Inflation is hitting one of Iowa’s cultural landmarks: gas station pizza.
Casey’s General Stores CEO Darren Rebelez disclosed to investors last week that the company has hiked prepared food prices three times since October, most recently at the beginning of May. And the rising cost of cheese is getting most of the blame.
The company didn’t disclose how much it has raised prices over the last eight months. But at its new Ingersoll Avenue store last week, a single slice retailed for $2.99. That’s up from the $2.56 that the tracking website fastfoodmenuprices.com most recently found.
Rebelez told analysts that with inflationary pressures pushing the price of many foods up, he believes consumers are willing to pay a little bit more at Casey's than they did earlier this year.
“Nobody really knows what the proper price for a pizza should be,” he said.
With about 2,500 gas stations in 16 states, Ankeny-based Casey’s continually ranks among the country’s five biggest pizza chains.
The pizza price hike comes after the company’s profit margin on its prepared foods, which also include doughnuts, hamburgers and breakfast sandwiches, dropped for three straight quarters. Casey’s reported a margin of 56.9% in the segment from February through April, down from 61% in early summer 2021.
But Rebelez and Chief Financial Officer Steve Bramlage singled out cheese, a prime pizza component, as the culprit. The company said the price it pays for the cheese it buys in boxcar quantities to pile on its pies is up about 30% from a year ago, resulting in a $3.5 million hit on profits in its most recent quarter.
The increased cheese price accounted for about one-third of the drop in profit margins for the company’s prepared foods division, it said.
Bramlage told investors the company is watching cheese futures markets “like a hawk every day,” waiting and hoping that prices will drop.
“The last six months have proven difficult to find any forward pricing that really makes any sense,” he said.
Expensive grains mean expensive milk. Expensive milk means expensive cheese.
The U.S. cheese market has been a “roller coaster” for the last two years, said Dave Kurzawski, a dairy broker at StoneX Financial.
Blocks of cheddar dropped to close to $1 a pound at the beginning of the pandemic in spring 2020, as cheese producers lost many of their restaurant customers. But as U.S. prices sank below those of major producers in Europe and Oceania, American factories found international buyers.
The U.S. government then began buying more cheese and providing COVID-19 relief payments to dairy farmers. Grocery stores bought more aggressively as customers ate at home more often. By June 2020, buyers on the Chicago Mercantile Exchange were paying a record $2.81 per pound for cheddar.
The market returned to normal for the first half of last year. But rising corn and soybean prices pressured dairy farmers, who rely on the commodities for feed. They sent their least productive cows to slaughter.
“Any animal that looked at them sideways got culled,” Kurzawski said.
From May 2021 through January, the U.S. dairy cow herd decreased by 140,000 head. Phil Plourd, head of market intelligence for Ever.Ag, said year-over-year U.S. milk production has been down for seven of the last eight months.
Demand for dairy, meanwhile, remained steady. Plourd said grocery stores promoted cheese heavily, given that the product’s price hadn’t risen as sharply as those for other goods like meat. Eventually, prices increased.
“You can’t just add another shift,” he said of dairy farmers. “You’re dependent on cows.”
The cost of Class III milk — the variety used to make cheese — hit $25.21 per 100 pounds in May, a 33% increase over where the price stood a year earlier. The price of cheese steadily rose, as well.
Russia’s invasion of Ukraine in February put further pressure on the market. Grain exports from Ukraine dropped, keeping feed prices high. And a surge in gas prices increased the cost of transporting goods and running farm equipment.
All told, cheddar traded at $2.34 a pound in April, up from $1.91 a pound in January.
Lino Saputo, CEO of Canadian cheese giant Saputo, said on a June 9 investor call that the company’s most recent fiscal year was “disappointing.” The company, maker of brands including Frigo, Stella and Treasure Cave, reported a $274 million profit for the year that ended in March, down from $626 million the year before.
Though it produces in five countries, the company blamed the U.S. market for its struggles. Lino Saputo told investors that the commodity-level prices for cheese and milk used to run within a nickel of each other, per pound. But milk has been much more expensive lately. Saputo reported that milk traded for 41 cents more per pound than cheese in January and February.
Lino Saputo said executives are renegotiating their contracts with customers and will increase cheese prices in July. He added that the company, which operates 29 U.S. factories, will try to raise cheese prices in anticipation of inflation before it affects them.
“We were playing defense,” he told investors. “Now, we’re playing offense.”
Kurzawski said the price should fall this summer. U.S. dairy farmers have added 35,000 cows since January. The price of cheddar decreased to $2.33 a pound in May, implying that demand has dropped.
“That doesn’t mean Casey’s won’t pay higher prices than normal,” Kurzawski said. “But it should be better than their prior quarter.”
Iowa dairy farmers have an advantage — to an extent
In one sense, Iowa’s dairy farmers are better positioned than most to handle feed price increases. Unlike western producers, most grow their own corn and soybeans.
They still deal with input challenges, such as the increased cost of fertilizer. But they don’t have to pay for delivery of the commodities — an expense that is rising with gas prices.
“We are insulated certainly more than someone who is buying their own feed,” said Larry Shover, the president of the Iowa State Dairy Association and operator of a 100-cow farm in Delhi.
The farmers are dealing with other increased costs, however. Feed still needs to be supplemented with hay and protein sources like canola meal. Vitamins are more expensive than they used to be. Suppliers struggle to make enough ear tags for cows and alkaline-based cleaners for the stainless-steel pipes that carry milk to storage tanks.
Kevin Knapp, who runs a 170-cow operation in Larchwood, said he also has increased hourly wages for his three employees by $4 this year. Fearful of more price hikes, he hopes to buy enough hay this summer to last his cows through the spring. He said he locked down a contract for canola meal last summer that runs until the fall.
“It’s going to be a whole new world,” he said of trying to negotiate a new contract. “Then we’re going to see even higher feed costs.”
Gary Kregel, of Clayton County, said he raised his standards for how profitable cows need to be to survive. He is quicker to pull a cow whose milk doesn’t have high enough percentages of butter fat and protein. He has 350 head right now, down from his usual 380.
Unlike a grain farmer, Kregel can’t keep his commodity in storage until prices improve. He ships fresh milk to buyers every two days.
“There’s no need to keep marginal cows,” he said.
Fancy cheese prices aren't like gas station pizza cheese prices
Despite the price hikes affecting Casey's, Des Moines’ most prominent high-end cheese retailer hasn’t seen prices rising.
C.J. Bienert, owner of the Cheese Shop and Cheese Bar on 42nd Street, buys about half his product directly from farmers and the other half from European importers. He said prices have remained surprisingly steady this year.
Bienert said his suppliers enjoy bigger profit margins than bulk manufacturers that supply chains like Casey's. With the price of milk up, he said, he believes his suppliers are eating more of that cost — and taking a smaller profit.
“Now our $15 grilled (cheese) sandwich (at the Cheese Bar) is a deal,” Bienert said. “We were laughed at at one time. But we haven’t been taking a ton of price increases because we were already paying a fair amount.”
Even so, at least a small hike appears likely in his future.
One of Bienert’s suppliers in southeastern Iowa, Milton Creamery, will increase prices by 6% in July. The company is best known for Prairie Breeze, a sweet-tasting white cheddar aged for nine months.
Junior Musser, who co-owns the company with his father, said they have increased prices only three times in 11 years. He said they try to remain consistent to appease high-end buyers. Fancy restaurants don’t want surprises that force them to print new menus.
In addition to milk, Musser said, Milton Creamery is paying more for ingredients and cleaning chemicals.
“We’re just hoping that we can ride through this storm, that this price increase can be enough,” Musser said.
Mike Bandstra, who owns the Frisian Farms Cheese House in Leighton, said he increased the price of his curds by 10% at the end of April. On top of other inputs, he said, the cost of the wax coating for his specialty, gouda, has increased.
Bandstra said he doesn’t plan to further raise prices. He worries that too many of his customers in Chicago, Iowa and Kansas City will stop buying if he tries to pass on the cost.
“I feel bad if I have to raise prices, you know?” he said.
This article originally appeared on Des Moines Register: Casey's General Stores raises pizza prices due to cheese inflation