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.”

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