Thursday, June 19, 2008

Farm-to-Market Memo: Massive Floods in the U.S. Heartland, Severe Drought in the West Coupled With Soaring Fuel Prices, Spells More Food Price Hikes

About 38% of Iowa's corn and soy crops are under water from the recent floods, according to the state's Department of Agriculture. There's an old saying in the Midwest: If a corn crop is 'knee high by the fourth of July,' it means it will be a good crop for that year. Not this year.

Earlier this year, Safeway Stores, Inc. CEO Steve Burd told a group of financial analysts, reporters and writers on a conference call that food inflation was the highest in the U.S. he has seen since he became CEO of the nation's third-largest supermarket chain 15 years ago.

'You ain't seen nothing yet,' as the old show business saying goes.

On June 13, Natural~Specialty Foods Memo wrote this analysis and commentary piece about how the soaring per-barrel cost of oil, and the resulting price increases of diesel fuel, gasoline and fossil fuel-based energy, was causing severe shock within the food and grocery industry, as well as among U.S. consumers, who are experiencing some of the fastest and most extensive food and grocery product price increases in many of their lifetimes.

Since we published that piece, two major events have occurred which, coupled with the soaring price of oil, fuel and energy costs, threaten to send food prices soaring even higher faster in the U.S.

Those two events, both natural and climatological in the main, are the massive floods that have been hitting the Midwestern U.S. farm belt and the increasingly severe drought in the Western U.S., which in California, the nation's number one farming state, resulted in Governor Arnold Schwarzenegger declaring an official drought state of emergency in early June.

California not only is the number one farm state in the U.S., its huge Central Valley, which stretches from Kern County in the South to the Sacramento Valley in the north (about 400 miles) also is the world's number one region in terms of total farm crop output.

America's heartland, the Midwest, also referred to as the farm belt, produces the majority of corn for the nation, which in addition to being the most used U.S. farm crop for food, animal feed and ingredients, also is increasingly being used as a fuel crop to produce ethanol, which is mixed with petroleum-based gasoline in nearly every U.S. state to make what is called blended fuel, such at E-10 (10% gasoline, 10% ethanol) and E-20 (20% ethanol).

The massive floods which ravaged Iowa, the number one U.S. corn producing state, and other Midwest states, have many corn (and other crops) fields submerged under water, rendering the crops unable to be harvested. Additionally, because of the timing of the floods, farmers will be unable to plant their crops in those fields, meaning not only that the current crops are lost, but in many cases next year's will be as well.

Both the Midwest floods and the Western USA drought are guaranteed to contribute to further increased food costs to food retail chains and wholesalers, and thus to consumers. Already, food prices are soaring across the board in the U.S. as they are elsewhere in the world because of a combination of oil price hikes, severe weather globally, growing demand for certain foods by developing countries like China and India, decreased surpluses, and a number of other factors.

Our analysis is Steve Burd's correct observation that food inflation in the U.S. is the highest he's seen in his 15 years at the helm of Safeway Stores, Inc. is that he--and the rest of the U.S. food and grocery industry along with consumers--are about to see the price of food soar even higher, faster in the coming months due to the added negative conditions from the Midwest floods and the Western U.S. drought, combined with the factors already in play described above.

Today we've chosen six articles/opinion pieces--three about the Midwest drought situation and its effect on food and farming, and three about the Western USA drought--for our readers. The pieces each approach the conditions from a different but unified perspective and offer insight from the writers' perspectives on the current situation.

The first three pieces are about the recent massive floods in the Midwest and the effect they already are having on the price of food, especially corn, which is used by the U.S. food processing industry in nearly every processed food and beverage product it produces as well as being the primary grain used to feed market hogs, chickens and cattle.

High Water, higher food costs, David Roeder, Chicago, Illinois Sun Times, June 17, 2008

The second piece about the effect of the Midwestern region floods and food prices discusses how the flooding, particularly in Iowa which was the state hit the hardest, is going to create a ripple effect of higher food prices beyond just the Midwest and throughout the United States.

Iowa's flooding will produce economic ripples beyond the Midwest, Susan Albright, Minneapolis, Minnesota Post, June 17, 2008

The last article, a feature piece from the Los Angeles Times, examines how the Midwest floods could send the prices of everything from corn and soy-based foods to meat soaring nationally in the U.S., beyond the serious price increases already experienced since just the start of 2008.

Midwest flood may cover nation in higher food prices, Jerry Hirsch and P.J. Huffstutter, Los Angeles Times, June 16, 2008

While most of Iowa and other parts of the Midwestern USA heartland are under water, California and other states in the west are experiencing drought conditions. These three pieces examine the drought in the west, especially California, from different perspectives, all having to do with the effects the drought is and will continue to have on food prices, the food industry and consumers.

The first article, from the Fresno Bee, which is the major daily newspaper in the Fresno area in California's Central Valley, one of the top food producing regions in the world, examines what effect the drought will have on food prices, since the region produces foods not only for U.S. sales and consumption but for export throughout the world as well.

Expect higher food costs with drought, Dennis Pollock and Mark Grossi, Fresno, California Bee, June 5, 2008.

Paul H. Betancourt is a farmer in the Central Valley. He farms in the Westlands and Fresno Irrigation District regions in what is a top-producing farm region in America. Betancourt wrote an opinion piece about how farmers are taking drastic steps to conserve water during the current drought, but also says food prices will rise because of the lack of water needed to meet farmers needs in the Golden State.

Drought: Farmers taking drastic steps, Paul H. Betancourt, Sacramento Bee, June 15, 2008

Lastly, former Associated Press and Fresno Bee reporter Lloyd Carter, who covered the state's agriculture and related industries with a focus on water issues for decades and now is a lawyer and director of the California Water Impact Network,, offers a well-written and expert-opinion piece about the drought in California, its effects on agriculture, business, consumers, the entire state of nearly 40 billion people, and beyond.

Lloyd G. Carter: Much of California is a desert, we should live in it as such, Sacramento Bee, June 15, 2008 [For more of Carter's writing about the water issue you can go to]

Natural~Specialty Foods Memo has been suggesting and writing for some time that the "era of cheap food" is over in the U.S. This fact has profound economic and social implications to a country that since the end of World War II has in the main made available to the majority of its citizens an abundance of cheap food, relative to the rest of the world.

Like cheap gasoline--it was less than half its $4 per-gallon U.S. average less than a year ago and under $2 gallon less than two years ago--cheap food has allowed most working class Americans the extra disposable income to live a good life, including home ownership, owning multiple automobiles, putting the kids through college, and other aspects of what's been come to be known as "middle class" living in the U.S.

The U.S. food and grocery industry has created a model in which nearly every cost imaginable has been driven out of the distribution system in order to keep food costs as low as possible for American consumers. There's plenty of room to argue about the industry's ways- a focus on less than healthy processed foods and the like--but the fact is the industry has done much to focus on providing as reasonable priced foods as it can to consumers.

The current conditions--soaring oil and fuel prices, floods, drought and other challenges--are testing America's agricultural and food distribution system like never before in modern history. How it all will play out is unknown. However, clearly alternatives to fossil fuels and similar changes are a must, and recognized by most progressive industry leaders.

As for floods and droughts, mother nature does play a major role there. However, as Lloyd Carter points out in his piece, there's also a pretty good logic for understanding mother nature and geography and designing methods to live within its dictates at times.

The U.S. food and grocery industry has managed to thrive despite the fact it survives on about the lowest profit margin (about 1% net) of any industry in the nation.

It's also an industry built on innovation. In the 1950's, for example, the concept of a self-service grocery stores was just beginning to take root in U.S. food retailing. A decade later in the 1960's it was the norm. The challenges are there today. But so is the innovation. What's lacking however is leadership in America. Therefore, the industry is pretty much on its own for the time being.

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