No choice cuts on beef prices in 2014

Even though food costs are expected to stabilize somewhat in 2014, restaurant operators will still face pricing challenges, especially where beef is concerned, industry watchers and commodities experts say.

The National Restaurant Association’s2014 Restaurant Industry Forecast said the price of beef would rise this year.

“Regarding the food price outlook for 2014, there actually could be some relief across certain commodity groups … the major exception being beef prices, which are at this point forecast to move up higher than any commodity group this year,” said Hudson Riehle, the NRA’s senior vice president of research.

John Barone, president of commodities analysis firm MarketVision, agreed with Riehle, saying, “Beef, right out of the chute, is going to be the biggest problem [for operators] this year. People have been talking about this for at least the last six months to a year, but it’s really shaping up as a perfect storm for beef prices this year.”

According to Barone, the drought that plagued the United States during the last two years, combined with skyrocketing grain prices, thinned out the beef supply, driving prices to historic highs.

“Right now we’ve got the smallest beef cow herd – it’s historically small – and that goes back to the two years of drought where ranchers were unable to graze or feed their cows so they sent them to slaughter,” he said. “Now we’re left with very small supplies and competition in world markets whose beef demand is growing.”

He noted that because of the growing international demand for beef supplies, beef trimmings imported from Australia to the United States are now going elsewhere, like China and emerging economies in Asia. He also indicated that prices of winter beef cuts, such as roasts, rounds, chucks and briskets, are particularly high now, up 16 percent from a year ago and 36 percent above the five-year average.

“If restaurateurs were squeezed last year and the year before, they’ll be even more squeezed this year,” he said. The fact that we’re hitting record highs on winter beef items kind of foreshadows the fact that items, like steaks and burgers, may very well set record highs this spring.”

But the commodities analyst pointed out that restaurateurs are adapting to the higher prices and are changing their purchasing and operational tactics to accommodate the challenges.

“They’re tweaking specs and, possibly, changing the portion sizes or types of beef items they’re serving,” he said. “They’re using less expensive cuts of beef and putting focus on other proteins.”

While the quickservice segment caught a break last year when prices on ground beef did not go as high as expected, Barone said that would not be the case in 2014.

“Prices will be significantly higher,” he said. “In the fine-dining segment, choice beef prices may not set record highs, but select grade prices definitely will, so that may affect mid-tier chains in terms of percentage increases over last year. That’s why not too many [operators] are focusing on beef in terms of where they’re putting their promotional dollars. They’ve all made or are making adjustments to get more profits out of other parts of their menus.”

Barone also said an unexpected outbreak of Porcine Epidemic Diarrhea virus, or PEDv, which strikes newborn piglets, has greatly reduced litter sizes and could bring pork production down this year by 2 percent or 3 percent. As a result, prices won’t decrease as much as predicted.

“The USDA was forecasting around a 5 percent drop in hog prices this year, but I think those prices are going to end up closer to last year’s levels,” he said. “They’re going to wipe out the decrease we were expecting. Still, when compared with beef, it will be a good value proposition.

On the poultry side, he said producers are profitable again, thanks to reduced feed costs and increases in parts prices.

“They’re getting fairly decent money for their birds and bird parts,” he said, “and their costs are down significantly. As long as those prices don’t go down significantly, that should lead to an increase in production this year and keep prices in check.”

Barone predicted that smart operators taking advantage of lower breast prices would do well this year.

“There are two different whole bird markets – the small 2 ? pound to 3 pound birds used by QSR chains that serve cut-up chickens,” he said, “and the bigger birds grown primarily for their breast meat. The smaller birds historically have been high priced – about $1.04 per pound – during the winter and will remain that way in 2014. They’re not very efficient to produce and their numbers are somewhat limited.”

Manufacturers, he added, are putting their expansion plans in the bigger bird market since they produce more meat.

“We’re seeing chains like KFC promoting their boneless program rather than the whole birds,” he said. “That way, they can take advantage of the larger bird breast market. Everybody’s gotten smart about where the value is, what they’re going to promote and what they’re going to downplay.”

The NRA’s Riehle said that in addition to increased protein costs, menu prices would rise 2.4 percent this year.