As feed price rises, cow and beer costs follow

Cheeseless snack puffs and changing beer flavors are two unexpected offshoots of rising grain costs.

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Hendrix sells half of his weaned calves to feed yards each fall, which fatten the calves up for slaughter, and keeps the other half himself to sell on to large meatpackers six to eight months later. Hendrix is getting hit on both sides: raising calves himself is more expensive, but Hendrix also receives less for the young calves he sells, precisely because the feed yards now have to spend more on feed.

"On average, the price dropped at least $10 per hundred pounds in October. A 500-pound calf [sold for] $50 less than a year ago," said Hendrix, who is also a director of the Colorado Independent CattleGrowers Association. Passing on his rising production costs has not been easy for Hendrix, a rancher with a small herd who sells to large companies that can dictate market prices.

"It's a margin business," he said. "Whoever's at the bottom of the totem poll is going to get cut the worst."

Normally, Hendrix would substitute wheat or barley into his calves' feed, but with many grains at record highs, he's out of alternatives. Soaring feed costs and the unfavorable conditions of last winter, he says, have "put a lot of people in the cattle industry in pretty rough shape."

Things aren't much easier for George De Piro, a brewer at C.H. Evans Brewing Company.

The restaurant brewery in Albany, N.Y., has seen grain prices go up about 50 percent in the last year. While De Piro has a futures contract that shields him from recent, dramatic hikes in hop prices, barley is a constant worry. A twenty-keg batch of De Piro's "hoppiest" beer, Kick Ass Brown, uses only 15 pounds of hops but as much as 650 pounds of barley malt. Industrial brewers can use rice or corn to substitute for some of the barley or wheat malts, but craft breweries such as C.H. Evans Brewing, whose business depends on the distinctive flavors of its beers, are less flexible.

"With the malt you're kind of stuck with a specific variety, because otherwise people would notice the difference in taste," De Piro said.

Creative adaptation

One hope for small businesses is a market correction in the near future. High prices caused by short supply are one of the best incentives for farmers to plant more of a specific crop, increasing supply and eventually bringing prices down. Plans are already under way for increased wheat acreage in the European Union and in the U.S.

But with world wheat stocks at a thirty-year low, Horizon Ag Strategies' Wagner thinks it will take some time, and a lucky run of favorable weather conditions, for the market to fully normalize itself.

"Those people who are looking for relief are unlikely to see that any time real soon," he said. "But if Mother Nature cooperates, we should see wheat prices substantially lower six months down the road."

Improved wheat harvests won't cure the crunch around other crops like corn and soybeans, which remain subject to increased demand. To survive the new norm, small businesses have to cope the best they can - which often means creative adaptation.

Robert Ehrlich, CEO and founder of Robert's American Gourmet, a Sea Cliff, N.Y., snack company that makes the puffed rice and corn snack Pirate's Booty, has instituted a number of changes in response to increasing costs. For the first time in its 23-year history, the company is arranging longer-term contracts with its suppliers to lock in prices for the next year or two. It is also raising the prices of some products in February 2008 to offset higher costs of corn, wheat and soybeans.

"We have not had a price increase in over eight years," Ehrlich said. "We were forced to do this because we've seen price increases in a lot of our inputs at once."

Robert's will also be launching Simply Booty, a lighter version of Pirate's Booty. This new variation contains no cheese, because the aged white cheddar Robert's uses for the original product has risen from $2 to approximately $3 a pound in the past 12 months, due in part to the increased cost of feed for dairy cows. Without this ingredient, Simply Booty will require less grain and oil inputs, which are usually used in larger volumes to carry and apply the cheese.

Meanwhile, De Piro knows that changing the malt varieties in Kick Ass Brown would not go unnoticed by his customers - but he'll consider doing it anyway if costs continue to climb. Kalupa is advising members of Retail Bakers of America to get efficient with their balance sheets and look for areas where they can cut costs.

"Today we live in a world economy," he says. "It affects the baker on Main Street just like the trader on Wall Street." To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.