January 31, 2007
Bob Krummert
The United States produces the world’s largest corn crop, and is also the largest grower and exporter of soybeans. Yet world dominance in commodity crops hasn’t necessarily meant prosperity for the farmers who produce this abundance. So-so prices for years have meant that many of these farmers have struggled just to get by.
On the other hand, low commodity prices are good news for restaurant operators. It means that the feed livestock growers use to raise cattle, hogs and chickens has been cheap, translating into manageable pricing for the protein items you sell at your restaurant. Similarly, that also means soybean oil has been abundant, keeping your deep frying costs in check. Weak commodity prices are a win-lose proposition, and restaurant operators have done most of the winning for years.
That will likely change in 2007. Prices of these long-dormant commodities have gone up already, and could rise further depending upon how this year’s crop turns out. If these prices increase, your restaurant’s food cost will spike, too.
Most of the increase in corn prices relates to subsidies given to the ethanol industry. They’re made in the name of energy independence and, by extension, national security. Congressional targets for renewable fuels standards call for 12 billion gallons of ethanol by 2012, 30 billion gallons by 2020 and 60 billion gallons by 2030. President George W. Bush wants it to happen even faster; he called for 35 billion gallons by 2017 in his State of the Union speech earlier this month.
Corn is just one of the feedstocks used to produce ethanol, of course. But it is by far the most cost-effective. The Earth Policy Institute says that by its count, there are 415 ethanol plants operating (114), under construction (70) or planned (the rest) in the U.S. These plants want corn; farmers mean to give it to them.
The scary part here: Many ethanol production facilities are farmer-owned, meaning that many farmers now grow crops for the alternative energy market, not for food markets. Several factors figure into the market price of chicken, beef and hogs and other food products, but it doesn’t look like cheap corn is going to be one of them any more.
That seems to be the thinking in Mexico, where earlier this month president Felipe Calderon faced a major crisis because of the soaring prices of corn tortillas, a staple of the Mexican diet. He signed a deal with the country’s supermarkets, bakers and tortilla manufacturers that put price limits on corn and corn flour. "The unjustifiable price rise of this product threatens the economy of millions of families," Calderon said. "We won’t tolerate speculators or monopolists. We will apply the law with firmness and punish those who take advantage of peoples’ need."
What happened? The Mexican government put the blame on U.S.-based ethanol plants, whose needs reduced the supply of corn available for export to Mexico, where corn prices are now at a 10-year high.
If you’re hoping this is just a temporary blip in the market, good luck. Combined state and federal subsidies can reach to $1 per gallon. Ethanol producers made a profit of $.86 per gallon last year when oil was $70 a barrel and corn sold for $2.50 a bushel. Lately, with oil about $55 per barrel and corn at $4.05 a bushel, the numbers don’t work as well, but they still work well enough. Pres. Bush’s proposed energy independence plan would require oil companies to buy ethanol and mix in into their gasoline. With a guaranteed market like this, it’s hard to see corn prices falling much unless farmers plant a lot more of it.
Which they could do this spring. But some of them might have their eye on the soybean market instead. After seven years of testing, fast-food giant McDonald’s has finally settled on a trans-fat free oil for use in its 13,700 units in the U.S. After multiple rounds of testing, the chain settled on a canola/soybean blend custom-produced for them by Cargill, Inc. The Minneapolis-based company said it has sufficient oil on hand to supply the initial phase-in for McDonald’s, but is counting on farmers to produce larger quantities of the particular kinds of canola and soybeans McDonald’s needs this year.
"There is a lot of demand out there for a relatively small amount of certain products," Robert Reeves, head of the Institute of Shortening and Edible Oils, told the Chicago Tribune. He noted that McDonald’s has to "have a large amount of readily available, consistent supplies," something some farmers have said they want a premium to produce if they’re going to switch out of other crops like corn.
Full-service operators seem relatively insulated from upheavals that could take place in both the corn and soybean markets this year. Still, as an end-user, you may want to plan carefully as you figure out how to source and price the items you buy this year that rely heavily on corn and soybeans. It looks like neither are going to be cheap this year.
We’re not sure what the long-term implications of this issue will be for operators. But Tyson Foods president/c.e.o. Richard Bond trotted out the "A" word-availability-when discussing his company’s
first fiscal quarter results two days ago.
"We remain on track to meet our earnings guidance for the year, but emphasize the dramatic rise in corn prices has become a major issue for us and others in the food industry. Companies will be forced to pass along rising costs to their customers, meaning consumers will pay significantly more for food. If left unaddressed, the bigger long-term issue will be the availability of U.S. and global grain for protein and other foods. We fully support efforts toward renewable energy; however, as the food-versus-fuel debate unfolds, we must carefully consider the negative and unintended consequences of over-using grains."
Bond sounds pretty concerned. Maybe we all should be, too.
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