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, http://www.c-win.org/, 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 http://www.lloydgcarter.com/]

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.

Farm-to-Food Memo Pro or Con: Is the Overplanting of Ethanol Crops Responsible For Higher Food Prices?

Natural~Specialty Foods Memo Editor's Note: The current U.S. Federal Government program of providing farmers subsidies and other economic incentives to plant corn to be used to produce ethanol fuel is being hotly debated by the U.S. Congress, which on a bipartisan basis created these subsidies just a few years ago in partnership with President George W. Bush.

However, with the soaring cost of food in the U.S. and elsewhere, including everything made with corn, Congress and others in the U.S. are wondering if creating the economic incentives, which have resulted in a record ethanol corn crop this year, was such a good idea after all.



A number of U.S. Senators and members of the House of Representatives, Republican and Democrat alike, recently called for hearings to evaluate the nation's ethanol policy and the subsidies that are encouraging more corn crops to be planted for the fuel.

The vast majority of corn grown by U.S. farmers is still for food, feed and ingredient uses, but the type of corn grown for fuel is rapidly increasing.

Additionally, U.S. states ranging from mega-California with 38 million people, to farm-belt states like Illinois and Iowa, have passed laws which require gasoline refiners to mix a higher percentage of ethanol, which in the U.S. is made nearly 100% from corn, with petroleum-based gasoline in order to make what's called blended fuels for use in those states. Numerous other states have similar laws and policies.

The result of these laws and policies means even if the U.S. wants to stop offering subsidies to farmers who grow corn crops for fuel, it's going to have a hard time doing so because the demand, created by these mixed-fuel laws, is already in place--and growing. California for example will soon require refiners to add an even higher percentage of ethanol to the petroleum-based gasoline they sell to service stations in the Golden state.

It seems a policy--creating economic incentives for farmers to grow corn for fuel--had its intended results, which was to create more supply of the grain-based fuel in the U.S.

It also appears the policy has had unintended consequences as well, depending on who you talk to, reducing the total acreage previously used to grow corn for food, feed and ingredients, thus creating less supply, resulting in soaring commodity prices for food-grade corn and reduced surpluses in U.S. grain silos.

Point/Counterpoint

Pro: Corn-ethanol production is responsible for soaring food prices

David A. Ridenour is the vice president of the National Center for Public Policy Research, which describes itself as a conservative, free market organization. (http://www.ncppr.org/.

Mr. Ridenour argues the policies creating subsidies and economic incentives for farmers to grow corn for fuel, which many are, has resulted in today's soaring commodity price of corn, the increased costs of meat and poultry, which are fed primarily a corn-based diet, and numerous other foods which are either made from corn or have corn-based ingredients like sweeteners used to produce them.

Read David Ridenour's pro opinion that the growing of corn for fuel use is a leading cause of the current soaring prices for livestock and corn-based foods here.

Con: It's a misconception corn-ethanol is to blame

On the other hand, Bob Stallman,a rice and cattle producer from Texas and president of the American Farm Bureau Federation, says it's a misconception that increased use of corn for ethanol production is the key or only factor driving higher food prices. (http://www.fb.org/.

Read Bob Stallman's con opinion that the increased practice of growing corn crops for ethanol production is what's causing the food price hikes currently being experienced by consumers at the supermarket here.

Natural~Specialty Foods Memo Analysis

You can determine for yourself which of the two arguments made in the essay's above you agree more with.

Each writer makes some fairly strong arguments--and some weak ones as well--regarding his respective positions.

Texas Republican Senator Kay Bailey Hutchison last week called for the U.S. Senate to place a moratorium on the current subsidies and economic incentives the government gives to farmers for planting corn for ethanol production and a freeze on the amount of the fuel produced, until it can be determined if these programs--and the use of corn-based ethanol--are causing the soaring food prices for meats, poultry and foods produced using corn

President Bush, who Senator Hutchison was and is a big supporter of, disagrees with her move to have the Senate consider this plan. Rather, he says ethanol production from corn is a key part of his administration's plan to produce more fuel from sources other than imported oil.

Both Bush and most others--although some corn-belt Republicans and Democrats are silent on the issue--say the long-term goal is to produce ethanol in the U.S. using raw materials like switchgrass, which is a non food-use crop.

However, scientists working on the switchgrass-to-ethanol fuel concept (called cellulosic ethanol) say it will be a number of years before it can be done in any meaningful and plentiful manner.

These researchers and many others also argue the Bush Administration and Congress has allocated nowhere near enough money to fund such research, especially if they want like they say to have switchgrass-to-ethanol technology be able to come on-line anytime soon.

Many of these switchgrass advocates say some of the money currently being used to subsidies farmers to grow more corn for ethanol, should be used to fund the research into switchgrass-to-ethanol technology.

Nearly everybody in the debate agrees corn is merely a short-term solution in producing ethanol; that it's far from the best crop to use to produce the fuel.

Meanwhile, the per-barrel cost of oil seems to increase daily, sitting at about $130 barrel today. This fact, along with $4 a gallon gasoline at the pump and soaring food prices in the U.S., makes the ethanol debate even hotter.

Most experts on the U.S. Congress are saying they don't believe the legislators will touch the current corn-for-ethanol subsidies and economic incentives like Senator Hutchison is suggesting it does. There are too many Democrat and Republican farm state legislators to let that happen.

Additionally, since President Bush apposes any such move, he would veto any legislation in that regard anyway, say the Congressional watchers.

This issue is only going to get hotter, since very few people believe the prices of food, oil and gasoline is going to stop increasing for the rest of the year and into 2009.

This also is a Presidential and Congressional election year in the U.S. Congress is currently on recess for the Memorial Day holiday in the U.S., a time when most of the members go back to their respective districts to attend holiday events and talk with constituents.

You can bet the members will be getting an earful about the perfect economic storm consumers are facing. That perfect storm being a combination of soaring food costs, coupled with never-ending increases of the price of gasoline at the pump, and an overall sluggish and uncertain economy on main street.

Illustration Credit: The illustration at the top of this piece depicting the gas pumps growing side-by-side in a corn field is by Anita Langemach, courtesy of The Gazette, Colrado Springs, Colorado.

Global Food Crisis Memo: Point-Counterpoint: Is the Soaring Cost of Food Good or Bad For American Consumers? And What About the Rest of the World?

In a recent New York Times article by writer Kim Severson, two intellectual leaders of the organic, healthy and local foods' movement, writer and Journalism professor Michael Pollan and Alice Waters, the food writer and restaurateur, told the writer that essentially what we've called the "end of the era of cheap food" is good for American and Western consumers and society.

Basically, the Pollan and Waters argument is that because the diet of most Americans and many others in the developed, western world is based on refined, processed foods and grain-fed meats, the costs of which are soaring, these consumers might turn to more healthy, less-refined whole grain-based, fresh and local foods like breads, cereals, fruits and vegetables and grass fed animals, since the costs of both the highly-refined processed foods and grain-based meats and the healthier alternatives will eventually become about equal.

In the Times' piece, Anna Lappe, founder of the Small Planet Institute, which studies food and public policy issues, disagrees with the Pollan and Waters' thesis, arguing that to equate cheap food with bad food is an oversimplification, because food pricing is a complex process.

Ms. Severson's article (nor do Pollan or Waters in the piece) doesn't address the myriad global issues and consequences involved in the soaring costs of basic food commodities such as rice, wheat, corn and soybeans and all the food products, meats and dairy items produced from them.

These consequences have been playing themselves out daily throughout the world in the form of food shortages and food riots in Haiti, Egypt and parts of Africa.

Additionally, as we reported here last week, dozens of countries that normally rely on food exports for income have either temporarily froze their food exports or cut back on the quantity of foodstuffs they export for fear of shortages and dramatic price hikes at home.

Further, even in the developed western world, the soaring costs of basic food items like eggs, milk, bread, rice and other staples are causing problems.

In Italy, consumers are cutting back on pasta--and even staged a one-day pasta boycott recently--because of the national foods' rising cost. The French staged a similar one-day boycott recently to protest the double-digit price increases of the baguette, that nation's bread staple.

In the U.S., lower-income and middle-income shoppers are being seriously pinched by the soaring costs of food, such as the 25% increase in the price of milk, the near 20% rise in the cost of eggs, and the double-digit price hikes in nearly every food product made from corn, wheat rice or soybeans, not to mention meat and poultry due to the soaring cost of grain which is the primary feed for chickens, hogs and cattle.

Counterpoint

Tom Philpott, a staff writer for the environmental publication Grist.org, as well as a professional farmer and cook, agrees with Anna Lappe's anti-Pollan and Waters thesis in a piece he wrote that's published today.

In his piece, "Why Michael Pollan and Alice Waters Should Quit Celebrating Food-Price Hikes," Philpott says Pollan and Waters are grossly simplifying matters when it comes to arguing that the current food-price hikes have a silver lining.

Philpott says in his piece he has a "hard time imagining people who are already struggling to put food on the table rambling off to the farmers' market to fill cloth bags with the sort of fresh, local, organic produce so beloved by Pollan and Waters (and me)." He adds: "Higher food prices are likely to send many time--and cash--strapped people in quite the opposite direction.

We invite you to first read Kim Severson's April 2, 2008 New York Times' piece with Michael Pollan and Alice Waters here. Then read Tom Philpott's counterpoint piece in today's Grist.org here.

Natural~Specialty Foods Memo Analysis and View

It's our analysis and view that any discussion of rising food prices and health and diet can't be properly conducted unless it's in a global context.

Sure, it's possible that if the cost of grain-fed meat, fast food burgers and fries, processed packaged foods and high-fructose sweetened soft drinks, equal the cost of whole grain-based healthier foods and fresh produce, American and other wealthy nation consumers could find it an economic incentive to make a switch to a more healthier diet.

However, its also just as probable this won't be the case. Further, education should be the prime motivator for eating healthier in our opinion, not forced economic choice--which is just as likely to not work as to work anyway.

For example, rather than eat healthy foods, the growing middle class in fast-developing countries like China and India are eating more like westerners, which is one of the reasons for the soaring prices of foods like meat and dairy products. They are going backwards from a dietary standpoint with their new wealth--from a grain and fruit and vegetable-based diet to a higher-fat animal protein and processed foods diet. Is one reason they are doing so because they have increased economic choice, which they do?

Additionally, although we have much respect for the work of both Pollan and Waters, we think it's myopic to talk about American consumers, food price hikes and eating healthier in isolation from the rest of the world. This way be more because the U.S was the focus of Ms. Severson's article however, in fairness to Pollan and Waters.

After all, it is the price of some of the healthiest foodstuffs that are soaring the most. Rice (in its unrefined state) is one of the healthiest of all grains, yet its cost to consumers globally has increased by over 50% since just January of this year.

Wheat--the stuff that produces whole grain bread--has increased by 30% in just the first four months of this year.

Further, the cost to consumers of organic and locally-produced fresh fruits and vegetables is rising as fast as the less-healthy, processed foods. This is do to such factors as the soaring price of oil, gasoline and energy sources, increased labor costs, and a marketplace in which organic producers, middle men and retailers make a far higher gross margin on organic foods than they do on conventionally produced ones.

Even prices of fresh produce at farmers' markets is soaring. This is do to many of the same factors--especially the increased costs of fuel and energy.

Therefore, in our analysis, any discussion of food price hikes and healthier eating must be discussed in a global context. For example, when China and Japan decide to buy up as much rice as they can globally--which is happening presently--that effects the supply and price of rice throughout the world. It's kind of like oil in that way, isn't it.

Also, when farmers in the USA decide to grow organic produce instead of conventional crops because they can sell it for a higher premium (which we don't object too), that means there's less "cheaper" conventional produce to ship overseas, where many consumers have a budget of less than $1 a day for food.

As we've argued in Natural~Specialty Foods Memo before, we do believe the "era of cheap food" as we've known it in the U.S. and other western nation's is coming to an end. However, the issues of world hunger, diet and health are far from over--including in the U.S. where more people are receiving food stamps at present than at any time in the history of the program.

We have absolutely no argument with the fact that Americans and others in the world need to eat better, healthier foods. Obesity, diabetes, heart disease--these are all illness which can be avoided in many ways by eating a better diet. We also agree with the environmental benefits to global society by increasingly employing sustainable farming methods.

However, lets also not forget that even in this "era of cheap food" billions of people throughout the world have gone hungry and billions more lack food security. Of course, there are political and distribution problems which cause this condition as well as economic ones.

The "era of cheap food" is coming to an end in our analysis. But the issue of domestic hunger in the U.S. and throughout the globe is far from over. The discussion is just beginning on what to do.