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

Jim Cramer is Watching Darden's Earnings on Tuesday
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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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.

ground beef prices
ground beef prices

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