Industry, lawmakers weigh methods to curb food inflation

Foodservice industry officials and lawmakers are exploring ways to put the brakes on runaway food inflation as commodity costs continue to surge upwards.

However, shaping public policy that would address escalating costs is likely to be difficult given the extreme complexity of the problem, especially in an election year.

Experts point to a tangle of macroeconomic trends that are driving commodity costs skyward, including heightened buying power in China and India, soaring global energy prices, the push to use food as a fuel source—notably corn-based ethanol—the weak U.S. dollar and growing speculation in the commodities markets.

“It’s become difficult to get a handle on all of the different pieces,” said John Barone, president of Market Vision Inc., a Fairfield, N.J.-based firm providing commodities analysis and purchasing support services for 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.”

Michelle Reinke, the National Restaurant Association [3]’s director of legislative affairs, observed that restaurateurs are used to seasonal price fluctuations based on supply and demand. “But I think we are in for some structural changes,” she added. “And my fear is that the prices won’t be coming back down to where they were before.”

The U.S. Bureau of Labor Statistics’ Food Price Update for March 28 showed that the most recent composite wholesale food price index rose 7.6 percent on an average annual basis in 2007—the largest single-year food price increase in 27 years. Meanwhile, the NRA said prices have climbed 15.5 percent between February 2006 and February 2008, costing the foodservice industry many billions of dollars in increased food costs.

Experts note that some of those recent hikes stem from the increased production of corn-based ethanol, a renewable energy resource that once was favored by environmentalists but lately has earned growing condemnation. The Food and Energy Security Act of 2007, which was passed by Congress late last year, mandates a dramatic increase in the production of ethanol by 2022, further persuading farmers to either divert their corn harvest for ethanol production or even convert former wheat and soybean fields to more lucrative corn crops. Today, 30 percent of all corn—much of which previously was used for livestock and poultry feed—goes toward ethanol production.

While the energy bill was still being debated, the NRA, the National Council of Chain Restaurants [4], foodservice operators such as Darden [5] Restaurants and Cracker Barrel [6], and many suppliers and their associations urged Congress and the Bush administration to consider “potential unintended consequences” of increasing the renewable fuel mandate by relying on corn-based ethanol.

“We objected to provisions in the bill to increase the ethanol mandate, saying that it would increase food costs,” said Scott Vinson, NCCR’s vice president of government relations.

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.

Vinson believes that because this is a presidential election year, any new energy-related initiatives that could offend special interests stand little chance of passing. Reinke concurred, saying, “There is really not much appetite for looking at mandates again.”

Nevertheless, she added, the NRA is seeking to build a coalition of broad interests to address the issue in the future. “Some momentum is beginning to develop,” she said.

The question remains, however, whether much can be done at this point to sway public policy and halt runaway food cost inflation. “As far as lobbying goes, the horse might just be out of the barn,” observed Ed Droste, a co-founder of the Hooters [7] chain and now the owner of Provident Advertising and Marketing in Clearwater, Fla. “I thought we would have been more of a player during the hearings.”

In the meantime, the NRA is supporting the Biodiesel Production Tax Credit Parity Act by Rep. Michael Burgess, R-Texas. The bill seeks to double the 50-cent-per-gallon federal tax credit for producers who use recyclable restaurant oils to produce biodiesel fuel.

Coming at the problem from a different angle, some federal and state lawmakers are taking a hard look at the run up in commodities speculation that has been impacting food and energy prices. Observers say Wall Street index funds and other investors who have abandoned the technology and real estate markets for stronger returns from commodities are inflating prices in an unprecedented way. They maintain that this new influx of money has driven commodity prices up independently of traditional supply-and-demand dynamics.

“The more money that comes in, the higher the prices will go,” said Matt Beeson of Beeson and Associates Inc., a Louisville, Ky.-based commodities risk management consultant. “And until the bubble bursts, the party will continue.”

As a result, some lawmakers are casting a critical eye on this new breed of speculators, particularly those investing in energy markets. Sens. Olympia Snowe, R-Maine, Dianne Feinstein, D-Calif., and Carl Levin, D-Mich., penned a letter to other Senate leaders calling for the closing of the “Enron loophole” and the need for more transparency and accountability in commodities speculation.

The Enron loophole refers to a measure passed by Congress in 2000 to deregulate energy futures trading. It allows electronic exchanges for traders to operate with little or no federal oversight. Some critics maintain that encourages excessive speculation and market manipulation.

In their letter, Sens. Snowe, Feinstein and Levin cited a source who said speculation can increase the price of a barrel of oil by as much as 10 percent, regardless of supply and demand. Others have suggested that speculation inflates oil prices by as much as 30 percent.

The Vermont House of Representatives also passed a joint resolution calling for Congress to eliminate the so-called Enron loophole.

Meanwhile, several other federal lawmakers also are focused on commodity trading. Rep. John Larson, D-Conn., vice chairman of the Democratic Caucus, has said he wants to introduce a measure that would limit speculation in the energy futures market by requiring that investors actually take delivery of the petroleum product in which they are investing.

Sen. Byron Dorgan, D-N.D., has suggested that speculation be curbed by increasing investment 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 for oil futures. “One prominent oil analyst just told us the futures market is like a casino open 24 hours a day,” he said in a statement.

Commodities experts warn that government intervention might prove to be a dangerous move, however. “Anything that would restrict speculation in total removes the liquidity from the market, and that would be a terrible, terrible thing,” Beeson said.