Issues

High Steaks

That $40 filet mignon is about to get even pricier

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A few months ago, Garth Weldon made a tough call. As the managing partner at Philadelphia’s The Prime Rib, he saw rising beef prices eating up his already narrow margins. He tried to cut back everywhere he could, but ultimately he did what restaurateurs hate to do: he raised prices. The full prime rib went from $49 to $53, and the restaurant’s annual “15 for 15” promotion, where customers could get 15 ounces of prime rib for $15, went up by $5 to become “15 for 20.”

And that was before the Midwest drought.

Now, after the drought has decimated the corn crop used to feed most of the US beef supply, the United States Department of Agriculture is predicting beef prices will rise by at least 5 percent next year. For steakhouses like The Prime Rib, that means even more overhead, which means another menu price hike could loom on the horizon.

“Restaurateurs are always reluctant to raise prices,” Weldon says, “but you have to.”

Weldon says he can’t raise prices so that the margins are what they were in the good old days, but on average, he expects certain beef entrees to increase in price. As it is, he is paying about twice what he used to pay for some of his beef cuts: $154 for a seven-bone, 17.5-pound prime rib, as opposed to the $80 he paid a few years ago. His wholesale price will likely increase in the fall and winter due to the drought.

“Luckily for us, patrons see the higher beef prices at the grocery store, too,” Weldon says, so they accept that beef is more expensive than it used to be. So far, he hasn’t had any complaints from customers on the higher menu prices.

Weldon is right: customers are seeing higher beef prices at the grocery store and, like steakhouses, will see those prices rise next year, along with many of their other staples that rely on corn as an input. Brian Todd, president of The Food Institute, estimates a family of four will pay at $350 more per year at the supermarket, thanks to the Midwest drought. About 30 percent of that increase will come from animal protein—everything from meat to poultry to cheese—and of that, 50 percent of the increase will come from beef alone.

But unlike average grocery shoppers, who can trade down and buy ground chuck instead of filet mignon, steakhouses pride themselves on selling high-quality, high-end cuts of meat. When you’re called The Prime Rib, there is an expectation that you will sell … well, prime rib. And because restaurants buy the prime cuts of meat that generally aren’t available at the supermarket, restaurateurs will experience even greater sticker shock than their consumers.

The reason beef bears the brunt of these price increases has to do with the structure and nature of the beef industry. Whereas chicken and pork producers are fairly integrated within their respective industries, for the most part beef producers still operate independently and don’t coordinate to mitigate shortages. And in the poultry industry, farmers can raise and slaughter a new generation of chickens every few weeks.  With beef, it takes 11 months for a cow to gestate, and from there, several months for it to reach its full weight.

A cow’s sheer size also poses challenges, especially when animal feed is expensive. Cows require a lot of feed to support their existing weight, much more than, say, a chicken. A full-grown chicken will weigh somewhere around six pounds, whereas a full-grown steer will weigh 1,000 pounds or more. So to add just one pound of weight to a 999-pound steer, a farmer needs to feed the animal even more grain on top of the amount a 999-pound animal would require simply to maintain its weight.

That was less of a problem when corn was cheap. But thanks to the Midwest drought, demand is outstripping supply. And even without the Midwest drought, corn prices have been ticking upward.

“The past two years, we’ve used more corn than we’ve produced,” says James Dunn, professor of agricultural economics at Pennsylvania State University.

Part of that has to do with poor yields, and part of that has to do with the ethanol mandate for gasoline, which diverts some of the field corn for ethanol production and not animal feed. But whatever the cause, corn prices are increasing. Dunn says in early June, a bushel of corn was going for $5.10 on the Chicago Board of Trade. In late August, the price had risen to more than $8 a bushel.

With a beef price hike looming, some chefs are getting creative. Steven Lewis of Philadelphia’s Union Trust has been executive chef for only five weeks, but already he has gotten calls from vendors about the drought and impending price increases. He knows raising menu prices is always an option, but as someone new to the job, he doesn’t want to alienate customers right out of the gate.

“I’m trying to work harder with my vendors to solve the problem in other ways,” he says.

One way has been talking with vendors about locking in a price for a month or longer, like a short-term futures contract. He works primarily with three meat vendors—one in New York City, one in New Jersey, and one in the northern Philadelphia suburbs—and all have been open to discussing future purchase prices.

Another way Lewis has cut down on costs is by having the Union Trust team butcher some of the meat themselves. Lewis buys primal cuts—an entire short loin or an entire strip loin—and butchers those pieces down into menu-size cuts. That gives him the flexibility to tailor portion sizes to customer demand and reduce waste, without having to raise prices on customers.

As for Garth Weldon at The Prime Rib, he, too, is talking to his suppliers about locking in prices for future purchases. But he says even if increasing menu prices becomes unavoidable, he knows his customers will keep coming back.

“People eat chicken or pasta all week, but when they come to The Prime Rib, they’re going to order the beef because it’s something they can’t replicate at home,” he says. “When people go out to eat, they want to reward themselves.” Even if that reward comes at a steeper and steeper price.

Comments

  1. Damion says:

    It sure is interesting and fortunate for us in Pennsylvania that locally grown grass fed beef didn’t get hit with a drought at all and at this point is pretty equivalent in price. Organic, better omega ratios, better mineral content, hard to beat going local. Grain/corn fed beef just can’t compare on any measure.

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