Stockpiling to counter the rising cost of food?

Posted by Daniel Palmer on 20th June 2008

The mounting cost of food has led to members of the food industry seeking new approaches to deal with the issue. For some it has been hedging on financial markets, many are looking to tighten their budgets and reduce other expenses, while others are simply stockpiling to level out the price of food.

Buying in bulk is becoming more prevalent as foodservice managers are trying to avoid a crisis and franchises, in particular, have benefitted from the practice.

Providers of food tend to guarantee prices for a period of time but, with the market so volatile, most are reducing the amount of time they offer contracts for. In Athens, for example, the rising prices have providers avoiding discussions of 6-8 month contracts for food products, with three months now the longest companies are likely to contract to hold prices. This has decreased the ability of businesses to budget their costs for the coming months.

The savings from stockpiling are made for two reasons: 1. The price per unit measurement is likely to fall as you purchase more (e.g. price per kilo of flour would be expected to be lower for a 20kg bag as opposed to a 1kg bag); and 2. With prices constantly on the up the purchase of enough stock to last three months as opposed to two weeks, for example, can enable a company to better deal with price fluctuations. That is, the cost of the product is locked-in for a longer time reducing the impact of price changes and improving the accuracy of budgets.

In America, the two largest warehouse clubs (Sam’s Club and Costco) were forced to limit sales in April in the wake of bulk buying by food wholesalers and retailers and, to a lesser extent, panic purchasing by consumers. With retailers and consumers worried by media reports about a potential rice and wheat shortage they hit warehouse stores with a vengeance and bought rice and flour in high quantities (the concerns were unfounded as America, like Australia, does not have a food shortage).

“These limits are designed to prevent large distributors or wholesalers from depleting our stock,” a statement from Sam’s Club said. “We believe limiting rice purchases to four bags per visit is consistent with the needs of the majority of our members, including many restaurants.” This statement implies their concern that, because their prices are lower than that of many restaurant suppliers, the bulk purchase of products from them has become popular for wholesalers and retailers alike.

There have also been reports of American restaurants buying larger freezers to stockpile product as a means of reducing the impact of any future rises. There are issues with stockpiling, however, as the food commodity markets could collapse, and there is also the obvious quality issue.

If the wheat market collapsed, for example, and a restaurant still had a stockpile of 4 months worth of flour, then operators would be left with a lot of expensive and overpriced product. Further, the rewards of stockpiling can only be reaped with products that have a long shelf life, which has seen the bulk purchase of flour, rice and frozen food become more popular recently.

The cost of food is leaving many concerned and stockpiling has proven to be one way that some companies have been able to level out the effect of price escalation. The impact of the strategy largely depends on the supplier of the product; as if prices are locked-in for an extended period then stockpiling is not worthwhile, as it will just clog up space but, if prices of products with a long shelf-life are likely to consistently fluctuate, then the practice could prove financially rewarding.