It’s been a tough start of the year for some in the food industry, particularly when looking at various external factors disrupting the supply chain. Global shortages of key ingredients have translated into higher prices for chocolate and coffee, while important growing regions like Mexico and Brazil have been hit by unfavorable weather. Local food suppliers have also been affected, with drought ravaging many crops in California and diminishing the cattle supply. To add to these hardships, America’s meat supply is sure to be reduced as a result of the Porcine Epidemic Diarrhea Virus (PEDv).
So what do these unfortunate events mean for the food industry, specifically for food prices? Federal forecasters estimate retail food prices will rise as much as 3.5% this year, the biggest annual increase in three years. This rise comes on top of a 2.8% average yearly food price increase over the past 10 years, which is higher than the 2.4% average inflationary increase for all goods.
Unless this price increase represents only a small percentage of total costs, those forced to pay more will likely pass on the cost to consumers. But this move comes with a risk, as raising prices outright puts those in the food and beverage business at risk of losing customers. See how retailers and companies are negotiating this rocky territory in the age of shortages and price increases.
The meat shortfall: A boon to some
According to Rabobank’s report on the impact of the Porcine Epidemic Diarrhea Virus (PEDv) on the North American herd, the diminished hog supply will translate into a story of “the haves and have-nots.” Pig breeders struck by the full impact of the virus will suffer tremendous losses, while hog producers who escape the brunt of PEDv will be able to command the highest profits in Rabobank's 40-year record. Other winners include those who offer alternative meats, particularly poultry. As American beef production is predicted to fall close to 6% this year, people will likely turn to chicken as their main protein source for dinner. Consequently, Rabobank anticipates higher poultry prices and profit margins in the spring and summer.
Coffee prices going up, but not at Starbucks
Dealing with shortages is challenging for food producers, restaurants, and retailers alike. But some stand to gain from the higher prices, if they are lucky enough to have had the forethought to lock in prices before they increase.
Analysts are forecasting that the drought in Brazil, the world’s largest coffee supplier, will result in 20% less coffee in the region. Dan Cox, president of Coffee Analysts, a company that tests coffee quality for retailers, expects the consumer price will go up by 50 cents a pound in the very near future. That may drive some to buy only what’s on sale, try cheaper brands, or even look to alternative caffeine sources like tea.
However, higher prices for coffee doesn’t necessarily mean consumers will be paying more for their coffee shop lattes or espressos. Those who include a Starbucks drink in their daily routine can rest assured that prices are not set to go up—the company used futures contracts to lock in coffee bean prices for next year.
A twist of lemon instead of lime
The price of limes has risen exponentially, with some recently paying nearly $100 per case, up from around $14 last year. Bryan Black, director of communications for the Texas Department of Agriculture, explained what’s behind this price increase: "Mexico received some heavy rains that destroyed a large amount of the lime crop, so with limited supplies we are seeing lime prices skyrocket." On top of the weather problems, some lime growers have been thwarted by Mexican drug cartels operating in the same area in Michoacán. Violence amongst these drug gangs has disrupted lime shipments.
But Mexican fare calls for limes, so what are Mexican restaurants to do? John Berry, who runs La Fonda, a Mexican restaurant in San Antonio, shared his solution: "We don't buy them. We substitute lemons." Likewise, Taco Cabano, a San Antonio-based Tex-Mex chain tweeted the following on March 25: “A nati’l lime shortage means we’re forced to temporarily serve lemons only on our Salsa Bar. Don’t panic, the margaritas will still be lime.”
Shortages can prove devastating for some, but a windfall for others. To situate one’s business in between those two extremes takes some planning and ingenuity, like locking in coffee prices in advance or finding substitutions for pricey ingredients. One thing’s for sure though: When the world refuses you limes, you just may have to replace them with lemons.
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