Eating into profits

From sunflower seeds to hops to ascorbic acid, the costs of key ingredients are rising sharply for northern

Nevada companies that manufacture food and beverage products.

More troubling, manufacturers have had only mixed success recovering those cost increases through higher prices, and their profit margins are squeezed as a result.

"I can't price myself out of the market," says Fran Pritchard, president of Panchita's Inc., the Minden-based maker of Killer Salsa. But she says profit margins are under assault from steadily rising prices for ingredients.

Ascorbic acid, used as a natural preservative in Killer Salsa products, sold for $4.50 a kilogram a year ago.

In January, Pritchard paid $14. And this summer she's preparing to pay $30.

The culprit? Ascorbic acid is made from corn, and corn prices have surged with the diversion of crops for ethanol production as well as rising demand from a hungry world.

The demand for corn squeezes Joe Dutra, too, as he shops for the sunflower seeds that are a key ingredient for some of the products made by his Kimmie Candy Co. in Reno.

Some sunflower growers, he says, have decided instead to raise corn and lessened supplies of sunflowers pushes up the price of their seeds,

An even bigger issue, Dutra says, arises as chocolate prices have climbed some 30 percent since the start of the year with no end in sight.

Competing in a world dominated by candy giants such as Hershey and Mars, Kimmie doesn't have much room to boost prices unless its bigger competitors also do so. At the start of the year, Dutra says, the company managed to make a 20 percent price increase stick.

A more attractive strategy, he says, is development of upscale candy products that aren't as price sensitive.

Buckbean Brewing Co., a startup beer maker in Reno, has watched as the price of hops a key ingredient in beer have climbed more than four-fold over their level a year ago as growers decided to grow other crops.

And the price of barley, another key ingredient for Buckbean brewmaster Dan Kahn, has doubled in price as more farmland is devoted to crops that can produce ethanol.

The company isn't pressured by the cost increases because of all of its competitors face the same issue, and all are being forced to raise prices.

"The price of our beer is higher than what we originally planned," says Kahn. "Ultimately, the cost increases will end up as higher prices for consumers."

For some food manufacturers, higher raw ingredient prices take a back seat to higher transportation costs, and some see opportunity in regional or even local manufacturing and distribution strategies.

Douglas Damon, president and chief executive officer of Damon Industries in Sparks, says the distributor of fruit juices and bar mixes so far has been able to recoup price increases that have run about 15 percent annually for high-fructose corn syrup.

But fuel prices, he says, are both a problem and a potential opportunity for growth.

Damon Industries is giving serious thought these days to creation of regional packaging and distribution centers. That would cut the costs of hauling products across the country and might give the company a

foot in the door with more national accounts, Damon says.

Similar thinking guides Tahoe Creamery Inc. of Minden as it plans the rollout of retail locations in northern Nevada and northern California.

It's doing so in the face of dairy price increases that have run about 50 percent in the past 18 months.

But Jeff Salen, director of sales and marketing for Tahoe Creamery, says the company's strategy of small production plants in each of the markets where it has significant distribution will allow it to avoid high transportation costs.

In fact, he says, the local plants may give Tahoe Creamery a cost advantage over bigger national names that truck ice cream from distant facilities.