Food’s a Deal, Save for Butter

Thanks to bumper grain crops and the global economic turmoil, U.S. shoppers in the near term can expect food to remain a relative bargain. That is, unless they’re planning to indulge in butter cream-frosted cake a la mode or mounds of cream cheese on bagels.

An extraordinary butter shortage continues to rocket prices for milk butterfat--a key ingredient in whipped cream, sour cream, ice cream and other fatty treats--into record territory. Butter is retailing in Los Angeles for as much as $4.59 a pound, more than double the price several months ago.

“Butterfat is like gold,” said Gene Grabowski, a spokesman for the Grocery Manufacturers of America, a Washington trade group. “At least through Thanksgiving, prices are going nowhere but high.”

With that and a few other exceptions--notably tomato-based products from California, which has endured months of weather disruptions--the outlook is for food prices to remain flat or to rise slightly, economists and food companies say.

“Even with inflation, we’re expecting food prices to go up only 2% in 1998,” said Annette Clauson, an economist with the U.S. Department of Agriculture. “In 1999, we’re still looking at only a 2% to 2.5% increase.”

So far this year, consumer prices are rising at an annual rate of 1.6%, the government reported Thursday. Food accounts for nearly 17% of the consumer price index, far less than housing, about the same as transportation and significantly more than medical care, entertainment or apparel.

Mark Drabenstott, a vice president and economist with the Federal Reserve Bank in Kansas City, Mo., said the tame price outlook for food “reflects weakness in farm and commodity prices, and we expect them to remain soft.”

The inflation forecast is good news amid the dire reports of worldwide economic chaos. Reduced demand in Asia, in fact, is contributing to an oversupply of beef and pork that is resulting in bargains at U.S. meat counters. Russia’s smaller appetite for poultry will channel more dark meat into the domestic market here, depressing prices somewhat.

California produce growers, meanwhile, have endured a year of weather and supply forces that have roiled markets. Because wet, cool weather delayed Central Valley harvests of peaches and melons, growers missed their marketing windows. Rather than pay to harvest crops for lousy prices, farmers let thousands of peaches plop to the ground and disked up melons in the field.

Filling a Gap in Lettuce Crop

Earlier this year, when El Nino unleashed its fury in produce centers such as Salinas, market observers predicted huge supply gaps in lettuce and other crops. But farmers in Arizona and elsewhere quickly planted to compensate, and prices soon fell back.

Reduced demand in Asia has also helped keep a lid on prices for some fruits, nuts and vegetables.

As is typical in times of softening demand, not all the price weakness has been passed along to consumers, Drabenstott said. But, as long as farm prices remain low, retailers will feel pressure to trim prices further.

Farm-level prices on average account for about 22% to 24% of the final consumer cost of food, according to Roberta Cook, a UC Davis agricultural economist. The rest reflects costs for processing, packaging, transportation and marketing. A loaf of bread, as an extreme example, contains only about a nickel’s worth of flour; so, no matter how cheap the raw ingredient is, it is unlikely to have much effect on the retail price of the finished product.

Given the tight U.S. job market, Drabenstott said, a company such as McDonald’s Corp. must pay more for entry-level workers. Since labor is a fast-food company’s highest cost, that will “more than offset the period of calm in food prices,” Drabenstott said.

At the moment, the most volatile item on the nation’s menu is butterfat. Dairy cows were stressed this year by unduly muddy conditions in California and by drought in Texas. As a result, they produced less milk and it contained less butterfat. At the same time, consumers have demonstrated a renewed appetite for high-fat products, from cream cheese to full-fat yogurt to rich cheeses to ice cream. With supply and demand out of kilter, the price of butter has zoomed out of sight.

“Butter is back,” said Lydia Botham, a spokeswoman for Land O’ Lakes Inc., a large dairy processor in Arden Hills, Minn. “We’ll see a lot of volatility in the market over the next few months.”

Suiza Foods Corp., a big Dallas-based dairy company, reported earlier this week that the unprecedented rise in butterfat prices would drive down earnings for its third quarter, ending Sept. 30. Recent increases in butter prices occurred with such unexpected swiftness that the company could not raise prices to wholesale customers quickly enough to recoup.

In the week that ended Sept. 11, the spot price of Grade AA butter on the Chicago Mercantile Exchange stood at $2.79 a pound, down 2 cents from the week before but nearly $1.25 above the monthly price for May. In early July, the price was less than $2.

“We are in the process of adjusting our prices,” said Barry A. Fromberg, Suiza’s chief financial officer. “We may very likely see a softening in volume sales because of the ratcheting up of price.”

Butter Is Costly Icing on the Cake

The Cake Collection, a West Los Angeles maker of fancy wedding and birthday cakes, raised prices 7% to 10% about six weeks ago, partly in response to higher butterfat prices. The company buys 400 pounds of butter at a time, and that lasts about two days, said Jim Yoppolo, general manager.

If prices continue to escalate, Yoppolo said, the company might consider a temporary increase for scones, butter cream-iced cakes and other items, simply to avoid going into the red. Such a short-term increase would probably tack $25 to $30 onto the price of a $350 three-tier wedding cake.

Dreyer’s Grand Ice Cream Inc. raised wholesale prices in July by an average of 20 to 30 cents a half-gallon and is evaluating whether another hike will be necessary, said Diane McIntyre, a spokeswoman for the Oakland company.

“Consumers seem to be aware of why we had to raise prices,” she said. “Volume has remained resilient. But we are in an impulse-and-reward category. At some point, a substitute will become more attractive.”

The imponderable in all this is how retailers will react as food processors work through gluts of corn, wheat and soybeans and produce growers in California and elsewhere continue to cope with weather disruptions.

“The linkage between commodity and food prices is not quick,” said Dick Gady, a spokesman for Conagra Inc., a big Omaha food processor.

The federal government studied the wave of supermarket consolidations in the late 1980s and found no pattern of higher prices, said Phil Kaufman, a USDA economist. Although mergers are continuing among traditional chains, that does not necessarily bode ill for shoppers, he added. More food is being sold in nontraditional outlets, such as discount stores, gasoline mini-marts, bookstores and drugstores.

“It’s a different kind of competition from 10 years ago and can counter the effects of consolidation,” Kaufman said. “ . . . There may even be more competition.”

* DAMPER ON INFLATION: Overall U.S. consumer prices rose a modest 0.2% in August, same as July. D3

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Slow Cooking

Food prices have risen each year over the last decade, but increases of late have been tame. Annual percentage increases in prices paid for food to be eaten at home and food to be consumed away from home:

1998 (Projected)

Food at home: 1.3%

Food away from home: 2.6%

* Economic Research Service, U.S. Department of Agriculture.