Olive Garden's parent company says one ingredient is 'historically expensive'

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Jim Cramer is Watching Darden's Earnings on Tuesday

With recent upticks in inflation and the Federal Reserve's focus on the measure, more and more attention is being paid to the pricing landscape in the US.

According to Gene Lee, CEO of Darden Restaurants, the massive price increase of beef is already crushing bottom lines.

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"I will say and I think it's important for everybody to know this, is that the middle meats continue to be strong," Lee said Tuesday in a quarterly conference call.

"And we have seen a lot of relief in ground beef, but we have not seen a lot of relief in the middle meats, your tenderloins, your short loins, and your ribs. And so I believe that beef in '17 will be less than it was in '16, but I also believe beef is still going to be historically expensive."

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Olive Garden's parent company says one ingredient is 'historically expensive'
In this May 22, 2014 photo, patrons enter an Olive Garden Restaurant in Short Pump, Va. (AP Photo/Steve Helber)
In this Wednesday, March 20, 2013 file photo, people leave an Olive Garden restaurant at sunset in Foxborough, Mass. (AP Photo/Steven Senne, File)
IMAGE DISTRIBUTED FOR DARDEN- A group of veterans celebrate Veterans Day with a free meal at the Olive Garden restaurant in Kissimmee, Fla. Olive Garden, Red Lobster and LongHorn Steakhouse are saluting those who serve our country by providing a variety of free menu items to veterans and active-duty military on Sunday, Nov. 11, 2012. (Scott A. Miller/AP Images for Darden)
Two employees enter an Olive Garden restaurant on the north side of Indianapolis, Friday, Dec. 15, 2006. (AP Photo/Tom Strattman)

Olive garden Italian Restaurant logo.

(Photo via AOL)

People enter a Darden Restaurants Inc. Olive Garden location in Reno, Nevada, U.S., on Thursday, March 19, 2015. Darden reported a 2.2 percent increase in same-restaurant sales for the Olive Garden versus last year, in a third-quarter earnings report released on March 20. Photographer: David Paul Morris/Bloomberg via Getty Images
An Olive Garden restaurant is shown in Hialeah, Fla., Thursday, Sept. 6, 2012. Servers at Olive Garden, Red Lobster and other eateries are suing the restaurants' parent company, claiming they were cheated out of overtime pay and not allowed to clock-in until customers arrived. The federal lawsuit against Darden Restaurants seeks back pay and other compensation, plus interest and attorney's fees. (AP Photo/Alan Diaz)

Lee, whose group includes the restaurant chains LongHorn Steakhouse and Olive Garden, is right that beef prices have shot up in recent years. For instance, the price of retail ground beef peaked in February 2015 at $4.24 a pound, according to the Bureau of Labor Statistics, nearly double the average price from 2006 to 2011. Same for USDA choice steaks, which peaked at $9.18 a pound in July after lingering near $6 a pound from 2006 to 2011.

Supply has been constrained by drought conditions in large cattle-producing states like Texas, as it has been expensive for ranchers to feed and maintain herds. This has pushed the prices well above long-term historical averages, and that is hurting restaurants like Darden.

There is, however, some good news on the horizon.

"The futures market looks very positive as we move forward," Lee said. "We at Darden have been short through this last cycle, and we expect it to be a tailwind as we move into next year."

Prices have indeed been sliding — retail ground beef is a few cents under $4 a pound — but Lee said the continued higher prices of the meat should still affect food retailers and restaurants for the foreseeable future.

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