released Augurst 10, 2022

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Podcast Transcript

Crystal Zulauf: How’s it going, Jim?

Dr. Lowe: It’s fantastic, Crystal. Did you, did you drive to work today?

Crystal Zulauf: Yes, I did. Did you?

Dr. Lowe: Um, yes.

Crystal Zulauf: Did you make it here?

Dr. Lowe: I made it here-

Crystal Zulauf: Did it cost you $500 to get here?

Dr. Lowe: It seemed like $500.

Crystal Zulauf: I think I spent 700.

Dr. Lowe: It’s, um, it’s amazing, isn’t it?

Crystal Zulauf: Yes.

Dr. Lowe: What is it- We had gas prices really high, what? Five or six years ago? Seven years ago?

Crystal Zulauf: They were high. But it was like $3.50, not $5.50.

Dr. Lowe: Yeah, they have come down a bit, but they are kind of ugly.

Dr. Lowe: Hi, I’m Dr. Jim Lowe and welcome to the Round Barn.

Dr. Lowe: So what are we going to talk about today?

Crystal Zulauf: We’re going to talk about why are the gas prices so high…and how is that impacting our food supply and the costs of…Food, bacon, cheeseburgers.

Dr. Lowe: Well, I think everybody knows me. I’m Jim Lowe and welcome to the Round Barn. But we have a new host or guest today. I guess it’s a host. Crystal.

Crystal Zulauf: My name is Crystal Zulauf and I work here with Jim Lowe.

Dr. Lowe: So we’re going to have a dive at this and see what happens. So, let’s uh, let’s chat about, yeah, gas prices. So what do you wanna know about gas prices, Crystal?

Crystal Zulauf: I want to know why are they so expensive right now?

Dr. Lowe: I’ll give you my stock answer. If I knew that for sure, I’d be in the Bahamas drinking mai tais. Because-

Crystal Zulauf: I would join you.

Dr. Lowe: I’d be so smart that I wouldn’t have to be here. I think it’s supply and demand, right? So the question is, right, so we have more demand than we have supply. That’s a simple economics answer. The question is why and which one of those changed? So I think if we look at the news– and I’m certainly not an economist, but I think this plays importantly in it or how it relates to food production. Supply has gone down a little bit, I think, If you look at the data. And that’s, right, a bunch of stuff, but that’s the war and what was going on. But really what’s happened is demand has come back to pre-pandemic levels. Like, we’re using as much gas as we were before the pandemic. And remember, we use gas for a lot of stuff besides driving around. So we use gas in plastics. And we use gas in a lot of chemicals. And we use natural gas for fertilizer. We use natural gas for, you know, heating, but we use it for a lot of stuff. So pertaining to Ag, natural gas is a primary driver of how we create nitrogen for corn crops. So, you know, nitrogen comes from natural gas. So what’s happened? Well, I think demand has come back to normal pre-pandemic levels, but we had a little pandemic dip there for a little bit. Where we didn’t drive and we didn’t use anything. And much like the airlines, which are a mess, because they cut off their flight crews because they didn’t have anybody flying and now they can’t get crews back. And they’ve, you know, it’s just been a disaster this summer. Kind of the same thing, it looks like, has happened in the oil and gas industry. So we weren’t using gas, so we quit pumping from wells because demand dropped. Oil got super, super cheap. Natural gas gets super cheap because we weren’t burning electricity in factories and, you know, all that slowed down. So we quit making it. And what we’ve discovered is- Oh, and maybe most importantly, we slowed down refineries. So remember the supply chain for gas is, we pump oil out of the ground, then we take it somewhere and we make gas out of it in a refinery. So we make a product out of raw material. Well, they slowed refineries down because they didn’t need to make gas because we weren’t driving. And so, in particularly diesel, we quit making diesel because we weren’t hauling goods around because there wasn’t demand for it. So all of this happens and- Oh, and diesel fuel is jet fuel. So big reduction in people flying, big reduction in jet fuel. Those refineries shut down. We’re not doing that. And what we discovered is, much like everything else with this crazy inflation we’ve got, when demand came back, it’s hard to turn the spigot back on. It is hard to get things to ramp back up. Look at us at the university. We kind of shut down for four months and then we tried to start again in the fall of 2020. That was rough. Well, you know, we only didn’t do it for, what, eight weeks?

Crystal Zulauf: Right.

Dr. Lowe: And we come back online and it’s rough. So now we’ve had these industries really slow down and we’ve got this just- can’t get the machine. So part of it’s demand, but I think a big chunk of it is we just don’t have supply. Then we got this mess in Ukraine and, you know, all that’s going on as well. I think if you look at the underlying factors, again, I’m not an economist, but if you just try to read the newspaper, these things were in play before that and will probably straighten themselves out. What’s the best cure for high prices? High prices. Because high prices induce more production. People are more willing to produce at high prices than they are low prices. So supply should go up. So high prices are is signal for more supply. And so we should get more supply of fuel. And I think it will come. The gas companies are obviously- or the fuel companies are massively profitable right now. So it will come, nut these are big, complicated factories. They just don’t- it’s not like, “oh, I just go flip a switch and, boop, we got gasoline again.” So as I drove in this morning, gas was $4.50 roughly and diesel was $5.50.

Crystal Zulauf: Yeah.

Dr. Lowe: So what you can see there is, right, it’s not just related to the raw ingredient, the price of oil, but it’s the diesel plants must not be fully online or there’s more demand for diesel relative to output. And so diesel prices are being a bit stickier than what gas prices are. So it’s just, again, supply and demand. I don’t think it’s- it’s not rocket science, but boy, does it suck.

Crystal Zulauf: Yes, it sucks. How do you see this impacting our food prices then? Because our food moves around the country, obviously using large trucks. Is that making a huge impact on our food prices?

Dr. Lowe: I read somewhere, I don’t know if it was in The Wall Street Journal or where I saw that- there was an estimate that actually the $5 diesel, so the sticky diesel price, it’s been over $5 for a long time, is having a lot bigger impact on inflation than $5 gasoline. So if we think about it, diesel is really the primary way we move goods around. It powers our locomotives for trains. It powers airplanes. It powers trucks, big trucks. And so the sticky price of fuel oil, diesel, is really embedding a lot of cost within that supply chain. And our supply chains are pretty interesting today. There’s a lot of transportation. So there’s been discussion, “ah well we should raise food locally because it cut out carbon emissions” and yadda, yadda, yadda. It’s not that much of that of the actual energy expended. And when diesel was cheap, it was not very much of the cost. But now all of a sudden, those costs are getting higher. So if we think about- we had a group up, you know, at McDonald’s last week. So let’s talk about a hamburger. And how does diesel impact the price of the hamburger/ So, well, how does oil impact the price of hamburger may be better. So in the short term, oil is really a diesel cost and that diesel impacts the price of the hamburger, not because it changes what it costs us to raise beef, because beef has got its own supply demand. Raising the cow and marketing the cow, that’s a supply demand of the price of beef, at least in terms of a carcass. So when I- Meat. What we do in animal ag, that’s determined by the supply and demand at the level of the packer. So how many cows are available to harvest versus how many spaces or how many cows does the packer, the processor, want to harvest today. And it’s that balance that really creates the price of meat. So, that’s kind of the first exchange and that’s where animal ag lives. That’s the beginning of the supply chain. We think about the hamburger supply chain- So I have a cow. I make the cow into muscle- into meat. Then I have to make the meat into a hamburger. And when we make hamburgers, we don’t use the steak, right? I mean, like, we all like to eat a steak, but we don’t ground that up in a hamburger. So what becomes a hamburger is actually what we call trim. So when I take a carcass- and we butcher, you don’t see that in a grocery store anywhere, you know, right? Growing up, they’d have a piece of meat in the back and the butcher would cut it. When he cuts steaks or when he cuts a roast out of a part, I don’t use all of that. There’s some pieces so it looks like a chuck roast. I kind of trim the edges off. And when I’m cutting the shoulder out to actually make a chuck, there’s some trim. There’s some pieces that come out of that because I trim it up. So it looks good, right?

Crystal Zulauf: Yeah.

Dr. Lowe: Well, all those little pieces that come off are called trim, and that bit of trim doesn’t get wasted. We don’t throw that away. We grind that up and make hamburger out of it. So most of our hamburger comes from trim or cull animals, where we take the whole carcass, because we don’t wanna use the meat because, you know, it’s not as tender or whatever. So let’s just say we’ve got trim. So I take my steers to town today and I butcher the steer. Got this carcass, got the pieces, the trim, I take the trim from where we harvested that steer and broke the carcass up to a plant that makes hamburgers. So now I’m selling hamburger. I’ve got to transport that. Well there’s some diesel that’ll get used in that. When I’m running the packing plant, there’s a lot of natural gas used in a parking plant because they’ve got to heat water. And I have to use a lot of electricity because I cool the plant. So I’ve got energy demand at the plant. So their costs have gone up. So they want to pass those cost on to their retailer, or to the hamburger maker. So now I’ve got diesel cost embedded in the transport to make the hamburger, then I have to turn around and take the hamburger and take it to McDonald’s distribution. McDonald’s distribution handles it. Again, its cold, so I’ve got increased costs there. Then I put it on another truck and I take it to the local McDonald’s. And the local McDonald’s makes a hamburger out of that. So I’ve got- that hamburger is on a truck from the farm to the packing plants. It’s on a truck from the packing plant to the hamburger maker. From the hamburger maker to the distribution center. From the distribution center to the store. So you look at me, “well why doesn’t just go from the hamburger maker straight to the store?” That’s would be a good question, right? I don’t take it straight to the store because a hamburgers- If I had a hamburger today at McDonald’s for lunch, which I did not. I did yesterday. Not today.

Crystal Zulauf: What did you have today?

Dr. Lowe: Oh, a ham sandwich.

Crystal Zulauf: A ham sandwich.

Dr. Lowe: A ham sandwich. I was traveling yesterday. So I couldn’t have a ham sandwich. So, when you do that, a hamburger isn’t just a burger, right? We think about that as a burger-

Crystal Zulauf: Right.

Dr. Lowe: But what’s on a hamburger? Well, it’s got burger and it’s got a bun and it’s got-

Crystal Zulauf: Cheese.

Dr. Lowe: Yeah. Maybe, cheese.

Crystal Zulauf: Bacon.

Dr. Lowe: Maybe bacon, but let’s just stick with the a simple hamburger.

Crystal Zulauf: Okay.

Dr. Lowe: I got a hamburger, I’ve got bun, and I’ve got some condiments. Ketchup and mustard and a pickle. So when I think about that hamburger, it now has bread. It has burger. It has ketchup and mustard. And it has a pickle. Well, those come from five different places. I don’t make pickles the same place I make ketchup. I probably make ketchup and mustard at the same place. So I’ve got- talking about having a hamburger plant where I make the hamburger. Well, somebody else is making a bun. Somebody else is making a condiment. Somebody else is making a pickle. So all of those have to take a truck ride to the distribution center so they can bundle that up so that all of that goes to the store. So it’s more efficient to take it to distribution. That’s why we have distribution centers. That’s where we bundle it up so we can give the store the components they need to make a hamburger. So everything we’re doing has got transportation in it. The pickle had to come from the field to go to the pickle maker. It goes into a jar or a bag or whatever they put a pickle in from McDonald’s. I don’t know. Then it has to get truck to the distribution center and then it has to get turned around and trucked to the store. So this embedded cost of of diesel is everywhere in our supply chain. And that’s literally true for everything we do. So whether that’s a shirt or whatever, right? Like, I’m a bit shocked Amazon would still deliver the house. Or WalMart delivers to the house. Whatever your a Walmart Plus, or Amazon shopper, or Costco. Whatever you’re willing to do, right? But they all deliver the house today. They haven’t increased that price yet. And that’s been interesting because all that transportation we’ve got, the supply chains, are going to be embedded. So I think if we look about food price in the short term, transport is a big deal. So why are vegetables going up at the grocery store? It’s not that we don’t have enough vegetables. Vegetables are expensive to truck. They don’t weigh very much. They’re pretty bulky.

Crystal Zulauf: I imagine you have to get them there on a fairly short timeline.

Dr. Lowe: Yeah.

Crystal Zulauf: Fresh vegetables, right? Frozen one’s are probably easier.

Dr. Lowe: Right. But they’re- think about lettuce.

Crystal Zulauf: It’s slimy.

Dr. Lowe: Yeah, it gets slimy, but what’s what’s- I’m thinking like a head of lettuce. A head of iceberg lettuce. I mean, it’s, what, six inches or seven inches across weighs ounces. You know, I don’t get very many heads of lettuce on a truck, and a truck can carry, say, 50 tonne or 25 tonne or something, right? 50,000 lbs. I don’t know if we got 5,000 to 6,000 lbs of lettuce on the truck and it’s full. So the expensive cost per pound of lettuce that I’m selling is a lot. I’ve got a lot of transport cost. So vegetables have gone up a lot because they’ve got to be transported fast. They’re not very bulky. So it’s hard to transport. It’s expensive to move per pound that I’m selling. If I’m selling pounds of lettuce. If I’m selling pounds of bananas, or whatever. We don’t get very many on this truck. A lot of bananas. So that’s had an immediate impact and I think that’s kind of our short term impact on, ” why is cost going up” on on food. Long term, we got another whole story. Other whole story, long term.

Crystal Zulauf: What’s the long term story?

Dr. Lowe: We don’t know. But that’s where the embedded costs become interesting. So I said natural gas makes nitrogen. So when we raise crops, you grow your yard, right? You fertilizer yard this spring. All that has nitrogen fertilizer in it. Most of that nitrogen is produced by using natural gas to produce urea. And that becomes- So we take natural gas and natural gas price has gone up. If you’ve noticed your power bill recently.

Crystal Zulauf: It’s as bad as my gas bill for my car.

Dr. Lowe: That’s exactly right. So guess what’s happened to fertilizer prices for farmers? Right through the roof. So did that change what farmers did this year? Probably not, because they’ve already committed to raise corn or whatever they were doing. But next year, we’re having a big discussion about are we going to raise less corn, are going to raise more soybeans because we don’t take as that- What does that do if I’m raising vegetables? What does that do to all of these discussions, right? So now we’re starting to have these longer term impacts and will that change supply? So today, we haven’t changed supply. And remember, prices are driven by supply and demand.

Crystal Zulauf: Right.

Dr. Lowe: Demand was up during the pandemic. It’s kind of come back to normal levels. I should change that. Demand for grocery food went up during the pandemic, not demand for food. We all eat the same. We bought it differently, but, you know, it’s the same. So food demand has stayed fairly steady. It’s gone up in price because of transportation, primarily today. We’ve got all this movement. What we’ve not seen now is, “will we start to see a reduction in supply, which would also increase prices?” Supply is relative to demand. So if demand stays the same and supply drops, is there going to be a supply side challenge starting to come in because of increased costs? So farmers produce less corn. That means corn is more expensive to feed cows and pigs. That means we have fewer cows and pigs because farmers are less profitable as they say, “ahh prices didn’t go up. We’re going to cut back on our inventory when inventory goes back.” Cow and pig inventory drops back. Price goes up. And so, right, there’s these kind of waves that we’re looking at. So short term, we’ve got a diesel impact on what happened to transportation cost. Long term, we’re going to have a discussion around what’s happening with supply because it’s changing the cost structure.

Crystal Zulauf: Are you seeing a difference in demand right now among consumers? Are they changing their habits based on the cost of goods? Like, hamburgers got too expensive so we’re switching to something else. I think chicken is still expensive now, which is probably a different story around avian influenza and whatnot, but are we seeing changes in consumer behavior because of these increased costs?

Dr. Lowe: I think if you read the popular press, I’ve not talked to any of our retailing friends, or at least they’re not willing to divulge all their secrets, but I think if you look at the press, I think there’s been two or three macro trends, which is interesting. One, the consumer is shifting to store brands.

Crystal Zulauf: I like the store brands. I like the Aldi store brands.

Dr. Lowe: Yeah, but they are shifting to, instead of buying Kellogg’s brand cereal, they’re buying whatever the store brand cereal is. And maybe it’s not as great, it’s a bit different, but it’s good enough. And so as prices have gone up, they’re shifting to store brands and away from national brands, and several retailers have commented on that here in the last few months. And so, I don’t know if that has a big impact on what we do every day, but it’s an interesting trend and probably says something about where do the major food brands fit long term. Will they continue to do that? Will store brands be more valuable, etc.? And you brought up Aldi, right? We shop at Aldi’s as well. That’s all store brands. They don’t really carry- And so, that’s one of the reasons they are more profitable because they don’t have all the marketing cost and all that stuff. And so, all the and LIDL, which is the other German chain, we don’t have any here in central Illinois, but those are the two fastest growing grocery chains in the US. And so it’ll be interesting to see what their growth curve does with the change in food price. So if they actually accelerate their growth or not. But I think those are some kind of macro trends. The consumption on beef, pork, chicken conversation, they’ve all kind of gone up at the same time.

Crystal Zulauf: Hmm.

Dr. Lowe: And so- and that has a little bit to do wit- We’ve got bird flu on the chicken side and that’s probably a little bit of supply. And we’ve had good export demand on pigs and there’s good export demand for beef. So maybe a little bit more is getting pulled out in total, in terms of total consumption. But the other thing is that beef price has gone up and beef price has been high and the others kind of play off of beef. So beef is always the most expensive. So as they’ve gone up, these others have been able to kind of ratchet their way up on price and have maintained good profitability in those spaces, for that end of the business, right? So, I don’t know the beef and chicken numbers at all. The pork number, carcass value, retail value of a carcass on pork, has been going up about 2% a year for the last 70 years. Yeah, 1970 forward. So not quite 70 years now. So if you just look at that, that whole time frame- 50 years, not 70 years, Jim. Do the math. 50 years. They’ve been on this kind of 50 year kick that it goes up about 2% a year, USDA calculates. And there’s- I don’t think the numbers that different for beef. But it goes down a little bit occasionally, goes up a little more than 2% occasionally. But it’s just kind of this nice, steady climb. And a lot of that has to do with, when we go buy a piece of meat in the grocery store, we’re not buying it- We think about buying it by the pound, but we’re really buying what’s the price of the package.

Crystal Zulauf: Yes, that’s how I buy them.

Dr. Lowe: Yeah, so you say, “okay, I’m willing to spend $5 on a meal tonight” for whatever that is, right?

Crystal Zulauf: Right.

Dr. Lowe: So whether that’s four pork chops or whatever. But I’ve got $5. So if I walk in and pork is more than $5, I might go grab a bunch of chicken or I’ll change the pork cut or I’ll go get beef or whatever. And so, as all those move up- I mean, I think there’s some short term trend. I’m not a retail psychologist, but you still play those against each other, you know, like, “oh, I can’t afford- I’m going to eat something, so I’ll pick what kind of looks in my price range.” And so I think those are some macro- So those are some long term questions of saying, “are we going to erode demand?” Because of continuing increase in supply- or increase in price. It looks like, if you look at the macro numbers, beef is going to be- this drought out west, is having a material impact on beef production. So we’re going to have less beef. So now we’ve got an inflationary environment with respect to corn price because of nitrogen. We’ve got higher cost across the supply chain, so they’re not incentive to make more. And oh, by the way, we got fewer cows because of drought. So I think beef will be interesting to watch. And how does all that play together? So we think about, “oh, does gas price have a play in food?” Yes, it does. And I think in the short term, it might be having a relatively big play in food. But, boy, long term, it’s a pretty complicated picture to figure out what are really the macro drivers of food pricing on a daily basis. Before we sound too terrible about the groceries, because sometimes I feel like they’re just doing it, one of the interesting bits, if you looked at WalMarts- In WalMarts, don’t quote me, it’s plus or minus 50% grocery or their sales. So, I mean, they obviously sell hard goods. Plus, they hold the grocery business. In their quarterly meetings, they’ve held the price and eaten these price increases in the supply chain. So they’re actually compressing margins.

Crystal Zulauf: The prices for transportation, for fuel, that’s what they’re eating?

Dr. Lowe: Yeah. So as the price of their goods coming into the store going up, they have- Yes, they’ve raised prices. But the price increase at retail hasn’t been as great as the price increase that they’ve paid wholesale and their operating expense. So they’ve compressed margins. In the average grocery business, I think it’s like a 3% gross margin business. It’s not- It’s a volume game. If you’re going to win in groceries, it’s about volume. So there- not gross margin, their operating margins about 3%. So if they sell, you know, $100 worth of stuff, they made $3. And it’s paid for the store and, you know, debt. And so, they’ve got to sell a lot of- they got to have a lot of you and me going through the store to make grocery work. And what they basically said is, “ah, we’ve compressed our margins by 50%. So we’re now, instead of making $3 on every one hundred dollars a transaction, we’re making a dollar and a half. And if we think about a typical business, we’d say, “gross or operating margin ought to be 10%.” A really good business is 15. Groceries is 3. So it’s a tight business. It’s a volume business. It’s always been a volume business. That’s the game that gets played. And so, what you’ve seen at the grocery store today, yes, it’s an increase, but that’s getting compressed, as they’ve said, “ah, we understand Crystal isn’t willing to pay more- that much more for her food, so we’re going to try to eat that to maintain sales.” So, it’s a- it’s an interesting time as we look at what’s going on in the food retailing business today.

Crystal Zulauf: Do they make more when I purchase their store brand as opposed to the name brand?

Dr. Lowe: They don’t release those numbers for a whole bunch of reasons. But, yes. The general sentiment is that store brands are more profitable than national brands. They are significantly cheaper. In some categories as much as 20%. I saw that summary the other day in that article and again, I don’t remember where it was. But, you know, an average store brands is a wide variety of categories, but between ten and 30% cheaper. The number settles at about 20. And that’s all because they don’t have all the advertising campaigns. So they are making that food for themselves. They don’t have the advertise. They’re not spending any money to advertise. It’s not necessarily the lower quality or cheaper. It’s basically saying, “we don’t have all this other embedded overhead cost and we can just put- and we don’t have to split the profit with anybody. We don’t have to pay a manufacturer and a pay a major brand. We’re just paying the manufacturing cost.” And so, the discussion generally is, yes, they make more money. How much that is, no one really knows. What they give up are these things called slotting fees and promotional dollars. So in grocery, most goods that are sold in grocery, if you have a brand- That’s not the store. If you’re trying to sell to the store you actually pay to have shelf space.

Crystal Zulauf: And the prime shelf space-

Dr. Lowe: Costs more.

Crystal Zulauf: Yes.

Dr. Lowe: And end caps cost a lot.

Crystal Zulauf: Yes.

Dr. Lowe: And so, if you’re selling the house brand, yes, they may be making more margin, but they may not be- They’re obviously not getting slotting space or shelf space payments. And so, you know, they obviously- They’re not going to discuss how all that works. So do they make more money? Yeah, it sounds like they do. And obviously, if they didn’t make money on it, they wouldn’t be doing it, right? Like, these company’s are not stupid. But, how much more? I don’t know.

Crystal Zulauf: So in your household, have you guys made changes because of how much gas prices cost? Like, do you drive less?

Dr. Lowe: I’m probably not the right guy to ask. I don’t think we’ve driven less yet. I think we have complained about it more. I drive a lot for work still, right? So that’s why I said It’s a hard, hard thing for me to think, cause I get- But I’m doing that, and paying mileage, and so- What I have noticed is, that as I talk to people I do business with, or people I’m, you know, business acquaintances, there’s a lot more complaining about mileage costs. There’s a lot more discussions about, “do we need to go do that because that costs $0.60 a mile, or 60 and a half, whatever it is, a mile, to drive today versus $0.40 two years ago. And should we be thinking about- So I think there’s- Are you guys driving less?

Crystal Zulauf: Yeah, we combine our trips so we live about, what, 20 minutes away from all the shopping in town.

Dr. Lowe: Yep.

Crystal Zulauf: And so, we combine- Instead of doing two or three trips, we’ll combine everything into one. And so, our habits have definitely changed in order to try and save some money. Is there opportunity along- I know we’ve got four points where our food is going to be moving to get from cow to McDonald’s. Is there opportunity for that to condense at all or is that so well streamlined that they’re not- they can’t even cut any costs there?

Dr. Lowe: It probably won’t take steps out. They won’t take out those phases, but companies are really- Like, high prices solve high prices. The best thing for high prices is high prices, and the best thing for low prices is low prices because it will cut production. In a commodity business, which is- food is commodity. These companies are amazing when they have to have an increase in price. So if beef price goes up, if McDonald’s is like, “oh, we know we’re going to have longer term, higher beef prices-” You know, I can’t change- Again, I’m willing to pay $2.39, or whatever it is, for a burger. What beef price does and what McDonald’s can charge for a hamburger are independent of each other. In many respects. It’s very hard to pass the cost of beef along, in the increased value, because I’m accustomed to paying whatever the magic price is for- So years ago, right, we were in a grocery chain, talking to a grocery chain. They said, “oh, $2.79. That’s what the average consumer’s willing to pay for two pork chops.” This is 15 years ago. Didn’t matter what they weigh, didn’t matter what they look like. It was $2.79 for two pork chops in one bag. And so, they would do almost anything to maintain $2.79. They’d cut different weights, they did different things, but again, they absorbed a lot of the price change. If you’re a McDonald’s and you’re really a highly processed product- That’s going to sound terrible. They’re not highly processed. It’s a product. It’s not meat. They’re selling a sandwich.

Crystal Zulauf: Yes.

Dr. Lowe: Right? It’s the experience of the sandwich they’re selling, including how they serve it to you and all that stuff. They are not likely to want to change that because they understand what people want to pay for that experience. So as beef price goes up, if it’s going to be up for a long time- Or a wheat price goes up, i.e. their buns going to go up more. They are amazingly efficient at driving increased efficiency in the supply chain. They’ll figure out how to do trucks different. They’ll figure out how, “how do we have less time in the warehouse.” That may not be that they’re going to save diesel because they’ve got the trucking sorted. But they’ll figure out how to make the warehouse slightly more efficient. They’ll figure out how to make the burger smashing machine more efficient, right? So in those environments, that’s where good operators are really successful. They understand, “listen, we can’t always control the price of the beef, but all this other stuff in the middle we can. And so how do we- how do we flex to make that?” So, do I think that $5 diesel is going to change how the supply chain looks? It’s going to change. They will get better. The royal, “They” will get better. And that’s good for us, right? That’s why food is such a low percentage of our budget in the U.S.. You know, we still spend 2%. We’re all moaning. It went from like 2 to 2.1. Maybe we just like to complain, but it’s- that’s the reality. What else do you want to know?

Crystal Zulauf: What are you making of for dinner tonight?

Dr. Lowe: It’ll be a surprise when I get home.

Crystal Zulauf: I think I’m having steak.

Dr. Lowe: Well, that’s better than I’m probably going to have. It’s Thursday night. Oh, no, I’m not eating at home tonight. It’s golf league. It’s the important stuff, so I don’t know what I’m having for dinner.

Crystal Zulauf: Peanut butter and jelly sandwich when you get home.

Dr. Lowe: No, no. We eat after- we at after golf. So, yeah. So I’ll have whatever. Well, this has been- This has been good, crystal. It’s been a good, good adventure here. So thanks for listening, everybody. And we hope you learned something and we hope you enjoy listening as much as we enjoy giving this to you. Thanks!

Crystal Zulauf: Thanks for joining us. We hope you enjoyed listening and we’d love to hear from you too. Find us on Twitter. Our handle is @TheRoundBarn1. We may even share your comments on our next show. Please subscribe and tell your friends about the show. It’s available on iTunes or the podcatcher of your choice. One last thing. We also offer a wide range of learning opportunities for folks who work with livestock and veterinarians, too. You can learn more at online.vetmed.illinois.edu. See you soon!