Girl pouring milk into glass
October 12, 2016

Higher Exports Could Negate Slowdown in Restaurant Business

 |  By: Fran Howard

By Fran Howard

The wide gap between food prices in grocery stores and restaurants sent the restaurant industry into contraction mode in August. While that is not good news for butter and cheese consumption, U.S. cheese and butter prices have become more competitive on world markets, which could offset slower growth in domestic demand.

For the first time this year, the restaurant performance index (RPI) fell below 100, according to a September 30 report from the National Restaurant Association. The August 2016 RPI fell to 99.6, down 1% from July and the lowest level since October 2012. An index at or above 100 represents an expansionary environment for the restaurant industry, while an index below 100 reflects contraction.

“A single month slowdown in the Restaurant Performance Index may simply be temporary, but it merits monitoring in the final quarter of the year,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle. “Relying on further expansion from restaurants to boost dairy demand could be tricky headed into 2017. At the same time, though, lower U.S. prices, relative to international prices, could help kick start U.S. exports, reducing some of the recent reliance on ever-higher domestic consumption.”

Strong domestic consumption of dairy products has been the main driver behind the recent large premiums in U.S. milk and dairy product prices compared with prices in Europe and Oceania. Those premiums have since vanished as U.S. prices have fallen and world prices have climbed.

“Domestic dairy consumption, the engine behind milk prices in 2016, supported U.S. prices above world prices for the majority of this year,” Dorland notes. For January through August 2016, Daily Dairy Report analysts estimate that U.S. commercial disappearance of cheese was 2% higher than the same period last year and U.S. commercial disappearance of butter was just 0.56% ahead of last year—still impressive given this year’s numbers reflect expansion over last year’s strong growth, she adds.

“The addition of all-day breakfast by several fast-food restaurants has been a boon for U.S. dairy because many of the breakfast items contain cheese, butter, or both,” Dorland says.

Large quick-serve restaurants like McDonald’s, Sonic, Hardees, and Jack-in-Box have introduced all-day breakfast menus, while Chik-fil-A and Taco Bell have added breakfast to their menus for part of the day.

With restaurant traffic slowing, domestic demand growth could soften. The RPI sank 1.6% in August to 98.6, due to a weaker current situation index, one of the two indices that make up the RPI. Only 30% of stores reported higher same-store-sales compared to August 2015, and just 21% had more foot traffic.

“Despite slowing near-term data, most restaurant operators are optimistic that the situation could improve headed into the last few months of 2016,” Dorland notes. The future expectations index for August fell only 0.2% from July levels to 100.6, and one-third of restaurant operators believe sales could be higher in the next six months.

“Restaurant business is significant for the dairy industry, especially since Americans are now spending more money on dining out than on groceries,” Dorland said. “A slowdown in restaurant foot traffic could therefore spell a related easing of U.S. commercial disappearance.”

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