.

All of which doesn't mean big chains won't be hiking their prices.

In a conference call with analysts Aug. 9, the chief financial officer of the Wendy's restaurant chain said the company would make cuts and implement selective price increases to combat higher beef costs. Stephen Hare, chief financial officer of the 6,500-unit chain, said he expected rising beef prices to be the largest driver of its commodity spending.

And while Aossey  said that his customers are now enjoying lower prices on some pork and beef items, he pointed out that it can't last.

"What I foresee is, we're going to have a rebound that's probably going to scare people to death," Aossey said. "It's going to bounce, and when it bounces people usually stop buying at all for a few weeks."

Aossey isn't overly worried about the impact of food costs on Midamar, which is a middle man in the food distribution chain. He said it mainly has to monitor prices from its suppliers frequently during periods of food price inflation to ensure it doesn't quote prices to customers based on outdated cost information.

Food inflation is currently at acceptable levels. The food component of the Consumer Price Index in August was up 2 percent from a year ago. Food price inflation could be limited to a range of 2.5 to 3 percent in late 2012, before jumping to a 4 percent to 5 percent range during 2013, according to the USDA.

Beef and chicken prices led the wholesale food price index gains in August, according to the USDA, with beef rising 15 percent versus year-ago levels, and chicken up 16 percent. Wholesale dairy and pork prices remain below a year ago, the company reported, although the trend is expected to reserve in 2013.

The price of foods purchased for at-home preparation and serving slowed to 1.5 percent in August, while the cost for food served away from home recorded a 2.8 percent increase, according to a report from Advanced Economic Solutions.

Wholesale dairy and pork prices remain below a year ago, although the trend is expected to reserve in 2013.