With the November elections less than seven months away, soaring food inflation is emerging as one of the most urgent issues confronting the nation, prompting lawmakers, presidential candidates and foodservice industry officials to promote legislative remedies.
Armed with proposals that would freeze domestic corn-based ethanol production at current levels, cut farm subsidies, clamp down on commodity market speculation and manipulation, remove tariffs from imported biofuels, and temporarily repeal gasoline taxes, officials are moving to rein in some of the causes of escalating food prices.
The skyward trajectory of those commodity costs also has prompted the National Restaurant Association and the National Council of Chain Restaurants to form an unprecedented alliance with environmental and social advocacy organizations and other trade groups in an effort to convince Congress to rethink the hurtful agricultural ripple effect of federal biofuel policies.
“We’ve been hearing from our members that food inflation is one of the top-priority issues for their companies right now,” says Scott Vinson, the NCCR’s vice president of government relations.
Cheryl Bachelder, chief executive of Atlanta-based AFC Enterprises Inc., which owns the Popeyes Chicken & Biscuits brand, says she is “deeply concerned” about the current economic situation.
“As an industry, we need to speak out,” she says. “A few weeks ago no one was even talking about this. Now we’re looking for ways to get involved.”
However, experts point out that crafting a public-policy response to rising costs will not be easy, given the extreme complexity of the problem, particularly during an election year.
Macroeconomic trends fueling accelerating commodity costs include soaring global energy prices; the weak U.S. dollar; increased buying power in emerging powerhouses like China, India, Russia and Brazil; weather-related production shortfalls; growing speculation in the commodities market; and the drive to use food as a fuel source—in particular, corn-based ethanol.
“It’s become difficult to get a handle on all of the different pieces,” says John T. Barone, president of Market Vision Inc. in Fairfield, N.J., which provides commodities analysis and purchasing support services to restaurant chains. “There are so many outside forces that have structurally changed commodity markets. You might as well throw the existing models based on historical supply-and-demand relationships out the window.”
Restaurateurs are old hands at dealing with seasonal price fluctuations based on supply and demand, but the current economic scenario appears to foreshadow some more permanent alterations down the road, foodservice industry authorities say.
“I think we are in for some structural changes,” says Michelle Reinke, the NRA’s director of legislative affairs, “and my fear is that the prices won’t be coming back down to where they were before.”
According to the NRA, food prices rose 15.5 percent between February 2006 and February 2008, costing restaurateurs billions of dollars in increased food cost.
The U.S. Bureau of Labor Statistics’ Food Price Update for April 18 reported that year-to-date wholesale food prices rose 8.5 percent. That hike followed a 7.6-percent increase in 2007, the largest single-year food price increase in 27 years.
As a result, lawmakers are stepping into the fray in an attempt to brake runaway costs. While some of the contributing trends are beyond governmental control, one target of renewed legislative interest is the increased production of corn-based ethanol, which some say is fueling food cost hikes.
The Food and Energy Security Act of 2007, which was passed by Congress last December, mandates a historic five-fold increase in the production of ethanol—a renewable energy resource with strong bipartisan support in Washington—from 7.5 billion gallons in 2012 to 36 billion in 2022. The measure, which provides subsidies for ethanol blenders, also is helping to persuade farmers to shift their corn harvest to ethanol production or even convert former wheat and soybean fields to more lucrative corn crops.
Approximately 30 percent to 35 percent of all corn, which is key to feeding livestock and poultry, now is being channeled into ethanol production. By comparison, some longtime foodservice operators recall pre-ethanol times of troubling food inflation when a drought or some other market force reduced the corn crop by even low-single-digit amounts.
Sen. Kay Bailey Hutchison, R-Texas, this month said she would introduce legislation designed to freeze last year’s biofuel mandate and halt scheduled increases.
“In recent weeks, the correlation between government biofuel mandates and rapidly rising food prices has become undeniable,” Hutchison wrote on her website. “At a time when the U.S. economy is facing recession, Congress needs to reform its ‘food-to-fuel’ policies and look at alternatives to strengthen energy security.”
Characterizing the mandate as “a well-intentioned” measure, she nevertheless concludes it is “impractical” and notes that “nearly all of our domestic corn and grain supply is needed to meet this mandate, robbing the world of one of its most important sources of food.” Hutchinson predicts that fulfilling the scheduled mandate eventually would require all of the corn currently raised in the United States.
AFC’s Bachelder says freezing corn-based ethanol production at its current level is not enough, though.
“I favor more urgent action,” she says. “We should repeal the whole thing fast.”
Other lawmakers also have begun to make their voices heard in the ethanol debate. Sen. James Inhofe, R-Okla., the highest-ranking Republican on the Senate Environment and Public Works Committee, is petitioning the government to institute “an immediate waiver” from the ethanol mandate, which would allow Congress time to review the measure’s unforeseen impact.
“People are starving to death because of this transfer from food to fuel,” Inhofe said.
Rep. Jeff Flake, R-Ariz., recently introduced a bill in the House seeking to repeal government tax credits for producing ethanol. Called the Remove Incentives for Producing Ethanol Act of 2008, or the RIPE Act, H.R. 5911 has already drawn a number of supporters in the House.
The inflationary ripple effect of the nation’s biofuel policy “is a classic case of the law of unintended consequences,” Flake said recently. “Congress surely did not intend to raise food prices by incentivizing ethanol, but that’s precisely what happened.”
From her vantage overseeing the Popeyes chain, Bachelder sees the subsidizing of corn crops as having “turned the market upside down.”
“Corn used to account for 25 percent of the cost of chicken,” she says. “Now it’s 50 percent. It’s forced us to raise prices, which we don’t want to do. It’s also slowing traffic and lowering the average ticket because people are just spending less. That’s not a lot of good news.”
She estimates that the foodservice industry has been forced to raise prices by some 3 percent.
While President Bush cites increased ethanol production as a key component of the nation’s energy policy, Secretary of State Condoleezza Rice allows for the possibility of negative fallout from the current U.S. biofuel program.
“Although we believe that while biofuels continue to be an extremely important piece of the alternative-energy picture, obviously we want to make sure that it is not having an adverse effect,” Rice said recently. “We think that it is not a large part of the problem, but it in fact may be a part of the problem.”
Widespread concerns over rising food prices and the nation’s controversial biofuel program have prompted the formation of an unusual alliance that includes the NRA, NCCR, several food industry associations, tax and budget organizations, and environmental and hunger groups like Friends of the Earth and Oxfam America.
“We’ve been working to bring together a broad group of interests on this issue,” the NRA’s Reinke says. “It’s an unprecedented coalition.”
The group is calling on Congress to revisit mandates put in place by the energy bill “and help make the transition to biofuel not made from food stocks as quickly as possible.”
The NCCR’s Vinson says the initially unnamed Washington-based coalition has been in communication with Hutchison’s office about the senator’s bill to freeze ethanol production, and sent an open letter to New York Democrats Sen. Charles Schumer and Rep. Carolyn Maloney, who recently held a congressional Joint Economic Committee hearing on rising food prices.
In the letter signed by representatives of the coalition’s 19 member groups, the alliance acknowledged that food prices are impacted by numerous factors, but stressed that Congress has the ability to address perceived biofuel policy glitches.
“We urge you and your colleagues to continue examining food-to-fuel mandates in the context of national and global priorities,” the letter states. “We must quickly transition toward supporting solutions that don’t pit our energy needs against our food needs.”
But this is not the first time the NRA and NCCR have petitioned lawmakers to be mindful of the possible ramifications of its biofuel policies. When the energy bill was being debated last year, the two associations, together with foodservice operators like Darden Restaurants and Cracker Barrel urged Congress and the Bush administration to consider “potential unintended consequences” of increasing the renewable-fuel mandate by relying on corn-based ethanol.
Industry members also voiced concern that farmers would plant fewer acres of soybeans, making it more difficult for the industry to transition over to trans-fat-free oils. Though exerting less impact than corn, soybeans also are being diverted from food market needs to make biodiesel fuel.
Reinke says the NRA has been asked to testify on the biofuels issue before the House Small Business Committee this month.
Some observers, however, question whether much can be accomplished at this point to influence public policy and rein in seemingly out-of-control food cost inflation.
“As far as lobbying goes, the horse might just be out of the barn,” says Ed Droste, a co-founder of the Hooters chain and now owner of Provident Advertising and Marketing in Clearwater, Fla. “I thought we would have been more of a player during [last year’s energy] hearings.”
Though Washington officials expect an uphill battle toward possible enactment of any new energy-related initiatives in an election year, the food price crisis is beginning to generate additional heat as the presidential candidates seize upon it as a campaign issue.
Presumptive Republican nominee Sen. John McCain, R-Ariz., favors the repeal of all ethanol subsidies that encourage increased production. As president he would rescind the 51-cent-a-gallon subsidy paid to fuel blenders for using ethanol, he said. A longtime opponent of subsidies, McCain also has said he would veto the $300 billion, five-year farm bill that was making its way through Congress this month, even though it seeks to reduce the per-gallon ethanol tax credit from the current 51 cents to 45 cents.
David Palmer, an analyst with the financial services firm UBS, was quoted in a news report recently as saying that McCain’s policies would benefit the restaurant industry. Palmer noted that the elimination of ethanol subsidies “would be a catalyst for lower food input costs.”
McCain also has declared he would end the 54-cent-per-gallon tariff on ethanol imports from countries like Brazil, which produces ethanol from sugar cane. The removal of the tariff would enable U.S. suppliers to purchase imported ethanol at a cheaper price than is charged by domestic producers. The new farm bill provides for a two-year extension on the tariff.
Many warn, however, that such actions not only would wipe out the country’s budding ethanol industry, but would punish its farmers as well. Sen. Charles Grassley, R-Iowa, testified before the recent congressional Joint Economic Committee while gripping a box of corn flakes and informing colleagues that a farmer makes less than 10 cents from a box that costs the consumer $5. “When a farmer gets so little out of a box,” he said, “don’t be blaming the farmer and ethanol for the high price of food.”
However, some critics, including President Bush, are calling for the elimination of the farm bill’s $25 billion in subsidies for farmers, claiming they are earning record income in the face of soaring food costs.
The Agriculture Department predicts that the average farm household will make in excess of $89,000 in 2008, which reflects a 6.3-percent hike over 2007.
In the meantime, the presidential candidates also have been suggesting possible remedies for runaway energy costs. Both McCain and Sen. Hillary Clinton, D-N.Y., are calling for a “gas-tax holiday,” which would suspend the 18.4-cents-a-gallon federal gas tax for three months over the summer. Among other things, proponents of the tax holiday reason that the reduction in the price of a gallon of gas could contribute to lower shipping costs, thereby reducing, at least briefly, the price of some food products.
Some lawmakers in the New York state Legislature also favor a repeal of the state gas tax for the summer, but the proposal is believed to have little chance of passage. New York City’s Mayor Michael Bloomberg called the summer-long suspension of the gas tax “about the dumbest thing I’ve heard in an awful long time.”
Sen. Barack Obama, D-Ill., also opposes the temporary tax suspension, calling it “a gimmick” and saying he favors going “after the oil companies and [looking] at their price-gouging.”
“We’ve got to go after windfall profits,” Obama said.
Lawmakers are not focusing solely on ethanol production and oil prices, however, in their newfound concern about stemming food inflation. An increasing number of federal and state officials are questioning the recent big bang in commodities speculation that some insist has been inflating the price of food and energy. Critics of what is said to be unchecked electronic speculation in energy commodities say Wall Street index funds and investors who also fled the technology and real estate markets for stronger returns from commodities are contributing significantly to inflation. They argue that the recent influx of capital into the marketplace has powered commodity prices upward independent of traditional supply-and-demand dynamics.
Matt Beeson of Beeson and Associates Inc., a Louisville, Ky.-based commodities risk management consultant, says, “The more money that comes in, the higher the prices will go, and until the bubble bursts, the party will continue.”
Some lawmakers are calling for a crack-down on the speculation. Clinton joined a chorus of voices recently when she proposed closing “the Enron Loophole” in a call for more transparency and accountability in commodities speculation. Earlier, Sens. Olympia Snowe, R-Maine, Dianne Feinstein, D-Calif., and Carl Levin, D-Mich., sent a letter to other Senate leaders also calling for an end to such speculation.
The so-called Close the Enron Loophole Act, an amendment to the farm bill, would moderate commodities speculation by adjusting regulatory legislation passed by Congress in 2000 that let electronic exchanges escape federal oversight, potentially fueling rampant trading and manipulation of energy markets.
By some analysts’ estimates, the so-called closing of the Enron loophole through new regulatory scrutiny and limits on electronic transactions could almost immediately shave anywhere from 10 percent to 30 percent off the per-barrel price of oil.
Rep. John Larson, D-Conn., vice chairman of the Democratic Caucus, also was weighing the introduction of a bill to limit speculation in the energy futures market by requiring that investors affirm they are able to take delivery of the petroleum product in which they are investing.
Sen. Byron Dorgan, D-N.D., also has suggested speculation be curbed by increasing margin requirements on the oil futures market. While margin requirements to buy stock are about 50 percent, Dorgan said, they are only 5 percent to 7 percent on the oil futures market.
“One prominent oil analyst just told us the futures market is like a casino open 24 hours a day,” he has said.
But some experts warn government intervention could be dangerous.
“Anything that would restrict speculation in total removes the liquidity from the market,” Beeson said, “and that would be a terrible, terrible thing.”