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As Food Prices Fall, Economic Pain Hits More Businesses

Consumers’ glee at the supermarket checkout over lower food prices isn’t shared by all: Farmers, grocers and restaurateurs are feeling the pinch of cheap milk, beef and corn prices on their incomes.

The U.S. is on track this year to post the longest stretch of falling food prices in more than 50 years, a streak that is cheering U.S. shoppers at the checkout line but putting a financial strain on farmers, grocery stores and restaurants.

The trend is being fueled by an excess supply of dairy products, meat, grains and other staples and less demand for many of those same products from China and elsewhere due to the strong dollar. Lower energy costs for transportation and refrigeration also are contributing to sagging food prices, say economists.

“Deflation is a godsend for consumers,” said Bob Goldin, vice chairman of food consultancy Technomic Inc.

Nationwide, the price of a gallon of whole milk on average was off 11% to $3.06 in July over a year ago; the price of a dozen large eggs fell 40% to $1.55 in the same period.

Those great bargains at the grocery store are spreading pain across the Farm Belt. Farmers and ranchers are getting less money for raw milk, cheese and cattle, forcing them to slash spending. Tractor suppliers like Deere & Co. DE 0.22 % are cutting production due to the farming slump.

Economists and food analysts say the supermarket price declines could last at least through year-end. The drop comes as weaker demand from China is broadly resetting commodities prices in everything from cheese to iron ore. The current food-price slump soon could beat the nine months of year-to-year declines experienced in 2009 and 2010—the longest stretch since 1960, according to the Bureau of Labor Statistics.

The price of food at home is down 1.6% on a seasonally unadjusted basis in the 12 months ended in July, according to the BLS.

Stephanie Hegre, a 46-year-old nanny in Thousand Oaks, Calif., has noticed an about 10% drop in her weekly food shopping bill. Her 16-year-old twin daughters go through a lot of milk, meat and bread, adding up to an average weekly grocery bill of about $200.

“I feel it has dropped by $20 a week which, when you’re on a budget, is noticeable,” said Ms. Hegre, who has been stockpiling staples in case prices increase. “We freeze bread and buy two weeks’ worth of bacon at a time,” she said.

The glut is so severe in some places that dairy farmers have been dumping millions of pounds of excess milk onto fields. The U.S. Department of Agriculture just bought $20 million worth of cheese in response to hard-hit dairy farmers’ requests. The cheese was given to food banks and others through USDA nutrition-assistance programs.

Ben Moore, a sixth-generation farmer who grows corn and soybeans on some 5,000 acres in Indiana and Ohio, said 2016 is shaping up to be his least profitable year in 20 years. Facing weak crop prices, he is making do with his current tractors and combines rather than upgrading his equipment, and is pushing for lower prices on pesticides, seeds and fertilizer.

On Friday, corn futures, which peaked in 2012 at more than $8 a bushel, closed at $3.16 a bushel, a seven-year low, on the Chicago Board of Trade.

“We cannot withstand $4 a bushel corn,” Mr. Moore said.

Farmers who had built a nest egg after a robust period earlier this decade now have exhausted those reserves, said Karl Setzer, a market analyst for MaxYield Cooperative, a West Bend, Iowa, grain marketer. “The guys that are heavily leveraged and those who don’t have a plan of action will suffer for a while.”

Falling costs are taking a toll on many food retailers. Grocery stores already have thin profit margins and deflation tends to reduce the value of their inventory. To stay competitive, they must cut prices on existing goods before lower-priced stables land on the loading dock, and have fewer opportunities to raise prices.

At least six national food retailers, including Costco Wholesale Corp. COST 0.03 % and Whole Foods Market Inc., WFM -0.13 % and four of the five largest publicly traded food distributors, including Sysco Corp. SYY 0.58 % and US Foods Holding Corp. USFD -1.66 % , have reported that their margins suffered in the last quarter because of food deflation, the first time analysts can recall so many grocers singling out deflation as a big problem.

“Deflation is kind of the elephant in the room,” Dennis Eidson, chief executive of SpartanNash Co. SPTN 0.15 % , which operates 160 grocery stores from Colorado to Ohio and distributes food to 1,900 retailers across the country, told investors this month.

Grocers such as Supervalu Inc. SVU 0.75 % and Smart & Final Stores Inc. SFS 0.08 % have been hit particularly hard. Even when the volume of products increased, profits have decreased in some categories because the price declines were so steep. Smart & Final’s division catering to restaurants sold 42% more packages of eggs during its most recent quarter but recorded a 34% drop in egg revenue because of the lower prices, Chief Executive David Hirz told investors.

Not all food has gotten cheaper. Total fruits and vegetables prices were up 1.4% in July from a year earlier in part due to the drought in California.

Wal-Mart Stores Inc., WMT 0.37 % the nation’s largest food retailer, has been one of the few to benefit from the falling prices, partly because it attracted more customers after slashing prices earlier this year. It reported strong second-quarter results this month despite “ongoing deflationary impacts in food.”

Normally, falling food prices would be good for restaurants, but with higher labor costs, they have had to raise menu prices, resulting in lost business. The second quarter was the industry’s weakest since the first quarter of 2010.

Three restaurant types posted declining sales in the quarter—fast casual, casual dining and family dining—and sales growth in every other restaurant category slowed except pizza, according to equity researcher William Blair & Co.

It has gotten a lot cheaper “to get beef at your local butcher and go home and grill,” said Todd Penegor, chief executive of burger chain Wendy’s Co., WEN 1.31 % which reported second-quarter sales below expectations.

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