Restaurants hit with higher food prices caused by drought; small, local eateries struggle most

This summer's oppressive drought scorched Midwestern crops, raising the cost of feed, dairy and meat. Those high prices are impacting the size of restaurant menus across the U.S., with small, local eateries feeling the pinch the most. The cost of food now rivals labor as the top expense for most restaurants, Tiffany Hsu of the Los Angeles Times reports. Owners are reducing menu offerings, shrinking portion sizes and considering staff cuts. (L.A. Times photo by Francine Orr: patrons eat at Smokin' Jonny's BBQ in Gardena, Calif.)

Restaurant prices have been rising for more than a year, with wholesale food costs increasing by 8.1 percent in 2011, Hsu reports. The increases will continue, but at a quicker pace, because the price of corn, which is a key component in livestock feed, powdered sugar, salad dressing, and more, jumped by 60 percent this summer. Chicken and turkey prices rose by 5.3 and 6.9 percent, respectively, and eggs now cost 18 percent more. Analysts expect overall food prices to rise from between 5 to 20 percent by year's end.

Big chains are able to weather drought price hikes well, but small restaurants will suffer, Hsu reports. "The smaller mom-and-pop restaurants are going to get hit with the drought very shortly," Motley Fool analyst Don Krueger told Hsu. It's forcing small restaurant owners to make tough decisions. Restaurant consultant Kian Abedini told Hsu more restaurants are using small plates and tapas dishes to save money. He's also noticed cheaper cuts of meat on menus, along with more curry and rice dishes. Pickled items are showing up as well because they're less expensive than fresh foods, Abedini said.(Read more)

California poultry company files for bankruptcy; will be eighth poultry firm to fold in the last year

Zacky Farms LLC, a California poultry company that dates to the 1920s, filed for bankruptcy this week. High feed costs following this summer's oppressive drought led to the decision, P.J. Huffstutter of Reuters reports. The company employs about 1,500 people in southern California, and listed between $50 and $100 million in assets, with debts in the same range.

The bankruptcy filing showed that the company's largest unsecured creditors are feed company Western Milling, to whom Zacky Farms owes about $6.6 million, and poultry company Foster Farms LLC, which is owed about $1.2 million. "Zacky Farms will be the eighth poultry firm to be sold, entered into Chapter 11 bankruptcy or shut down altogether since 2011, according to data from trade group National Chicken Council," Huffstutter reports. (Read more)

Huffstutter advises in an email that Zacky's is ranks about among poultry companies in revenue, and about 10th among turkey packers.

Pentagon to buy six-month advance supply of meat from struggling livestock producers, on Obama order

The Defense Logistics Agency is buying a six-month advanced meat supply, estimated at more than $100 million, for its Department of Defense customers by order of President Obama to give some relief to the drought-riddled livestock industry. The DLA asked its top three vendors to buy, store and distribute beef, pork, lamb, chicken and catfish.

The vendor Subsistence provided hundreds of millions of pounds of meat to the U.S. military and other DOD agency across the world in 2011, reports Rita Gabbett of Meatingplace. Subsistence officials are negotiating with prime vendors on storage and distribution fees, estimated to cost between $2.4 and $3.3 million.

Corn farmers, meat producers and biofuel makers argue over ethanol quota amid drought

A Kansas ethanol plant reecieves corn.
(NYT photo by Steve Hebert)

Three big agribusiness interests -- corn farmers, meat producers, and biofuel refineries -- are in a political fight to protect their interests amid the ravaging drought. At issue, reports John H. Cushman Jr. of The New York Times, "is whether to suspend a five-year-old federal mandate requiring more ethanol in gasoline each year, a policy that has diverted almost half of the domestic corn supply from animal feedlots to ethanol refineries, driven up corn prices and plantings and created a desperate competition for corn as drought grips the nation’s farm belt."

Meat producers, writes Cushman, "are demanding that the Obama administration waive the ethanol quota to ease rising feed prices. But ethanol producers worry that the loss of the quota will undermine the ethanol industry and do little for corn farmers but drive down the price of their stunted harvest. The meat industry, backed by several governors, lawmakers and even international food agencies, argues that the quota has distorted grain markets by sucking up corn when ranchers can least afford it. But the ethanol industry says that its corn consumption is down 12 percent since the start of the summer and that weekly ethanol production is at a two-year low. As corn prices have risen, refineries have scaled back production, idled dozens of plants and sold ethanol inventories. As a result, the industry may consume 10 percent less of this summer’s crop than last year’s, government and industry officials said." (Read more)

Drought one of worst in history, but not necessarily economic disaster, Kansas City Fed bankers write

"Severe drought has ruined one of the most promising harvests in U.S. history," but a weather disaster doesn't mean economic disaster, Federal Reserve Bank of Kansas City Vice President Jason Henderson and economist Nathan Kauffman write in the latest edition of the bank's quarterly publication, The Main Street Economist.

Though the U.S. Department of Agriculture recently cut estimates of the corn crop by 12 percent and the soybean crop by 8 percent, but "USDA’s price and yield projections suggest that U.S. corn revenues could rise 12 percent above June estimates and approach last year’s record highs." (Chart based on data from Commodity Research Bureau.) "Similarly, total soybean revenues are now projected to increase 3 percent above June 2012 estimates. A similar revenue pattern emerged during the 1988 drought. Still, final revenue estimates for 2012 will hinge on future weather patterns, final production losses and price responses to harvest expectations."

Individual farmers' situations depend on their crop choices, marketing strategies, the weather and crop insurance, the report says, but livestock producers are worse off: "Estimates suggest that over 70 percent of all beef cows are in states with pasture conditions rated as poor to very poor. With two-thirds of U.S. hay production areas experiencing drought, alfalfa prices have jumped 15 percent since May. In an attempt to limit losses, ranchers weaned calves earlier than usual and increased the placement of feeder cattle into feedlots. Combined with the increased shipments of feeder cattle from Mexico, the influx of cattle into feedlots contributed to a 12 percent decline in feeder cattle prices since mid-June. . . . USDA expects feedlot operations to lose more than $200 per head this fall. . . . Hog and poultry enterprises are also bracing against rising feed costs and falling profits." But if short-term losses reduce livestock head count, prices are expected to rebound.

Henderson is the bank's vice president and Omaha branch executive. Kauffman is an economist. Their report also addresses the drought's effect on transportation, meatpacking, ethanol, food prices and all consumer prices. To read it, click here.

Vilsack warns drought will worsen, raise prices; organic stock get a double hit as pastures dry up

The worst drought in decades is getting worse and will mean higher food prices for consumers, Agriculture Secretary Tom Vilsack said at a briefing in the White House Press Room yesterday. He also said the suggestion of waivers from ethanol mandates on oil companies isn't necessary because it's not affecting the price of corn, as some farmers have suggested.

Vilsack said an additional 39 counties have been designated as primary natural disaster areas, raising the total to 1,297 in 29 states. Here is the list. Russ Blinch of Reuters reports. Vilsack urged Congress to work with the administration to improve aid to farmers, something the new Farm Bill could do. The House has stalled on voting on its version of the bill. Peter Baker of The New York Times reports. Vilsack said more than three-quarters of U.S. corn and soybean crops are in drought-affected areas, and more than one third of those are now rated poor to very poor.

Corn prices have risen to almost $8 a bushel, making it difficult for livestock producers to buy animal feed. This will likely cause the price of beef, poultry and pork to rise late this year or early next. Iowa Pork Producers Association President Bill Tentinger told The Gazette in Cedar Rapids that high corn prices would force many pork producers out of business, and the new Farm Bill would only help crop farmers, not livestock producers. Analysts predicted a 4 to 6 percent increase in beef prices pre-drought, but Hibah Yousuf of CNNMoney reports consumers could see 10 percent increases if the drought and high corn prices continue.

Meanwhile, Bob Meyer of Brownfield reports, "The drought presents a particular challenge for organic livestock and dairy producers. Organic standards require a portion of the ration to include pasture, and when pastures have dried up that is a problem. Another problem is while the price of conventional corn and soybeans hits record highs, the price of organic corn and soybeans is even higher." For Meyer's eight-minute audio interview with Harriet Behar, outreach coordinator for the Midwest Organic & Sustainable Education Service, click here.