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Wheat Prices Keep Burning Higher

Supply constraints have put the grain in uncharted territory.

The price for wheat has catapulted to record highs from what were already elevated levels earlier in the year as inventories reached their most constricted point in six decades.

Along with rising prices for other food commodities, as well as climbing energy costs and a potentially slowing economy, it could spell continued stress for casual dining firms such as

Brinker International

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Darden Restaurants

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Some may have already started to feel the bite. Earlier this week, Darden reported disappointing quarterly earnings, in part due to rising food costs, sending the shares down more than 7%. Brinker retreated in sympathy.

Darden runs Red Lobster and the Olive Garden. Brinker operates eateries such as Chili's Grill & Bar and Romano's Macaroni Grill.

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reported that low inventory levels for wheat helped propel prices to then-record levels above $9 a bushel. At the time, analysts warned that the casual dining space could see margins squeezed.

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Since then, though, wheat prices have climbed even higher.

The cost of the grain recently surged to $10.30 a bushel amid continued supply worries and strong demand, but have retreated to $9.77 at the Kansas City Board of Trade. That compares with a long-term average price that experts say is normally around $3.50.

Larry Glenn, of Glenn Commodities in Wichita, Kan., says the cost of wheat could go even higher longer term, although "we may have reached a short-term top."

He explains that the phenomenon isn't likely a temporary one, because inventory levels are now "the tightest in the last 60 years."

At least three factors seem to be at work. First the declining value of the U.S. dollar is helping boost prices for all dollar-denominated items, which include food commodities and oil. But also demand for corn-based ethanol has had a ripple effect through the farm patch, driving up everything from milk to beef and soybeans.

Add to that rising consumption of food and energy throughout the world, and it's easy to see why the costs for restaurants are going to remain high.

That means dining establishments are going to have to do some "real juggling," says George Yared, chief investment strategist at Minneapolis-based Yared Investment Research. However, he notes the wafer-thin margins in the business don't give chief financial officers too much room to maneuver.

In addition to Darden and Brinker, Yared says

Panera Bread


is another stock to watch.

And now there's something extra to add into the mix: a slowing economy. Even the most optimistic forecasters say growth will be lower than previously anticipated.

"That's bad news because people's eating habits change when the economy slows," says Peter Morici, professor of economics at the University of Maryland, with people more likely to forgo a meal out in favor of a homemade one.

Casual dining restaurants, and those that don't cater to high-spending customers, will also find it hard to pass on the rising costs through price increases, he explains.

"They've already seen problems," he says, "and they are going to see more."