Serving of Energy Price Woes Expected at the Dinner Table
There’s an axiom in the food business that no matter how trying the economic times, people still have to eat.
With that simple truth in mind, a noted Wall Street analyst claims the food industry is poised to pass higher energy costs along to consumers and restore its shrinking profit margins with the biggest round of price hikes in the United States in at least five years. Leonard Teitelbaum, who covers the food industry for Merrill Lynch & Co. Inc. in New York City, says food companies have cut costs to the bone in past years to boost their profits without price hikes. Now, with the harsh winter fading, competitors are prepared to respond to the higher energy costs it helped foster.
“The food industry has cost justification for going forward with price hikes,” Teitelbaum said, alluding to higher energy costs. “It can’t just keep trading dollars – it has to be profitable. That means prices that are fair to both consumers and producers.”
It’s difficult to make definitive statements in the food industry because it’s so competitive, but several food industry experts say Teitelbaum’s prediction is on the mark and an industry-wide correction is imminent.
Grocery Manufacturers Association of America spokesman Gene Grabowski said food industry profit margins have slipped from 8 percent to 4 percent since the late 1960s due to cutthroat competition – possibly setting the scene for industry-wide price hikes.
“Len’s prediction is the first I’m hearing of this,” Grabowski said of Teitelbaum, “but it seems to me that he’s on to something.”
The Grocery Manufacturers Association of America is a Washington, D.C.-based trade association comprised of food companies, such as Omaha-based ConAgra Foods Inc.
None of the food industry giants contacted for this story disclosed any plans to raise their prices, but none of them ruled it out, either.
ConAgra Foods chief economist Dick Gady indicated that the prediction is likely to come to fruition and said consumers should expect to be affected by higher energy costs when they visit restaurants and grocery stores. Those prices will be bolstered by business disruption costs in states such as California, where ConAgra’s garlic growing and processing operations are being hindered by power interruptions.
“Sharply higher energy costs will put upward pressure on food prices,” Gady said. “Food cost increases have been subdued for the last several years but will increase this year as a result of higher input prices.”
Food companies are legally prohibited from intentionally working together to boost prices, a practice called “collusion,” but they can bring about the same result independently when spurred by a common problem, such as higher costs. In the past, one company’s price hikes typically were exploited by lower priced competitors seeking to steal customers. However, any price hikes are likely to be adopted this time, according to Teitelbaum, because every food company is feeling the pinch of higher energy prices.
“This time, price hikes will stick,” Teitelbaum said. “We’re basically talking about maintaining profit margins, not increasing them. Still, it’s a tough time to be doing it. It’s a shame the industry didn’t raise prices a year ago when the economy was better.”
North Omaha resident Alan Darlington, 43, said he already is seeing higher food prices.
“I don’t like it, but there’s not too much you can do about it unless you start growing your own food,” Darlington said Tuesday as he carried his 2-year-old son Rhys from the Albertson’s Inc. store at 7946 Dodge Road. “You can shop around for better prices, but that takes time, too, and I’d rather spend mine with my family.”
Federal data indicates the food industry may be poised for the price hikes Teitelbaum is predicting, and which Darlington already has says he has noticed, because the consumer price index has grown so slowly in recent years. The index includes both food and other goods, such as fuel and movies.
For example, $ 100 worth of consumer goods purchased in 1997 would cost $ 11.21 more today, according to Federal Reserve statistics, compared to the $ 19.89 price hike sustained during the five-year period from 1987 to 1991 and the $ 50 hike from 1977 to 1981.
U.S. Department of Agriculture data, which runs through 1997, indicates that the cost of food and beverages has grown at an even slower pace. Between 1970 and 1997, food prices grew by 303 percent, compared with 414 percent for all consumer goods.
Energy costs have a multiplier effect on the economy because businesses pass them along to consumers in the form of higher prices whenever they can, whether the product is crackers or bricks. That’s exactly what Teitelbaum claims the food industry is about to do.
“Misery loves company and that’s what we’ve got (in the food industry) right now,” Teitelbaum said. “It’s tough out there (for business).”
Higher energy costs have hit every segment of the food industry, from growers to retail grocery stores.
Heating oil prices rose 15 cents in January across the United States, compared to January 2000, according to the U.S. Energy Information Administration.
The price jump was even more pronounced in the Midwest, where heating oil sold for about 30 cents a gallon more.
Natural gas prices this winter have soared to as much as five times over what they were 18 months ago.
Gasoline prices have gone up precipitously over the past two years, too, boosting trucking costs.
Even the price of propane, which poultry growers use to keep chicks warm, has gone up.
Higher energy prices have caused many food companies to cut their earnings projections for this year, including ConAgra Foods, which spent an additional $ 150 million on winter energy costs. ConAgra is the nation’s second largest food company, with $ 27 billion in annual sales and a host of top retail brands that include Bumblebee tuna, Swiss Miss hot chocolate and Butterball turkeys.
The Archer Daniels Midland Co., which is based in Decatur, Ill., plans to indefinitely suspend the crushing and refining of oilseeds at its Alberta, Canada, canola plant April 1 due to what it calls the “extraordinary increase” in energy costs. ADM is a leading supplier to farmers and food processors, with $ 18.6 billion in annual sales.
Energy costs also played a part in Tyson Foods’ decision last week to downgrade its own second quarter earnings projections from between 6 cents and 10 cents a share to “break-even” for the three-month period ending March 31. Tyson Foods Inc., is the nation’s largest chicken processor; it’s based in Springdale, Ark., and has $ 7.2 billion in annual sales.
San Francisco-based Del Monte Foods Co., a leading producer of canned fruit and vegetables, and Franklin Park, Ill.-based Dean Foods Co., a dairy and pickle distributor, also have lowered their earnings projections.
Officials at IBP Inc., the nation’s largest beef processor, say IBP is feeling the pinch of higher energy costs, too. The Dakota Dunes, S.D.-based company has $ 16.9 billion in annual sales and is set to be acquired by Tyson.
“We here at IBP can confirm that the per head cost of converting livestock into beef and pork products is higher this year because of increased natural gas and fuel oil prices,” said Gary Mickelson, a spokesman for Dakota Dunes, S.D.-based IBP.
Tyson spokesman Ed Nicholson said higher energy costs will account for about a penny a share in lost quarterly earnings during the current quarter. A glut of chickens is partly to blame for the rest of the projected earnings shortfall and makes it difficult for chicken companies to pass energy costs along to consumers.
“We really can’t raise prices based on the market alone right now, so it’s difficult to say if our higher input costs will lead to a price hike,” Nicholson said.
Richard Lobb, a spokesman for the National Chicken Council, said chicken prices also must compete with other meats, such as pork and beef, for meat dollars.
“I hate to try and forecast these things because there are so many variables,” Lobb said, “but if the price of beef goes up, chicken can too.”
The possibility of a price hike is no surprise to Harvey Rosenfield, president of the Santa Monica, Calif.-based Foundation for Taxpayers and Consumers Rights. He said the food industry shouldn’t be blamed for passing such costs along to consumers and that similar prices hikes probably are inevitable in other industries.
The problem is the energy industry, according to Rosenfield, which is heavily concentrated, lacks the competition of the food industry and operates without adequate regulation – a practice he claims virtually ensures abuse.
“These costs are a massive problem, and one that will continue so long as government allows the energy industry to suck us dry,” Rosenfield said.
Most customers at the Albertson’s grocery store on West Dodge Street were unhappy about the prospect of paying more for food, but resigned to the possibility it may happen. Pat and Marlin Mercer, of Emerson, Iowa, said food prices have remained steady for some time.
“I don’t think there’s much we can do about it,” Pat Mercer said as she loaded groceries into their car. “We still have to eat.”