Fast-food restaurants bring home the bacon They now are buying 55% of U.S. supply

August 19, 1996|By BLOOMBERG BUSINESS NEWS

CHICAGO -- The buying muscle of fast-food restaurants is turning the pork market on its head.

As restaurants such as McDonald's and Burger King add more bacon to their menus, prices for pork bellies, which are cured and sliced into bacon, are soaring.

McDonald's Corp., based in Oak Brook, Ill., estimates that 18 million pounds of bacon a year will be served just on its recently launched Arch Deluxe burger. The company also has bacon on its menu for other meals.

In the past six months, Miami-based Burger King said it bought about 2.7 million pounds of bacon. Since 1993, bacon consumption is up more than 30 percent in the 6,600 U.S. Burger King outlets, the company estimates.

"We anticipate using more bacon in our restaurants," said Kim Miller, a Burger King spokeswoman.

"Customers love bigger, better burgers but they want variety. Bacon enhances the flavor."

Last week, Burger King launched the Bacon Double Deluxe Cheeseburger with "three hickory-smoked slices of bacon," Miller said.

Fast-food companies' ability to buy huge lots of bacon is giving them the upper hand in an industry that's used to waiting for tomatoes to ripen in the summer for a surge in consumption of bacon, lettuce and tomato sandwiches.

About 55 percent of all bacon is consumed by fast-food outlets and restaurants, according to Dean Witter Reynolds Inc., up from about 35 percent before 1992.

Driving the market

"Bacon demand isn't driven by retail chains and supermarkets anymore, but by the fast-food companies," said Jim Ritter, a pork belly broker at Stewart-Miller Inc. in Vernon Hill, Ill. "They can buy the meat cheaply in large supply contracts and when prices rise, they don't incur a loss."

Burger King, owned by Grand Metropolitan PLC, and McDonald's together make up two-thirds of the $34.7 billion U.S. burger market.

The rising demand from the fast-food industry comes at a time when a dwindling supply of hogs keeps pork belly inventories low.

The rate of hog slaughter has fallen below the annual average of about 300,000 hogs a day -- a rate that usually produces about 2.25 billion pounds of bellies a year.

"There simply aren't enough hogs around to slaughter, and that led to a drop in supplies of loins, hams and bacon," Ritter said.

Excessive heat last summer disrupted the hog-breeding cycle, leading to lower conception rates and smaller litters, while soaring feed prices earlier this year forced farmers to reduce their herds.

According to a June 28 report from the U.S. Department of Agriculture, the nation's hog population is down 4 percent from a year ago.

Some analysts estimate the herd is as much as 6 percent below last year's levels.

The shortfall helped push stockpiles of pork bellies down 24 percent from last year, and strong demand from restaurant chains is keeping inventories from rising.

"Fast-food demand is a constant factor now, which it wasn't in the late 1980s and early 1990s," said Karen Curry, a livestock analyst with Rosenthal-Collins Group in Chicago.

And if steady consumption by fast-food outlets wasn't enough to keep supplies low, booming demand from overseas was, especially from Eastern Europe and Asia.

In April, for example, U.S. pork exports soared to about 128.6 million pounds from 54.8 million pounds the year before, according to the Commerce Department.

"There's no doubt that export demand is also part of the reason stockpiles are so depleted," said Dan Vaught, a livestock analyst at A. G. Edwards in St. Louis.

The depleted stockpiles have had their effect on pork belly futures.

Pork belly futures hit their highest level ever on the Chicago Mercantile Exchange and, because of the long-term contracts held by large restaurant chains, the pork belly market could face a worse supply shortfall later this month.

Stand and deliver

Bacon producers who agreed to those contracts as a way to lock in sales to fast-food restaurants at a set price likely bought futures contracts to cap their costs.

With the August futures contract on the Chicago Mercantile Exchange set to expire Aug. 27, and no more contracts until February, contract holders could force sellers to make good on delivery as required by exchange rules.

"Fresh pork bellies are going straight to bacon slicers and not into storage," said Ritter of Stewart-Miller Inc. "There are no deliverable bellies being tendered to the warehouses, so supplies are being squeezed."

Pub Date: 8/19/96

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