Grocers, Restaurants Benefit From Hedging Prices of Beef, Pork
June 02 2020 - 7:27PM
Dow Jones News
By Nina Trentmann and Kristin Broughton
Some grocers, food manufacturers and restaurant chains weathered
the supply-chain disruption in recent months in part because they
use a common hedging practice: Locking in beef prices and
quantities of meat purchases months in advance.
Costco Wholesale Corp. and Jack in the Box Inc. are among the
companies that have said they negotiate prices of some supplies in
advance, providing finance chiefs with a forward look on costs.
That practice became a key tool for these companies after the
pandemic disrupted the U.S. meat supply and prices soared.
Slaughterhouses and processing plants were shut down for days
and sometimes even longer in March and April to contain the spread
of the novel coronavirus. Major meat processors such as JBS USA
Holdings Inc., Tyson Foods Inc. and Smithfield Foods Inc.
temporarily scaled back their operations. In addition,
transportation and distribution networks were affected, making it
harder to get meat to stores and restaurants.
Prices fluctuated wildly as restaurants and food-service
providers adjusted to virus-related restrictions, and grocery
stores responded to stronger consumer demand. For instance, the
price of pork belly per 100 pounds swung from around $40 in
mid-April to over $200 in mid-May.
Consumer prices for beef, pork and poultry were up several
percentage points in April compared with March, according to the
latest available figures by the Bureau of Labor Statistics.
Many businesses that use frozen protein products -- including
food manufacturing companies and restaurants -- agree on prices and
volumes with their suppliers roughly one year out, said Matthew
DiFrisco, a managing director at investment bank Guggenheim
Securities LLC.
"It removes uncertainty or volatility," Mr. DiFrisco said.
Companies usually negotiate these contracts in February, with some
staggering them throughout the year, he said.
Costco is locking in some prices with suppliers, Chief Financial
Officer Richard Galanti said. He declined to provide specifics on
how much of Costco's supplies come with pre-agreed prices but said
the operator of members-only warehouse stores would lock in prices
for weeks or months at a time.
"It's not unlike locking in currencies. How we operate hasn't
really changed," Mr. Galanti said. He said he expects overall food
prices to come down as supply shortages ease.
Hormel Foods Corp., the maker of Spam and other food products,
relies on forward prices for a limited amount of pork, its finance
chief, Jim Sheehan, said. "We wouldn't go in and lock in all the
cost of pork," Mr. Sheehan said. "We would have a balance between
contracted prices, open-market prices and then operating
costs."
The Austin, Minn., food manufacturer keeps price locks at a
minimum to mitigate risk of price fluctuations and to prevent
speculation on future pork prices, Mr. Sheehan said. He said the
company has been able to manage the market fluctuations during the
pandemic.
Some restaurant chains follow a similar approach by agreeing to
preset prices for a portion of their ingredients. Jack in the Box,
the San Diego, Calif.-based fast-food operator, locks in some
prices for beef and other products, finance chief Lance Tucker
said.
Jack in the Box hasn't suffered from supply constraints during
the pandemic, Mr. Tucker said. The restaurant chain kept its
drive-throughs, which generate most of the company's sales,
open.
"We talk to our supply chain every day, and we are not expecting
any big shortages," Mr. Tucker said. He declined to comment on how
much of the company's supplies have locked-in prices.
Competitor Wendy's Co., which doesn't use frozen meat and serves
fresh beef only, reported temporary limitations to certain menu
items because of supply shortages. It is harder to lock-in rates on
fresh beef, Mr. DiFrisco of Guggenheim Securities said.
Agreeing to set prices in advance can provide stability for the
business, but it also comes with risk, Hormel's Mr. Sheehan
said.
"We've all been in a situation where we were sure that the
market was going to go in one direction and it didn't," Mr. Sheehan
said. "And you do that just once or twice, and hopefully you're
smart enough not to do that again."
Write to Nina Trentmann at Nina.Trentmann@wsj.com and Kristin
Broughton at Kristin.Broughton@wsj.com
(END) Dow Jones Newswires
June 02, 2020 19:12 ET (23:12 GMT)
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