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Food Costs Rising as Coke, Chipotle Pass on Commodity Gains
Food prices in the U.S. may be rising faster than the government forecast as companies including Coca-Cola Co. (KO), Safeway Inc. and Chipotle Mexican Grill Inc. (CMG) pass higher commodity costs on to consumers.
Rallies in meat, grain and dairy products since February may mean the increase in food costs will surpass the 3 percent to 4 percent that the U.S. Department of Agriculture predicts, said Christopher Hurt, an agricultural economist at Purdue University in West Lafayette, Indiana. The USDA today left its forecast for this year’s gains unchanged and said 2012 prices will increase 2.5 to 3.5 percent.
“Food inflation will continue to increase through this summer to this fall,” Hurt said July 19 in a speech in Washington. “We can’t replenish supplies until a new crop comes in, and that puts a lot of basic pressure on food prices.”
Costs for groceries and restaurant meals rose 3.7 percent in the 12 months through June, government data show. During the period, rice, wheat, corn, soybean and milk futures touched the highest levels since at least 2008. Yum! Brands Inc., owner of the KFC and Pizza Hut restaurant chains, said July 13 that U.S. commodity costs this year would rise as much as 7 percent, after previously predicting a 6 percent increase.
Corn futures rose 76 percent in the 12 months through July 22, wheat jumped 16 percent, raw sugar advanced 71 percent, and rice was up 65 percent. Cattle and hog futures climbed at least 21 percent.
Coca-Cola, the world’s largest soft-drink maker, said July 19 it will raise North American drink prices 3 percent to 4 percent in the second half of 2011, after 1 percent to 2 percent increases in the second quarter. The Atlanta-based company cited higher costs for raw materials, including fruit, metal and oil used to make plastic packaging.
Futures for orange juice traded in New York, which is used in Coca-Cola’s Minute Maid beverages, were up 37 percent in the past year through July 22 as inventories declined. Coke, which also uses corn as a sweetener, is trying to stay ahead of inflation by managing retail costs, Gary Fayard, the chief financial officer, said in an earnings conference call July 19.
PepsiCo Inc., a Coke competitor and the world’s biggest snack-food maker, said last week that profit will increase more slowly than projected, partly because of commodity costs. Spending on raw materials will rise at the high end of its forecast of $1.4 billion to $1.6 billion this year, from a base of $18 billion, Hugh Johnston, the chief financial officer of Purchase, New York-based PepsiCo, said in a conference call.
“We will try to cover as much of the commodity inflation as we can,” Chief Executive Officer Indra Nooyi said.
Chipotle Mexican Grill, a Denver-based burrito chain whose share price has more than doubled in the past year, reported July 19 that second-quarter profit was less than analysts estimated as commodity costs rose. Chief Financial Officer Jack Hartung said costs for avocados, dairy and meat are rising and he expects food inflation of about 5 percent this year.
Food inflation was “stronger than expected” at Pleasanton, California-based Safeway supermarkets, with prices rising 2 percent in the second quarter, Chairman and Chief Executive Officer Steven Burd said July 21 on a conference call with analysts.
Food and fuel increases have hurt demand, “and that’s particularly true for that segment of our shoppers that believe we’re still in a recession, which is the largest segment” of customers at Safeway, the fourth-largest U.S. supermarket chain by sales, he said.
Inflation may be able to stay within the USDA’s range should crop inventories improve, said Mark Waller, a grain economist at Texas A&M University in College Station, Texas. Adverse weather and oil prices, which have averaged just under $100 a barrel this year, could quickly send food costs higher, he said.
“There’s an awful lot of uncertainty because of where we are in the crop cycle,” Waller said by telephone last week, noting that the Midwest heat wave may decrease production. “With the late planting of some crops and the really dry conditions, crop production is vulnerable over the next 60 days to any additional problems.”
Food prices measured by the Bureau of Labor Statistics rose 0.2 percent in June. The USDA left all of its estimates for different food categories unchanged in today’s report, except for processed fruits and vegetables, reducing its estimated increase by 1.5one-and-a-half percentage points to a range of 1.5 percent to 2.5 percent.
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