Cost Forecast

By Peter Thor, President, Bellissimo Foods

First the bad news.  Pepperoni and other pork and beef products will continue to climb in price.  The March changes in pepperoni pricing by leading manufacturers was $0.15 – $0.20 per pound, up 8% in one month.  The basic ingredients of pepperoni (pork and beef) continue to be priced at historically high levels.  Pork 72’s, as oft used primary input, generally cost $0.40 – $0.50 per pound FOB plant.  Pork 72’s averaged just $0.36 per pound in December of 2015 and $0.53 per pound in 2016.  Today, Pork 72’s cost $0.68 per pound, a 24% increase since the first of the year.

Beef, usually the second ingredient in pepperoni, has seen an even greater increase in cost.  Beef 50’s (50% trim) have increased in cost from $0.37 per pound average in December 2016 to $0.79 per pound in mid-February to $0.96 per pound in mid-March; a 160% increase.  There are numerous conspiracy theories about the causes of these changes, but deliberate industry capacity consolidation and raw material spot shortages are at least contributing factors.  Some experts point to lack of actively traded futures as well, but in a concentrated industry one wonders how this could happen.  Implications include supplier changes and spot shortages in product, not to mention large increases in distributor costs.  The good news relative to pepperoni and other related pork and beef products is that additional capacity is being planned and built by reputable suppliers.  Increased production will likely help to moderate costs beginning in the summer.  One of the priceless attributes which we appreciate in foodservice (unlike retail) is that it is still a people business.  Those companies which take care of their customers well will earn long lasting loyalty and business.

Other key ingredient categories have not been adversely affected by weather or capacity.  Despite California milk production declining slightly, overall US production increased by 2.7% in 2016.  Wholesale CME block cheese prices have decreased since the beginning of the year, declining by $0.20 – $0.25 per pound depending on the product.  Cheese production has increased along with milk production, keeping inventories relatively high.  Exports are also recovering, but are not expected to have an adverse price impact at current levels.  Lower animal feed costs have helped keep costs under control.  Wholesale block cheese prices are currently below their five-year average, but are expected to increase modestly through the year.

In addition to weather and other unknowns, this year offers additional risks to the regulations.  Embedded in this are a variety of ag industry subsidies and regulations which, if changed, could quickly benefit or hurt the various components of the food industry.  So too will be any changes in foreign policy which restricts or alters the cost structure of food imports and exports.

Poultry product costs has been similar to 2016, but chicken breast and tenderloin prices are expected to increase 10-15% in the second quarter due to seasonal factors.  Chicken production costs also benefit from low grain costs, but average bird weights have not increased compared to last year.  While breast costs will go higher, wing costs should come down following the end of football and winter sports.

Oil costs have been relatively flat except for olive oil due to the persistent drought in Spain.  Fortunately, import price increases have been largely offset by the rising value of the US $ compared to the Euro.  At the current 1.06 US dollars per Euro, the value of our currency for purchasing many imported goods is a full 10% better than last year.

Domestic grain supplies are still a question mark given heavy snows in North Dakota and Canada leading to planting delays.  However, the USDA reported that this year farmers have planted the smallest number of wheat acres in 100 years.  We expect seasonal support due to crop concerns but the offset is large domestic wheat stocks.  Overall, there is no upside price momentum.

Please contact Delco Foods for up-to-date information on ingredient cost changes and options.  Please remember that Delco is a pizza expert and is dedicated to the continued success of independents – where quality lives!

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