I understand that my purveyor (and others) can get no better than one week contracts for flour beginning next week. What are your expectations for flour pricing for the next 6 weeks?
I’ve been told the trucks purchased this week will be over $30 for 50lbs. Add in your supplier’s markup, it could be over $35 next week with prices still marching steadily up. Ugly.
Last week…$17.30…this week…$21.25…next week…$29. All Trumps 50#.
I believe next weeks flour will be priced tomorrow (Thursday),so it will be interesting to see where it comes in at. At what price does it come back to earth & what price do people simply stop making the doughnuts? $40–$50? For those that believe speculators are manipulating this market. Have been told a floor trader at MGEX was quoted as saying that a call came to the floor for one million bushels, what would it take for a million bushels & that led to a $20 bushel price. I am guessing that took place in the cash/spot market & don’t completely believe it happened. Still, interesting to confront. the idea that one speculator ( or a small part of a hedge fund) impacts the market that way for a lousy 20m., change for them.
Wheat is only selling at about $14.00 a bushel, not $20.00. Durum wheat is presently going at something over $25.00 a bushel, but that type of wheat is used primarily for pasta production. Stat tuned, I’ve written an article addressing this very topic. In the mean time, look at it this way, when flour was $6.00 for a 50# bag, a pound of dough had about 7.25-cents worth of flour in it. Today, that same dough, made with flour selling at $22.00 a bag will have about 26.5-cents worth of flour in it. This is an increase in cost of 19.25-cent attributable directly to the increased cost of the flour. In other words, a $0.20 increase in the cost of a pizza made using a 16-ounce dough ball would be sufficient to cover the flour cost. Since most of us use less than 16-ounces of dough for a lot of our pizzas, the overall average would be even less than this. A 12-ounce dough ball made with $6.00 flour has a flour cost of 5.45-cents, when made with $22.00 flour, the flour cost figures out to 19.9-cents total flour cost, for a difference of 14.45-cents. Please keep this perspective in mind and price your pizzas accordingly. P.S. Even the big chains are “taking it in the chops” on flour prices, we’re not in this alone. There is a global shortage of wheat, and wheat production projections are “iffy” at best, now add two cups of speculation, a dash of corporate greed, a dash of politics, and you’ve got the recipe for today’s flour prices.
Tom Lehmann/The Dough Doctor
Tom I understand your perspective of it only being a 20 some cent increase per pizza but it goes beyond that. I go through on average 45 fifty pound bags of flour a week. The difference from the $9.80 I was paying a couple months ago to the $32 I will be paying in a few weeks is staggering. I will pay $1000 per week more for the same amount of flour over just a 3 month swing. If I felt 3 months ago that I could generate $1000 per week more in sales by increasing my pizza prices by 20 some cents each, I would have already done it. I have raised prices three times in the last 18 months to help offset the increases in utilities, cheese, labor, insurance. I’m going to try to eat this increase for as long as possible, which from the price projections I hear, may not be very long at all.
Tom,
Very much looking forward to your article on this subject. Wheat did see $19.45 on MGEX, last Friday I believe. Increasing prices is the most rational approach to the present input costs in the manufacture of a pizza. Everyone can see the logic in your math, but that pre-supposes that stores are priced correctly to begin with. It has been my experience that a great many independent operators have no idea what their costs are to begin with. Everyone in the business of selling pizza should be able to quote the exact price of manufacturing a pizza on a weekly basis, not mention the costs & contribution margins associated with every item that they sell. Walk into ten pizza shops, you will lucky to find one who can quote it to the decimal. When will indys confront their lack of knowledge of costs?
Is it reasonable to assume that the present economics of selling pizza will result in a “shake-out” of under-performing operators? Is it reasonable to assume these operators will be indys? I think yes.
I am an indy operator & I believe my best chance for growth is taking market share away from other indys. Now is the time. Sink or swim.
Paul,
I agree. We should all be price maximized every day of the week, not just when inputs rise.
[[size=18]b]Wheat Falls as Weather May Favor Crops in Northern Hemisphere[/b]
[/size]
By Tony C. Dreibus
Feb. 28 (Bloomberg) – Wheat fell for the first time in six sessions, halting a record rally, on speculation that crops in the Northern Hemisphere will emerge from winter dormancy next month in good condition.
Growing areas in the U.S. and Europe for winter wheat varieties have had favorable weather, according to Woburn, Massachusetts-based Meteorlogix LLC. Crops in Ukraine and Russia escaped damage during a cold snap last week and temperatures have risen since, the forecaster said. Wheat prices have doubled in the past year as weather damaged crops and demand grew.
The wheat's in awful good shape as we come out of dormancy across the Northern Hemisphere,'' said Larry Glenn, owner of Glenn Commodities in Wichita, Kansas. We’re not hearing about the potential problems like we had last year. It’s quiet. And when people are quiet, things are usually good.’’
Wheat futures for May delivery fell 70.25 cents, or 5.6 percent, to $11.7975 a bushel at 11:43 a.m. on the Chicago Board of Trade. Most-active futures touched $13.495 yesterday, the seventh record this month. Wheat is up 33 percent this year on speculation global demand will outpace production.
Chinese Crop
Wheat in China, the largest producer of the grain, won’t be harmed by cold weather expected in the next few days, Meteorlogix said. Summer rains are helping replenish soil moisture in Queensland and New South Wales in Australia, where drought devastated crops for the past two growing seasons.
The price may also be declining after the National Farmers’ Union in the U.K. said the country’s wheat production may be 19 percent bigger this year because of increased winter and spring plantings.
Global wheat stockpiles will reach 113 million metric tons in the season ending June 2008, the International Grains Council said in a report today. That compares to the IGC’s January forecast of 110 million tons.
The U.S. Department of Agriculture earlier this month said global inventories as of May 31 would be 109.7 million tons, the lowest for the date in 30 years.
Volatility in U.S. wheat futures has surged, with unprecedented price changes. Wheat rose to a record yesterday, then fell by the exchange-imposed daily limit before rising again by the maximum allowed. The 25 percent rally that day from the low to the high was bigger than all but seven annual price increases for wheat since 1973.
MF Global
MF Global Inc., the world’s largest broker of exchange- traded futures and options contracts, said it set aside $141.5 million to cover an employee’s losses on wheat trades, after he exceeded limits in his own account. The employee was fired and client funds were not affected by the trader’s actions, MF Global said today in a statement.
If you continue to see this happen, it will take some trust out of the managed futures side of things,'' said Vince Boddicker, manager of Farmers Trading Co. in Mitchell, South Dakota. If we get much more of this the public will be concerned. It gets to a point where you’re looking at it saying, `Are we monitoring this the way we should be from a compliance standpoint?’’’
The U.S. Commodity Futures Trading Commission said it found out about the MF Global situation yesterday and that it ``appears to be an isolated event.’’ The agency said MF Global is in compliance with all of the CFTC’s regulatory capital requirements.
Wheat was the fourth-biggest U.S. crop in 2007, valued at $13.7 billion, behind corn, soybeans and hay, government data show.
To contact the reporter on this story: Tony C. Dreibus in Chicago at Tdreibus@bloomberg.net .
Last Updated: February 28, 2008 13:17 EST
I would like to add one more thing on the price increase. It is true, that the flour cost is only increasing each pizza $0.10 to $0.20 cents. But a $0.20 increase will not cover like we need it to. We are told by every restaurant analyst, that we need to keep our food costs at or below 33% to survive. This means that the flower cost increase of $0.20 would actual increase the price of a pizza by $0.60 if we want to keep our margins in line. This isn’t bad, except for we just had to do the $2.00 price increase for cheese, minimum wage, and now increasing our delivery charge for fuel, not to mention all of our other costs rising because of the manufacturer’s fuel charges. We could come out of 2008 easily with pizzas $3.00 higher than at the end of 2006.
I can increase my prices by the amount that the cost is rising for the short term, but in the long term I have to be able to keep my 35% - 45% gross margin if I want to be able to pay my rent and utilities.
Paul;
Do the math, unless you have a back door flour market going, al lof that flour is going into your pizzas. If you make a dough based on 50# of flour, your dough yeild should be about 82.5-pounds of total dough weight, which you will cut up into individual dough balls for making your different size pizzas. I think the problem that many operators have is that you must pay for the entire flour shipment at one time, but you get reimbursed for it only as fast as you can turn the flour (sell pizzas), and until you use all of the flour in the pizzas that you sell, you don’t get full reimbursement. Lets look at another way of pricing our pizzas. Lets say it will take you a month to turn all of your flour shipment. Lets say that each bag of the 20 bag shipment cost you $20.00, so the total cost of the flour shipment is 20 X 20 or $400.00. Remember, it will take you 30 days to use all of the flour, so your money will not be FULLY returned to you for as long as 30 days. Lets assume that you took out a $400.00 bank loan to pay for the flour and the loan interest was 10% for the 30-day duration of the loan. The total cost of your flour is now $400.00 plus 10% or an additional $40.00 for a total of $440.00 use this to calculate your flour cost. So the cost of this flour in a pound of dough would be about 26.6-cents. On a 12-ounce dough ball the cost of the flour would be about 20 cents. Since it would theoretically, take you 30 days to use up the entire 20 bags of flour, you could pay back the loan, plus the interest in 30 days. I realize we don’t do this type of thing, but it just shows how little the cost of flour ACTUALLY affects our unit pizza price. BUT, since we have this cost on each and every pizza we sell, it is imperative that we charge for it or we will soon be hanging out a “closed” sign.
Am I missing something?
Tom Lehmann/The Dough Doctor
I’m with you. I figured out the effect pf the increase will add .5% to my food cost. But that was just for my large sized dough. I haven’t done the rest yet
Yes, the 10% is an annual interest rate (unless you are dealing with a loan shark). So the actual simple interest for 30 days would be roughly 10% divided by 12… or $3.33, not $40, for the $400 over 30 days. 
Our papers had an article about the soaring cost of wheat due to worldwide shortages, quoting the Chicargo market hitting an all time high of $13.80 per busshel.
It said cost of everything will rise coupled with the highest ever price and massive shorgaes in bulk butter.
Time to brace for further increases.
Luckily for us Western Australia had a bumper wheat harvest this year despite many areas still in drought. The areas who came out of drought had good rains so their crop was huge.
Dave
That bumper crop will help our U.S. prices too! Whew!
Charles;
You are correct, but I was trying to show a point with exaggerated numbers, even at that 10% interest rate, over a 30-day period, the cost of the product doesn’t rise all that much. I’m beginning to see where more and more merchants are passing along (direct) charges as a surcharge, to cover their increasing costs while still maintaining a reasonably low unit price. Sorry about the confusion, I don’t deal with 120% annual interest rate people either.
Tom Lehmann/The Dough Doctor
10% interest? I sure hope not. I get money right now for 6%. At this time of year I don’t need it, but I do generally hit my credit line in Oct/Nov while we wait for the season to kick in.
I put in a pretty hefty price increase back on Dec 1st. 50 cents added to the delivery charge, 50 cents to a 16" pizza and 20 cents for a topping and most appetizers went up 50 cents, salad and chicken wings up $1. Added together the average ticket went up probably $2. Did some customers squak? Yes, a few did. $2 on the bottom line of every order adds up fast though. Our sales for Dec and Jan were up by about 15K. My best guess is that half of that was the price increase.
I contacted the newspaper with info about wheat, cheese, oil and tomato price changes and it resulted in a front page story in the sunday paper about food inflation and particulary pizza with a photo of one of my asst managers spinning dough.
Make lemonade. Don’t be afraid to do what you have to with prices. Tell the story, make sure your employees understand. The statistic that seemed to connect with my employees was that the price change in cheese alone amounted to more than one of them makes and without the price increase was going to take about $500 a month out of the bonus pool. It lead to a good discussion on why portion control is important.
Flour prices are a bi#&ch, but the increase in cheese on a per-pizza basis in the last 9 months has been 3X as much. Are we just getting used to it?
Your approach is definately the right way to go. Explain things to your employees as well as your customers. Education is the name of the game. No, we never do really get used to it, we just learn to adapt, and live with it. Remember when we all screamed when gasoline hit $1.00 a gallon??? I’m betting that today, you’d find a new friend at a gas station selling gasoline for $2.00 a gallon. We don’t like it, but we’ve learned to live with it, and everytime we buy gas at $3.00+ a gallon you think back to the good old days, as you curse the gasoline companies and pay for your gas. We adapt, and learn to live with it…but we still don’t have to like it. Like my friend says, it’s a hell of a way to do business, but it sure beats the alternative.
Tom Lehmann/The Dough Doctor
There is an old saying that “a little bit of price resistance is a good thing.” I never used to understand, but now I do. We raised prices at the start of the year around 7% - what we thought was a huge increase and one we were actually worried about. After the hike, as a company we only heard one complaint that we know about. That lack of grumbling tells me that there is more “room” to raise prices… I haven’t hit a point of resistance yet.
The G.M. with one of my suppliers has become a good ally for my business. A couple years ago he beat me up for not raising prices. My reasoning: “Costs are stable, I don’t need to raise prices.” He just shook his head. Now I get it! I could have given myself raise after raise and gotten ahead of inflation (and invested the money in the meantime), instead I’m raising prices just to keep up. Stupid me.
The most “terrifying” price increase I ever did was adding a delivery fee. We feared the addition of that $.79 would derail our delivery business. And you know what? Volume DID decrease after adding it! However, after seeing the 1st P&L we kicked ourselves for not doing it sooner. We were moving a few less pizzas, but we were making way more money on each one that we did.
Er… what was my point? Oh, yeah. Don’t be afraid to raise prices! Add a dime here and there when you don’t need to just because you can. And, don’t be scared to pass along a price increase when you have to!
I mean, it’s not like someone is going to write a newspaper article about your price increase! 
Brad;
The only word that is missing is “Amen”
Tom Lehmann/The Dough Doctor
I’m sitting on about 1000 printed menus that have yet to be distributed. I figured I would have them out early spring when we did our annual big doorhanging event. I feel the need to raise prices. Can I raise prices without printing new menus for 2 months? Will people notice?