Inflation fuels action: beset by commodity inflation linked to federally mandated biofuel production, industry players get politically active, call for change

Nation's Restaurant News, May 19, 2008 by Paul Frumkin

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.

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"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 NRAs 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.