Food, Industry & Energy Memo: Analysis and Commentary: What to do About the Soaring Cost of Oil and its Effects on the Food Industry and Consumers?

Despite a growing diversification into renewable energy sources like bio fuels, solar and wind power by many food and grocery industry companies, oil remains the lifeblood of the industry.

The transportation fleets which transport crops from the farm to food processors, from the processors to distributors and retail chain warehouses, and from these distribution facilities to the stores, all are powered by diesel fuel, which currently is nearly $6 gallon in the U.S. and even higher in Europe. Just one year ago diesel fuel, as well as gasoline, was half today's cost in the U.S., for example.

Most farms, food processing plants, distribution facilities and grocery stores throughout the world, and particularly in the U.S., run primarily on fossil-fuel based energy in the form of electricity produced from burning fossil fuels. In Europe, much of this energy is now produced from nuclear power plants rather than fossil fuels, but in the U.S. only 20% of the nation's energy needs are from nuclear power, while a mere 2% are from renewable energy sources like solar and wind, according to the U.S. Energy Department and independent sources.

In the case of fuel, ethanol and bio fuels aren't even a significant contributor to global trucking fleets at this point in time. Ironically, the primary reason U.S. and other nation's trucking fleets are powered by diesel rather than gasoline, is because historically diesel fuel has been cheaper than gasoline. Not any more.

Gasoline also is integral to the global food and grocery industry. The vast majority of consumers drive gasoline-powered automobiles to do there grocery shopping in the developed world; and an increasing number of them are doing so in the developing world, especially in China and India, the globe's two most-populus nation's, as well as having both country's having the two fastest-growing economies in the world.

Oil is currently at nearly $140 a barrel. The investment banking firm Lehman Bros., along with other oil industry analysts and experts, are predicting today that oil will hit $150 a barrel by July 2, which is only three weeks away.

At $150 a barrel for oil, the per-gallon cost of diesel fuel is predicted to hit slightly over $6 a gallon on average in the U.S., and substantially over that in states like California, for an increase of about 50 cents a gallon from today's cost. Add that 50 cents a gallon premium to the current per-gallon cost of diesel in Europe and elsewhere in the world, and you will have the realities at the pump of $150 a barrel oil globally, which is on the way.

The soaring cost of oil is global not only in it's geographical effects, but in how it effects every aspect of the food and grocery industry and the price of food at the supermarket. Farmers, food processors, distributors, trucking firms and retailers are all feeling the effects daily from the soaring cost of fuel and energy.

Consumers are feeling it not only at the pump when they fill their cars with gasoline, but at the supermarket checkout counter as well when they pay for their groceries. The biggest contributor to food inflation, which is the highest it's been in decades, is the soaring cost of oil and the related fuel and energy produced from it.

Even though much of the food and grocery industry is moving rapidly to diversify its energy sources with biomass plants, solar, wind and other alternative energy methods, it's going to be many years from now until renewables contribute even somewhat significantly to the overall energy mix in most of the world's nations, particularly in the U.S.

Meanwhile, fossil fuel-based fuel and energy remain the lifeblood of the food and grocery industry. Regarding the cost of oil, most experts and analysts say it isn't going down in price anytime soon. In fact, the opposite is their analysis--they see it continuing to increase in price for sometime before possibly stabilizing.

In California, $5 a gallon gasoline is near reality, as some service stations in Los Angeles and the San Francisco Bay Area are currently selling regular unleaded gasoline for $4.80 a gallon. A $10 jump in the cost of a barrel of oil by July 4, as numerous experts are predicting, will easily push the price at those stations to $5 a gallon and over.

The average price per-gallon also hit $4 this week throughout the U.S., according to the American Automobile Association. A $10 jump in the cost of a barrel of oil in the next few weeks should send that average per-gallon cost closer to the $5 a gallon mark nationally.

Associated Press business writer Emma Vandore has a story today which provides a good global overview on what numerous oil industry analysts and experts believe is the status of oil pricing and where it's going--up. Read the AP piece, "Today's high oil prices could be here to stay." here.

The long terms solution for the food and grocery industry--and global society and national governments as well--is clear: a massive renewable energy program on the order of America's Manhattan Project and the respective 1960's era races to put a man on the moon by Russia and the U.S. is needed. The jobs it could bring also are needed.

What to do in the medium to short-run though, especially for purposes of this piece in the U.S. where the food and grocery industry finds itself caught in a spiral of increasing fuel costs which are dramatically increasing the cost of business for the industry and the price of food and groceries consumers are paying at the supermarket, is the big question?

Western Europe--particularly France and Germany--have taken the nuclear energy option route as the primary way to diversify away from using fossil fuels to provide energy for businesses and consumers in those nations, while focusing on the medium to long-term on renewable energy sources.

The nuclear power option does nothing to help in providing fuel for trucks or cars though, at least until and unless nuclear power plants are used to produce hydrogen fuel for hydrogen-powered automobiles, if and when they come on line, which will be well over a decade from now.

In the U.S., even talking about increasing nuclear power is a near-taboo topic, despite the fact both France and Germany are far more politically left countries than the U.S., but still have managed to increase the number of nuclear power plants and the overall contribution to national energy needs it provides in both countries.

Again though, even if the U.S. were to dramatically increase the percentage of energy produced from nuclear, it would do nothing to address the need to diversify away from oil-based fuels like diesel and gasoline.

Consumers can buy smaller cars if they can afford to, drive less, and do other things to decrease the amount of gasoline they need to use. However, the food and grocery industry can't merely conserve its way out of this serious problem. It can look at alternatives such as using more rail and even when possible the waterways, like Tesco is doing in the UK, to transport food and grocery products in the supply chain, but there's still the matter of getting the goods from the plants and distribution centers to the stores; and that takes trucks.

The distribution and retail sectors also can more rapidly convert their trucking fleets to bio fuels, like California-based Safeway Stores, Inc. is doing with its trucking fleet, which we think is a very good idea. However, that takes time, and as more and more industry distributors and retailers do so, the demand for bio fuels is going to outstrip the supply, sending the cost of the fuel soaring at least for a while.

One short to medium-term solution to the soaring price of oil in the United States is to launch a massive new oil exploration and drilling program in the states. Proponents of doing this say it will not only provide America with more oil in the short term, while medium and longer term renewables programs are accelerated, but also will send a signal to the major exporting oil-producing nations of the world that prices are too high.

One of these proponents is the respected scholar and writer Victor Davis Hanson, who in addition to being a scholar in residence at Stanford University's Hoover Institution, is a classics scholar and a farmer in California's Central Valley.

Hanson says in an opinion piece today titled, "Why liberals should support drilling for oil," that's it is imperative the U.S. drill for more oil for the short term, while aggressively launching renewable energy programs for the medium and longer term. Read Hanson's opinion piece here.

Hanson's opinion is a growing one among some sectors in the U.S. However, like with nuclear power, there's a strong anti-oil drilling lobby in the U.S. which is so strong for example even Democrats who might want to support increased drilling for various reasons--like they come from oil-producing states for example--are afraid to do so.

These folks argue primarily from an environmental perspective that increased oil drilling in places like the Arctic Wildlife Refuge and off-shore in the U.S. pose grave environmental consequences. In other words, the environmental risks of doing so far outweigh any benefits, they say.

Others argue against increased drilling for oil in the U.S. from a more resource-based and economic perspective, saying the cost of drilling for what they claim is very little more oil in the continental USA just isn't worth it. Rather, they say the money would be put to better use dramatically accelerating renewable energy development. Many from this sector also argue for increased nuclear power plants along with the renewable energy strategy.

An April, 2008 article in Popular Mechanics magazine, a respected U.S. scientific publication, disagrees with this argument however, saying with today's new oil drilling technologies a substantial amount of oil can be taken from even the current U.S. oil fields in a relatively environmentally harmless manner. Read the Popular Mechanics piece here.

Conversely, this May 23 story from U.S. News and World Report magazine quotes U.S. Department of Energy staffers as saying it would take ten years to even get the oil flowing from new drilling in the Arctic National Wildlife Refuge area, the place sighted most often by new drilling advocates as holding the most promise for new domestic oil for the U.S. Further, the U.S. Government experts quoted in the piece say even then the output from the Arctic Wildlife Refuge region oil fields wouldn't amount to much; it's impact being minimal.

Ten years is hardly a good short or even medium-range solution to soaring oil prices, and if the results after a decade of drilling are merely modest ones, perhaps the cost-benefit analysis of the anti-drilling pragmatist faction in correct?

For another view on increasing oil drilling and production in the U.S. vs not doing so, read this May 30, 2008 piece from CNN Money.com.

What is clear from a food and grocery industry perspective, and thus a consumer perspective because everybody has to eat, is that the soaring cost of oil is having a ripple effect throughout the industry. Take away the doubling of the price of oil over what is less than the last year, and you will see modest food inflation, rather than the record-breaking food price increases currently occurring.

Something has to give in the short to medium run. Food manufacturers, distributors and retailers have been holding the line somewhat on food and grocery prices, despite the high food inflation globally, by in the case of manufacturers and marketers holding back in many cases on price increases, and in the case of food retailers not always reflecting the total penny price increases they receive on a given item in their stores, taking a slight margin hit in the process.

Since fuel produced from oil is the lifeblood of today's modern food distribution and transportation system, food and grocery prices at the shelf are only going to continue to increase as the per-barrel price of oil increases, at least in the short to medium term, until alternative fuels can make a significant impact on America's transportation fleet.

The issue poses far more questions than it has answers. But we know what's needed is a massive medium to long term renewables program, combined with conservation all around. For the short term, increased oil drilling along with increased nuclear power should be debated calmly and intelligently in the U.S. like it is in most of Europe.

Natural~Specialty Foods Memo believes the "era of cheap food" as we've know it in the U.S. is over.

However, unless the energy situation is addressed, and more aggressive medium-term and longer -term renewable energy programs are put into place fast, along with short-term programs being put into place as well, we're going to jump from the end of the "era of cheap food," right into the era of prohibitively expensive food, which is something that will not only cause serious economic problems, but also will begin to break down the very fabric and fiber of U.S. society even more than has already been happening.

Food Trends Memo: 'Green' Consumerism, the 'Greening' of the Food and Grocery Industry, and the Impending End of the Era of 'Cheap Food'

For the eight months or so we've been publishing Natural~Specialty Foods Memo (NSFM), we have suggested a number of overall themes in our writings as they relate to the natural and specialty foods (and general food and grocery) industries globally, and more particularly in the developed western world.

Two of these themes are that there's a "green" or environmental trend or movement coming from consumers from the bottom-up (grassroots), as well as from the private sector food and grocery industry, which is way ahead of the world's (especially the U.S.) respective national and local governments' environmental policies.

In terms of the consumer "green" movement or trend, it's evidenced by the perhaps slow but progressive changes we're observing in people, ranging from middle-class and upper middle-class consumers, to the more affluent. These environmental changes folks are making also are do in part to harsh economic realities, ranging from the soaring costs of gasoline and home energy fuels, to rising food prices.

For example, we've been observing a change in consumer car buying habits which include a shift from gas-guzzling SUV's to smaller, more energy efficient automobiles. This shift is most apparent in Western Europe (where smaller cars have always been more generally popular anyway) but also is occurring in the U.S., home of the SUV and muscle car.

Evidence of this purchasing behavior shift in the U.S. can be seen in automaker sales numbers: smaller car companies like Toyota and Honda are thriving for example, while SUV and big car makers GM and Ford are losing billions of dollars annually, and trying to retool their vehicle designs to smaller, more gas efficient car and truck models.

We also see a consumer "green" trend at the supermarket. Sales of organic and local food products are up by double-digits. Additionally, more and more shoppers are bringing their own reusable shopping bags with them to the store, rather than having their grocery purchases packed in single-use plastic or paper carrier bags. Further, surveys in Western Europe and the USA show more than 50% of consumers are for outright bans on the use of free plastic carrier bags at the supermarket, as well as packaging like disposable styrofoam take-out containers at in-store foodservice venues and at restaurants.

Other examples of this grassroots consumer "greening" include an increased concern by shoppers about the carbon footprints of the retail stores where they shop and of the manufacturers' who's products they buy. Increasingly, consumers are factoring in companies' environmental policies, as well as price and quality, when choosing a brand and spending their money for food, groceries and non-foods items.

The 'greening' of the food and grocery industry

Food and grocery manufacturers, marketers and retailers are increasingly noticing this gradual bottom-up consumer "greening," and responding to it. They're "greening" product packaging, food manufacturing plants and supply chains, among other environmentally responsible efforts.

Food and grocery retailers also are increasingly adding environmental improvements to their operations; some more so than others of course.

Among the "greening" trend at retail we're obviously seeing more and more retailers, including mid-range grocers, increasing the variety of natural, organic, sustainable and local food and grocery products they sell. The reason for their doing this isn't just do to increased consumer concern about eating healthier products, although that's key. It also has much to do with sustainability and other "green" consumer concerns as well.

Food and grocery retailers also are moving towards a stronger conservation and energy-reduction mind-set. Numerous U.S. retailers such as Wal-Mart, Target, Safeway Stores, Inc. and others are installing solar panels on the roofs of their stores and distribution centers. Others like Whole Foods Market, Inc. are combining solar panel installations with other energy-saving innovations like fuel cells. Still, others like Sainsbury's and Tesco in the UK are installing wind turbines in store parking lots as a way of providing 30 -to- 40% of a store's energy needs from a sustainable source.

The retail "greening" trend, which is in its infancy, is towards using more and more sustainable sources of energy like solar, wind and fuel cell technology to provide a percentage of power to supermarkets and distribution facilities.

Other green practices among food and grocery retailers include charging customers for free plastic grocery bags if they want one, like Marks & Spencer in the UK will soon begin doing, and like small-format discount grocer Aldi does in its stores throughout the world, including the nearly 900 it operates in the U.S.

Some retailers are going even further. Austin, Texas-based Whole Foods Market will stop using plastic grocery bags at its 270-plus stores in the U.S., Canada and the UK beginning on April 22, Earth Day.

Others, such as U.S. specialty grocer Trader Joe's, which is owned by Germany's Aldi, doesn't use plastic grocery bags at all in the majority of its 300-plus grocery markets in the U.S. Rather, Trader Joe's uses paper grocery sacks made from 100% post-consumer recycled paper only in the majority of its U.S. grocery stores, as well as selling reusable shopping totes for 99-cents each.

In fact, nearly every supermarket, from the most upscale to the most downscale, in the developed western world is selling reusable shopping carriers in its stores. Many grocery retailers also give shoppers a discount of anywhere from 5-cents -to- 10-cents-off per-reusable shopping bag they use at the store rather than having the store provide a free plastic or paper bag for the grocery orders.

Era of cheap food on the way out

The second theme we sound frequently in NSFM is that for the developed western world, and particularly for the U.S., the long, post World War II era of relatively "cheap" food is coming to an end.

As we mentioned, this is especially true for the United States, which has experienced about 60 years of relatively cheap food compared to the rest of the developed world. This era of cheap food, which Western Europe has experienced but to a lessor degree than the U.S., is do to three primary factors.

First, as part of the reforms to get the U.S. out of the Great Depression in the 1930's, the U.S. Federal Government enacted a serious of farm and crop subsidiary programs that would give taxpayer money to farmers, encouraging them to plant certain crops (wheat, corn, soybeans and rice, for example) for which they would be compensated for producing. These farm subsidies also lowered the retail prices of certain foodstuffs by tinkering with the market in a way that allowed products made with corn and wheat for example to sell for much less than they otherwise would without the government price guarantees.

These farm subsidy policies were stalled in the U.S. in the 1940's do to America's involvement in World War II. The costs of the war required food and fuel rationing in the U.S. because so much of the agricultural products and oil being produced at home was being sent abroad to fight the two wars in Europe and Asia.

However, the end of World War II signalled a new era in government crop and farm policy and subsidies in the U.S. And, as a result, Americans have been able to purchase and eat most food and grocery products for far lower prices than would be the case if these farm subsidies didn't exist.

Of course, not all foods are subsidized in the U.S. Fresh fruit and vegetable crop farmers receive very little if any government subsidy money for example. In fact, nearly 90% of all U.S. government farm payments go to growers of four crops: corn, rice, soybeans, cotton and wheat. In other words, it's no accident that the cheapest processed and packaged food and grocery products in U.S. supermarkets have three of these four farm commodities as their primary ingredients.

However, the U.S. and Western Europe are experiencing the highest levels of food inflation in decades. Commodities like corn, rice, soybeans and wheat are up by double-digit percentages this year, compared to last--and are continuing to increase. Milk, eggs and butter are up 20% this year over 2007. And, processed and packaged goods are up at retail ranging from 6 -to-15% this year over last.

Natural, sustainable, cruelty-free and organic food and grocery products have and are increasing at an even higher percentage rate. For example, free-range, organic eggs are up nearly 30% this year, compared to last. Organic Milk has seen a 30% rise in the last two years alone.

While it's true much of these dramatic increases in food costs across the board--from basic commodities, to upscale and organic foods--is do to the current economic downturn or recession in the U.S. and increasingly in Europe--that's far from the only cause. Nor, are increasing food and grocery costs a temporary phenomenon.

Rather, do to a number of factors--an increasing world population, diminishing farm land acreage, a growing movement to trim government crop subsidies, the use of commodities like corn in ethanol fuel production, and a few others--the era of "cheap" food is coming to an end.

Natural foods industry vets agree with both of our trend assessments

We aren't the only experienced food and grocery industry folks who make these two arguments: that there's a bottom-up "green" trend among consumers, as well as a "greening" trend occurring in the food and grocery industry which is ahead of government environmental policies; and that the era of "cheap" food in the developed, western world, especially in the U.S., is coming to an end.

Last week, Walter Robb, co-president of supernatural foods' retailer Whole Foods Market, Inc. and Gary Hirshberg, the president of organic foods' company Stonyfield Farms, echoed our themes about the grassroots and food industry "green" trends and that the era of "cheap" food is over, in talks they gave together to students at Iowa State University and Drake University, in the U.S. farm belt state of Iowa.

In terms of the impending end of the era of "cheap" food, Hirshberg said: "Every assumption we've made about agricultural policy, industrial policy, is now irrelevant." Robb was even stronger in his comments, saying: "The era of cheap food is over," according to David Elbert, the business editor for the Des Moines Register newspaper, who interviewed both natural products' industry veterans after their talks to the agriculture students.

Robb said the cost of food is rising on average at a rate of about 5-6% a year, and will continue to do so at those levels or higher. Both men said higher-priced oil is the cause in part of these soaring food costs. However, it's not the only reason.

Robb sighted another key factor (in agreement with us basically), which is the historic levels of farm crop subsidies for conventional food products and commodity crops. "Conventional food has been heavily subsidized with price supports to farmers and government research," he said. Robb believes, like we do, that will end. His argument primarily is that consumers will realize the benefits to them of such subsidies aren't what they expected and aren't worth it to them personally as taxpayers and consumers.

Regarding the costs versus the benefits of these government subsidy programs, both Hirshberg and Robb offer their analysis.

Hirshberg says many of the packaged food products made from the subsidised commodity crops are "empty calories." He adds: "Instead of building up the nutrients in the soil (because of the conventional commodity crop farming methods), we've synthesized nutrition from the soil."

Focusing on the U.S., Robb said: "Americans have been eating more but getting less, which is causing more obesity, juvenile diabetes and other health problems." His argument is empirically sound based on the soaring rates of obesity and diabetes in the U.S., which doctors and nutritionists attribute primarily to dietary factors.

Least you think Both natural foods industry veterans (or us) believe the ending of the era of "cheap" food means doom for the natural and organic foods industry, think again.

Both Robb and Hirshberg believe it actually will help the industry to grow. In addition, they both suggest the "greening" trend among consumers and by food and grocery industry companies is evidence in part of that fact.

They argue the two trends we've identified go hand-in-hand; that the consumer trend towards more healthier and environmentally sustainable foods and the impending ending of the era of "cheap" foods will serve the natural foods industry well. Both men say consumers are driving the green revolution and that will force corporations to be more sustainable. The natural products industry therefore is in the position to be the driving force in this change because its long been, and continues to be, the leader in sustainability and healthy foods.

Conclusion

The two themes we sound here often--the "greening" among consumers and in the food and grocery industry, along with the impending end of the era of "cheap" food--aren't just ours alone, or merely shared by Mr. Robb and Mr. Hirshberg.

For example, we just finished reading a transcript of a recent symposium held by the Agricultural Policy Issues Center at the University of California at Davis, which is one of the top agricultural and food research centers in the world. A major theme of the participants' in that conference was that the era of "cheap" food is coming to an end, especially in the developed western world, and particularly in the U.S.

Additionally, this topic is currently high on the agenda at meetings of farmers and policy makers at farm and agricultural trade associations throughout the world. It's also a hot topic of discussion in the executive suites of global agriculture and food corporations like Monsanto and Archer Daniels Midland Corp., as well as in the offices of medium-sized and small natural and organic foods' companies.

We agree with Robb and Hirshberg that the natural foods industry could benefit--and certainly won't be hurt by--the era of "cheap" foods' impending end. However, "cheap" is a relative term. The fact is, current retail prices of many natural and organic foods products are just out of reach for the average family to purchase primarily or regularly.

We also don't believe government crop subsidies in the U.S. will go away anytime soon, although we suggest the cost of food will continue to go up at far-higher than historic average rates even with these subsidies in place. (Imagine the increases if they were removed?) In fact, the current U.S. farm bill, which looks like it will pass with a few changes, actually increases commodity subsidies, and for the first time gives some fresh fruit, vegetable and nut growers subsidies on certain crops.

However, we do agree that the long-term trend will be to decrease such subsidies, especially in the land of debt, the U.S. If not, in order to pay for them--along with a host of other things like war, Medicare, Social Security and other social programs and financial institution bailouts--the future U.S President and Congress will have to raise taxes, which doesn't seem politically tenable at the present time. There's really no other solution under current U.S. government spending levels.

In terms of the natural foods industry, we suggest it needs to try to reduce the current retail costs of natural and organic food products--or at least contain the increases--if the industry is going to truly benefit (many) consumers. [Keep in mind that many consumers already are having a difficult time being able to pay for that "cheap," subsidized food which is currently increasing at double-digit rates.]

A key goal of the natural foods industry--in addition to its already laudable ones of producing and selling cleaner, healthier and more sustainably-grown foods--needs to be attempting to be more inclusive as well. By this we mean doing everything economically possible (including perhaps a bit of retail margin reduction) to make natural and organic food and grocery products more affordable so that more lower -to- middle-income consumers can afford to regularly buy natural and organic food and grocery products.

We realize this isn't easy, especially in today's food inflation climate. We do argue however that it's a worthy goal, right alongside of the healthier and more sustainable ones, that the industry should work hard to achieve, from the organic farm to the supernatural food store.