Area pizza parlors struggle with soaring cost of wheat flour

The thick and thin crust creations at Ciro's Pizza Café wouldn't measure up without good flour and cheese, so Rob Marvin grits his teeth and pays the record prices being charged for them.

He spends $469 a week on flour alone, up from $156 six months ago. Next month, he predicts the tab will grow to $625 a week. So far, he hasn't dared to raise prices out of concern that he'll lose business to rivals.

"There's only so much the consumer is willing to pay," said Marvin, general manager of Ciro's in Folsom and Citrus Heights. "So you have to tighten your belt, not cut corners and hope it's a short-term situation."

The expenses are taking big bites out of the profit pie at pizzerias everywhere, making for a study in how global commerce is wreaking havoc on bottom lines in Folsom, Citrus Heights and other localities.

A weak U.S. dollar has suddenly made the nation's wheat and cheese look cheap to foreign consumers. The wheat is being bought to feed not only people but also poultry, cattle and dairy cows.

While demand has surged, supplies are down. U.S. farmers have been growing less wheat, opting to plant corn and reap government incentives meant to ramp up the nation's ethanol supply. At the same time, wheat farmers in other parts of the world have brought in poor harvests, and the cost of getting wheat to market has soared because of rising fuel prices.

"I don't expect concerns to ease anytime soon," wrote market analyst Brian Henry of Chicago-based Archer Financial Services, in a report for the Minneapolis Grain Exchange. "This market is going to need to see adequate yields and harvest progress before concerns ease."

The increased prices aren't all that worry Marvin. He's equally concerned about getting future deliveries from supply-strapped distributors.

Other flour users such as restaurateurs, bakers and doughnut makers could look to buy larger, months-long supplies as a hedge against increased demand and supply challenges, Marvin said.

It's not much better for cheese. Marvin pays roughly $1.85 a pound for a 40-pound block of mozzarella cheese. It was $1.35 at the same time last year and spiked as high as $2.20 a pound just two weeks ago.

The weak dollar has combined with drought in Australia and New Zealand, two major dairy exporters, to boost international demand for U.S. cheese. Exports have grown roughly 50 percent in the past year, keeping domestic prices high.

While cheese is expensive right now, so is its main ingredient, milk, noted Bill Schiek, an economist with the Dairy Institute of California.

As a result, cheese makers are hesitant to ramp up production for fear that cheese prices will drop, and they'll be stuck with warehouses full of cheddar and mozzarella made from high-priced milk.

"They're pretty much making only what they can sell," Schiek said.

Each of Marvin's stores uses roughly 5,000 pounds of cheese every month and with the cheese market fluctuating from week to week, Marvin says he and other independents can only ride it out.

The big chains are feeling it, too, said Clark Rupp, chairman of the San Ramon-based Straw Hat Cooperative Corporation Board and owner of two Straw Hat Pizza parlors in Sacramento.

Because Straw Hat is a cooperative of restaurant owners, it can negotiate better deals with suppliers, but Rupp still has had to tweak menu prices to recoup costs.

He estimated the rising costs for flour and cheese have added $1.40 to the cost of making a large pizza. Tack on shipping, delivery and fuel costs and the situation is "ugly," he said.

"It's going to get worse before it gets better," Rupp said. "(Costs) are going to continue to go up. They're not here to stay, but it's a bubble that needs to be burst."

If high costs aren't here to stay, as Rupp suggests, they will be here for a while, said Russ McCann, vice president of program sales for Sysco Food Services of Sacramento Inc.

McCann, who worked 25 years in the pizza industry for familiar names like Round Table, Straw Hat and Chuck E. Cheese, calls the cost increases "dramatic."

Once seen as fixed or near-fixed costs, the volatility of both the wheat and dairy markets has been tough for pizza makers to swallow.

"The bottom line is dramatically affected," McCann said, noting that cheese costs have increased by more than a third in the past 12 months.

"Flour's now a commodity with prices changing day to day," McCann said. "Even cheese, if it went up 5 or 10 cents a week, that was a big deal. Now, it's a 20- (cent) to 40-cent swing."

Sysco is working with its pizza-making clients to reformulate their dough recipes with less expensive flour, talking to them about portion control plans and redesigned menus to help cut costs, McCann said, but those are short-term options.

Low profit margins and tough competition, climbing energy costs, labor and overhead expenses will take their toll.

Add to that the rising prices for two of pizza's key ingredients and McCann projects some parlors won't survive.

"I estimate 15 percent closure in the next 18 months," he said. "Pizza operators can't just hold on. They're going to have to pass the costs on," he said. "If they hold on, they'll become another victim. It's not a short-term deal. The market's too volatile, and it's going to remain volatile."

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• Call The Bee's Darrell Smith, (916) 321-1040. The Bee's Jim Downing contributed to this report.