When The Price Isn't Right: Food And Beverage Manufacturing In The Time Of Commodity Price Volatility

When it comes to both commodity and key ingredients, quality is still crucial, but nothing is irreplaceable.

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Elis Cheesecake SliceMadagascar vanilla, all-natural sour cream and Euro-certified butter are key ingredients that Jeff Anderson and his team at Eli's Cheesecake Co. use in their signature gourmet desserts. None of these ingredients comes cheap, and their prices can be unpredictable, but lately it's eggs that give Anderson fits when it comes to price volatility.

“Eggs are the thing over the last couple of years that has been the wildcat,” said Anderson, vice president of operations for Chicago-based Eli's. “There is no telling where they will be. They can really go up and down so fast that it leaves you shaking your head.”

In the past 18 months, guar gum has been a visible ingredient of volatility in the food business. Meat prices went high a few years back and have stayed there. A decade or so ago, the cost of vanilla skyrocketed after a storm in the tropics wiped out a crop and damaged the slow-growing orchid plants that yield the complex, mellow ingredient.

Whether a food maker produces cheesecake that is served at the White House or a savory snack that gets tossed into millions of lunchboxes each day, ingredient supply and corresponding price fluctuations can really mess with a business plan.

The most obvious responses to price jumps are not very appetizing for food processors and their retail customers, says Gary Raines, an economist with INTL FCStone Inc., New York, who recently authored a paper on the topic of commodity price volatility. Typical responses would include changing ingredients, operating on a thinner margin or moving the pain down the line.

“Managing margins by passing wholesale cost increases on to one’s customers will never set a company apart from the competition,” Raines says. His paper, "From Field to Shelf: A Look at Cost Pass-Through from Commodity to Foodstuff," is interesting in that it demonstrates a counter-intuitive notion about how commodities of all types respond to supply crunches.

FC Stone provides services that help companies know when to buy and allows them to hedge the cost. Taking shortcuts to the detriment of product quality is a short-sighted solution, Raines points out. Ingredient flexibility can offer a response to price spikes that does not impact flavor and texture.

Ingredient suppliers have for years offered analogs that can give the food processor some wiggle room, and at each IFT Food Expo those ingredient specialists roll out a few more. In some cases, once these new or alternative ingredients find a home in a given formula, they are there to stay.

When gum releases gas

The energy industry and food processing don't often cross paths, but when oil and gas exploration companies began using guar gum as a medium for carrying fracking material deep into potential wells, they met face to face.

Guar gum is used in a variety of applications in the food business, most commonly as a binder for baking. It has been popular for years, because, at around a dollar a pound, it had been less expensive than other hydrocolloid ingredients such as gum arabic, carageenan and carob bean gum, all of which can provide the same function. It was cheap for fracking too, until the increased demand tightened supplies, explains Joshua Brooks, president of Gum Technology Inc., Tucson, Ariz.

“There were reports that certain oil and gas companies were air-freighting containers of guar from India just to keep the drills pumping. Obviously, with laws of supply and demand in play, pricing went from the historic lows of $1 per pound to as high as $12 per pound in a relatively short time,” Brooks says.

Those prices have eased considerably more recently as the frackers have found other ways to shake the earth's crust in hopes of reaching natural gas deposits. What happened in the interim, however provides an interesting lesson in what happens in the food industry when prices jump and plummet.

Gum Technologies as well as TIC Gums, Belcamp, Md., have introduced new hydrocolloid blends, and other commodities, like tara gum, have elbowed their way into the market.

“By creating synergistic blends of gums as well as [ adding ] other hydrocolloids such as starches, or fibers, we can keep the costs of these blends competitive,” Brooks says. “Our Hydro-Fi and GumPlete blends have replaced guar – and other individual gums – in many applications.”

Those include baking applications where the products are used to improve cell structure and prevent staling. GumPlete systems are also effective in frozen cheese sauces — providing more consistent melt than gums or starches alone.

These ingredient systems incorporate fibers and starches and can be used at lower usage levels overall, further reducing costs.

“Guar gum pricing has come down over the past year — well below the highs of $12 per pound but not yet back to the lows of a dollar per pound,” Brooks says. “Out of necessity, the fracking industry started developing its own guar replacements as did the food industry.”

That said, guar gum might not win back all its former customers. Having reformulated once, companies might not be eager to switch back, even as prices drop.

“Many companies have stayed with these replacements or alternatives, having been frustrated with guar farmers and how the guar increases may have been somewhat due to manipulation," Brooks says. “Knowing the alternatives are [sometimes] product improvements and have greater problem-solving capabilities gives manufacturers a very welcome hedge against difficult market conditions.”

Meanwhile, starch-based products can play similar roles, and they also allow flexibility for a number of applications including baked and frozen foods.

“We have a range of specialty starches that can partially or completely replace gelatin in gummy-type candies,” says Ricardo Rodriguez, with the confectionery division of Ingredion Inc., Westchester, Ill. “These specialty starches can provide similar textures as gelatin if needed or improve the texture. In addition, they can increase the overall shelf life of the product. Our specialty starches offer cost savings over gelatin and can be used in vegetarian/halal/kosher products to meet consumers' dietary requirements.”

Ingredion's starch-derived ingredients also have applications in savory, dairy and beverage categories.

Chocolate or vanilla?

Chocolate is another ingredient that can be critical to the quality of a product, but can add a good deal of cost in the wrong year.

“Some of the main ingredients used in cocoa and chocolate products, such as cocoa beans and vegetable oils, are traded as commodities,” says Courtney LeDrew, marketing manager with Cargill Cocoa and Chocolate NA, Lititz, Pa. “As a result, prices for such ingredients fluctuate with the market.

"To help our customers minimize risk and manage costs, Cargill has a portfolio of flexible risk management resources that can be tailored to fit customer needs," LeDrew continues. "For example, Cargill has research teams located in origin countries to offer timely supply and demand insights, as well as a dedicated risk management team. We can also provide in-depth commodity reports to help customers make better buying and formulating decisions.”

Lowering the cost of a formula by choosing a percentage of less expensive ingredients is an option, but it might take some work and finesse to arrive at a new formula that passes muster.

“When ingredients are substituted, it is important to make sure the new formulation maintains functionality and does not introduce complexity to the production process,” says Stacy Reed, Cargill Cocoa's product development manager. “In addition, sensory and consumer testing is necessary to ensure the new formulation meets parity.”

Asked which ingredients are key to a premium dessert product like Eli's plain and flavored cheesecakes, Anderson points out the same grade of vanilla has been used in every batch since the company began making cheesecakes as part of a restaurant business more than 40 years ago. On its website, Eli's even specifies that is uses Nielsen-Massey Madagascar Bourbon vanilla.

Pound-per-pound, vanilla, especially the top-quality stuff, is very expensive. But Craig Nielsen, CEO of Nielsen-Massey Vanilla, Waukegan, Ill., says vanilla typically makes up a small percentage of the overall ingredient bill and therefore a smaller percentage of the cost of a product than one might expect.

“You can always cut corners depending on the market, the product and how you want to market it to consumers,” Nielsen says. “Pure vanilla has different grades and quality from the same origins. Lower qualities are lower priced. And vanillin and vanilla flavored WONFs [with other natural flavors] do provide cost savings, but not the complexity that comes from pure vanilla."

Vanilla prices have been known to fluctuate. In 1999, a cyclone in Madagascar wiped out the largest part of the global vanilla crop for the year and had repercussions for more than five years as the growing stock recovered. The price jumped from $50 per kilo to more than $600, but once the crops were back to normal, the price dropped right back to where it had been, and it has remained fairly stable for more than seven years, Nielsen says.

The bee's knees

Eli's classic plain cheesecake was indeed served at President Obama's Inaugural Staff Ball in 2013. For its cheesecakes, Eli's creates a signature, all-butter shortbread crust, and keeping that crust consistent is crucial. Over the past year or two, Eli's has worked with Tate and Lyle, Hoffman Estates, Ill., to identify starch products that will offer a broader variety of functions and consistent results.

“We had two different types of modified food starches, and now we have 12 or 13,” Eli's Anderson says. “We went to them and said, 'Hey, we have got a problem,' and they broke it down for us and told us we weren't always using the right starch.”

Eli's newest cheesecake flavors include Key Lime Pie, Vanilla Bean, Chocolate Espresso and Honey Mediterranean with Pistachios. Honey Mediterranean is made with salted honey (from honey harvested by students at the Chicago High School for Agricultural Sciences) as well as toasted pistachios and almonds. It sells for $54 mail ordered from Eli's website.
While many of its high-end products can sell for $40 or better, Eli's does take steps to protect its bottom line against manifold increases in ingredient prices, Anderson says.

Gourmet ingredients help make a premium product, for certain, but even everyday ingredients such as ground beef and eggs can fall into short supply. With the ongoing drought in the western U.S., especially California, there may be more reason than ever for food processors to begin thinking about how to go about replacing ingredients without spoiling the soup.
A product developer with a very large multinational company says the drought could have serious consequences.

“If California doesn't get some rain soon, there will be big problems for fruits and vegetables,” says the product developer, who asked not to be named. “It could blind side everybody in the food industry. There's only a small window to make the whole year's [industrial] supply of tomato paste, and the tomatoes may not be there.

That said, a large company can use its leverage.

“We put a lot of pressure on our suppliers to keep prices down," he continues. "We're big enough that we can do that, even if they have to absorb the cost. Sometimes we agree to increase quantities to keep the price down.”

The vagaries of weather are not alone in prompting changes in ingredient selections. Often changes are driven by consumer trends.

“Market trends or demands for gluten-free products, egg replacement and fat reduction in many applications have all been growing over the past five to six years,” says Gum Technology's Brooks.

Whether it's eggs, dairy or fats that need to be replaced, custom hydrocolloids can stand in, he says. “These can easily be replaced with a system of gums and starches which will hold the texture and impart creaminess.”

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