Most of us who have been in the foodservice supply chain for the last few decades spent a large part of our time yearning for attention. Let’s face it, supply chain for many foodservice companies was generally viewed wrongly as a necessary evil. But then in the winter of 2020 that all seemed to change as COVID-19 disrupted the chain. And now supply chain even gets its own column in Nation’s Restaurant News; you can hear this foodservice supply chain nerd giggling with excitement.
With that, let’s get started.
For those of you who have followed me over the years, you know that I love data. That said, let me introduce to you the Foodservice Supply Chain Pressure Index. This index is made up of five categories, including commodity inflation, labor inflation in the chain, domestic freight rates, foodservice sales and other world supply chain pressures captured in the New York Fed’s overall Supply Chain Pressure Index. Readers will notice that the pressure increased substantially during COVID (cue Gomer, “Surprise, surprise, surprise”), but note the trend over the last several months: The pressure is easing.
As a matter of fact — and you know I love those too — the three-month average for the Foodservice Supply Chain Pressure Index fell to its lowest level in February in over two years. Further, it is nearing pre-COVID levels. In other words, the supply chain as a whole appears to be returning at least close to normal conditions. And that, ladies and gentlemen, is certainly good news. But as you would guess, there are still concerns, which we’ll spend most of our time within this article.
Labor inflation has eased in the chain but it’s not close to normal levels. Readers will notice that “normal” annual wage inflation in the foodservice supply chain is typically close to 2.5 percent. In February, the wage inflation was still north of 5 percent. Yes, it has eased, and it does appear somewhat easier to find employees, but overall warehousing and distribution is a fast-growing space. And competition for employees is likely to persist over at least the next several months, which may underpin at least some pressure in the chain. Freight rates may continue to add pressure to the supply chain as well.
How about some good news you ask? Commodity prices are generally tracking below year ago levels.
The Datum Foodservice Commodity Index is a basket of numerous commodities including beef steak cuts, beef trim, cheese, chicken breast, chicken wings, wheat, corn and other traditional foodservice commodities. What jumps out first is the notable declines that have occurred in recent months. However, a large part of these declines is due to the abnormally strong price gains last year. For those keeping score, and you know I got you, this commodity basket in February was 12.4 percent less than 2022 but was still 17 (think Brian Sipe) percent more expensive than a year ago. So yes, commodity inflation is easing, but commodities are generally still expensive, including grain corn.
Adverse weather conditions have contributed to a tighter corn supply over the last few years, which has helped push feed costs to historically inflated levels. The good news is that high prices are always the cure for high prices. In this case, margins have improved immensely for farmers, which is expected to lead to a boost in the crop this year. The USDA released its first 2023/24 domestic corn crop estimates a few weeks ago and the news was encouraging.
Due to big plantings and improving weather conditions (the National Weather Service is forecasting drought to end in most of the growing areas this spring) and USDA has the available corn supply from the 2023/2024 crop climbing to multi-year highs. So, assuming the weather does cooperate, much lower feed prices could occur this fall and into 2024. Why is this so important to the foodservice industry? Corn is one of the major feed ingredients for the biggest commodity exposures for foodservice, including proteins and dairy. And lower feed prices should help protein and dairy producer margins, which in turn should encourage production expansion. A word of caution here: Timing of protein production expansion will differ based on the protein. In other words, it takes a lot longer to build the cattle herd than it does the broiler flocks. And in the case of cattle, the herd has been in decline for the last four years, and it may be at least a few more before we see expansion.
Several weeks ago, the USDA released their semi-annual cattle inventory data for the U.S., and the news was not surprising but discouraging. Drought and inflated feed prices have placed significant challenges on the industry over the last few years, which is being reflected in the data. The total herd as of the first of this year was 3 percent smaller than 2022, the smallest since 2015 and the third smallest in over five decades. Thus, beef production is expected to be historically light this year and at least into 2024. Sure, lower feed prices later this year should help, but a large part of cattle country is expected to remain in drought, which could cause the herd to decline further. These factors are anticipated to be especially supportive of the beef markets at times over the next several months. So, although many of the commodity markets important to restaurants are expected to average below prior year levels in 2023, beef is not one of them.
So yes, a lot of the pressures in the foodservice supply chain are easing, including lower chicken, table egg and dairy prices, a better availability of freight, and shrinking import challenges. Risks remain in the supply chain, including labor, grain and beef supplies. But expectations are for the general pressure in the chain to continue to drift towards pre-COVID levels over the rest of this year.
David Maloni is the Principal of Datum FS, a foodservice supply chain consultancy featuring his three decades of experience working with the majority of the top 500 restaurant brands. Datum FS assists companies with commodity forecasts, market baskets and supply chain data management best practices. For more information, email [email protected].