Respondents noted that beef costs stay high with no relief in sight. The ISM report shows pricing volatility as the top concern, followed by tariffs and the Iran war.
Raw Material Costs Surge
The Richmond Fed survey found two-thirds of firms reported higher costs from oil prices. One-third noted higher prices, showing a delay between cost changes and actual price movements.
Managing Price Increases in the Food Industry
In recent months, a significant majority of purchasing executives, 58.6%, have reported paying higher prices for raw materials, with the food industry being one of 16 sectors affected by rising costs. Despite this, producer prices for food have remained relatively stable, with a mere 0.1% increase in August. However, other costs, such as diesel fuel, have surged by 77.8% over the past 12 months, creating a challenge for companies to pass on these increases to their buyers. A blanket price increase asks your buyer to accept a cost increase that doesn’t match their own data.
While your freight, energy, and packaging costs go up, your buyer is focusing on unchanged food prices. A letter requesting 4% across the board asks them to trust you over their own data, and they’re likely to push back before you’ve made your case. This leaves you to absorb the difference, taking funding away from new lines, customers, and the people who manage both. To mitigate this, companies can consider incorporating a contract clause tied to specific inputs and measured by a public index, ensuring that both parties are centered on the same data point.
Manufacturing PMI Shows Rising Prices
According to the September Manufacturing PMI report from the Institute of Supply Management (ISM), the prices index rose by 6.8 points to 77.9% over the month, with 58.6% of purchasing executives reporting higher prices, 38.6% reporting no change, and only 2.8% paying less. The ISM calculates this index by adding the share of executives reporting price increases to half the share reporting no change. Raw material prices have been rising for 24 consecutive months, with 16 industries, including Food, Beverage & Tobacco Products, reporting higher costs in September.
Notably, none of these industries reported paying less. Several commodities that have seen price increases, such as corrugated products and packaging materials, have a direct impact on food plants. One food industry respondent noted, “Beef costs remain high, with no relief in sight.” The negative comments collected by ISM for the latest report highlighted pricing volatility, tariffs, and the Iran war as key concerns, with 46%, 34%, and 30% of respondents mentioning these factors, respectively.
If you read the August Producer Price Index (PPI) update the way a food buyer would, you’d focus on final demand foods rising 0.1%, processed foods and feeds dropping 1.2%, and slaughter cattle declining 3.9%. A plant controller, on the other hand, would pay attention to: No. 2 diesel fuel prices rising 77.8% Plastic resins and materials increasing 6.6% Containers for intermediate demand jumping 5.5% Supplies to manufacturing industries rising 10.8% The Bureau of Labor Statistics (BLS) reported that final demand energy prices surged by 24.4% over the year. If you only track food prices, you’ll see almost zero inflation. But if you pay for trucks, film, and corrugate, you’re following steep increases.
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The Federal Reserve’s September Beige Book noted that Philadelphia-area manufacturers reported freight and utility costs that they could not pass on to customers, while in the St. Louis area, poultry demand continued to rise, but increasing input costs squeezed producer margins. Consumer-facing businesses in a few districts reported that price-sensitive shoppers were limiting the amount of cost increases that could be passed through.
As a result, retail customers are likely to bring this pressure into negotiations. A PPI-linked clause can provide a solution, allowing buyers to verify price changes and ensuring that both parties are working with the same data. This approach is already used by some procurement teams, with 28% of respondents to the BLS’s 2024 PPI user survey reporting that they apply PPI data to contract price adjustments.
Using PPI Data to Set Prices
Adding a band and a fallback to the clause can provide additional protection. A no-change band can prevent small price movements from triggering unnecessary paperwork, while a backup index can ensure that the company is covered in case the BLS discontinues or recodes the series. When indexing SKUs based on rising inputs like beef and wheat, companies should consider leaving out inputs like eggs and milk, which may be expected to decline in price.
The USDA Economic Research Service’s 2026 outlook, updated on September 25, forecasts wholesale beef prices rising by 8.5%, farm-level wheat increasing by 18.3%, and farm-level vegetables going up by 16.0%. In contrast, farm-level egg prices are anticipated to drop by 79.2%, and farm-level milk prices by 9.4%. As a result, indexing to beef may be beneficial for beef processors, while an egg-indexed clause for an egg-heavy SKU could lead to lower prices.
Before presenting a PPI-linked clause to a customer, companies should prepare by pulling eight quarters of actual input costs and the matching BLS series. They should then run the proposed clause against this history to see what it would have paid, what it would have cost the buyer, and how often the band would have triggered. AI tools can facilitate this process, allowing companies to run the backtest across dozens of SKUs and several indexes in a short amount of time.
When proposing the clause at renewal, companies should provide an evidence pack that outlines the specific index series for each SKU, a 24-month chart of each index, and what the clause would have done to the price over that period. This demonstrates that the company has already checked whether the clause would have cost the buyer money and allows everyone to start the meeting on the same page.