By Nina Trentmann and Kristin Broughton 

Some grocers, food manufacturers and restaurant chains weathered the supply-chain disruption in recent months in part because they use a common hedging practice: Locking in beef prices and quantities of meat purchases months in advance.

Costco Wholesale Corp. and Jack in the Box Inc. are among the companies that have said they negotiate prices of some supplies in advance, providing finance chiefs with a forward look on costs.

That practice became a key tool for these companies after the pandemic disrupted the U.S. meat supply and prices soared.

Slaughterhouses and processing plants were shut down for days and sometimes even longer in March and April to contain the spread of the novel coronavirus. Major meat processors such as JBS USA Holdings Inc., Tyson Foods Inc. and Smithfield Foods Inc. temporarily scaled back their operations. In addition, transportation and distribution networks were affected, making it harder to get meat to stores and restaurants.

Prices fluctuated wildly as restaurants and food-service providers adjusted to virus-related restrictions, and grocery stores responded to stronger consumer demand. For instance, the price of pork belly per 100 pounds swung from around $40 in mid-April to over $200 in mid-May.

Consumer prices for beef, pork and poultry were up several percentage points in April compared with March, according to the latest available figures by the Bureau of Labor Statistics.

Many businesses that use frozen protein products -- including food manufacturing companies and restaurants -- agree on prices and volumes with their suppliers roughly one year out, said Matthew DiFrisco, a managing director at investment bank Guggenheim Securities LLC.

"It removes uncertainty or volatility," Mr. DiFrisco said. Companies usually negotiate these contracts in February, with some staggering them throughout the year, he said.

Costco is locking in some prices with suppliers, Chief Financial Officer Richard Galanti said. He declined to provide specifics on how much of Costco's supplies come with pre-agreed prices but said the operator of members-only warehouse stores would lock in prices for weeks or months at a time.

"It's not unlike locking in currencies. How we operate hasn't really changed," Mr. Galanti said. He said he expects overall food prices to come down as supply shortages ease.

Hormel Foods Corp., the maker of Spam and other food products, relies on forward prices for a limited amount of pork, its finance chief, Jim Sheehan, said. "We wouldn't go in and lock in all the cost of pork," Mr. Sheehan said. "We would have a balance between contracted prices, open-market prices and then operating costs."

The Austin, Minn., food manufacturer keeps price locks at a minimum to mitigate risk of price fluctuations and to prevent speculation on future pork prices, Mr. Sheehan said. He said the company has been able to manage the market fluctuations during the pandemic.

Some restaurant chains follow a similar approach by agreeing to preset prices for a portion of their ingredients. Jack in the Box, the San Diego, Calif.-based fast-food operator, locks in some prices for beef and other products, finance chief Lance Tucker said.

Jack in the Box hasn't suffered from supply constraints during the pandemic, Mr. Tucker said. The restaurant chain kept its drive-throughs, which generate most of the company's sales, open.

"We talk to our supply chain every day, and we are not expecting any big shortages," Mr. Tucker said. He declined to comment on how much of the company's supplies have locked-in prices.

Competitor Wendy's Co., which doesn't use frozen meat and serves fresh beef only, reported temporary limitations to certain menu items because of supply shortages. It is harder to lock-in rates on fresh beef, Mr. DiFrisco of Guggenheim Securities said.

Agreeing to set prices in advance can provide stability for the business, but it also comes with risk, Hormel's Mr. Sheehan said.

"We've all been in a situation where we were sure that the market was going to go in one direction and it didn't," Mr. Sheehan said. "And you do that just once or twice, and hopefully you're smart enough not to do that again."

Write to Nina Trentmann at Nina.Trentmann@wsj.com and Kristin Broughton at Kristin.Broughton@wsj.com

(END) Dow Jones Newswires

June 02, 2020 19:12 ET (23:12 GMT)