Volume 4 | Issue 4 | Year 2008

Food prices are rising with little reason to believe that there is any reprieve coming in the near future. Average inflation for grocery food prices is 2.5 percent. In 2007, food inflation doubled to just over 5 percent, and additionally in the first six months of 2008, food prices rose another 5.5 percent. To date, Congress has lamented this fact, but done nothing to alleviate the food price crisis.
The impact from the food price crisis has been felt in all stages of food production, but most especially with food producers and consumers. In May 2008, the American Bakers Association (ABA) was asked to provide witnesses to testify at two Congressional hearings on this key issue. In both cases, bakers cited similar concerns with high food prices, and remarked that most bakers across the country were feeling the extreme impact of high prices. Testimonies from these bakers cited the need to cut costs by cutting jobs or decreasing production, or else they may be forced to close their businesses altogether.

The baking industry was under extreme pressure and something had to be done immediately. Bakers were calling me daily with reports of flour being four to five times its cost of just weeks before. We recognized then that while costs to bakers were increasing at this time, due to the lag effect, consumer prices would start to dramatically increase within a few months. Due to these extreme economic circumstances, ABA quickly organized the Band of Bakers march and rallied other baking/grain based food organizations and allied organizations. With wheat prices still hovering around $12 a bushel, bakers from across the country came to D.C. to discuss solutions with their members of Congress, the USDA and the White House.

Congress was slow to react, though, as rising food prices had not yet hit the majority of consumers. ABA’s approach was to help prevent rising food prices and that impact on consumers, not wait until food prices were reaching extreme highs and then react. Even today, despite ABA’s aggressive efforts with three member fly-in events, two congressional hearings, and over 150 meetings with policy makers on Capitol Hill as well as meetings with USDA and the White House, very little has been done by policy makers to help alleviate the food price crisis. Commodity prices are still twice as high as the historic average, meaning that food prices will continue to remain high. While food inflation may slow in the coming year, prices are not likely to return to where we were a year ago. Unfortunately a new, higher average food price will be set, and American consumers will have to plan on a larger percentage of their budgets to cover food costs for their families.

What made commodity and food prices climb? Food prices are high today due to many reasons: Adverse weather across many vital agricultural areas throughout the world, increasing global demand for wheat and meat in many developing countries, the decreasing value of the dollar, to name a few. But there are also other factors that have heavily influenced our current situation, namely the corn-based ethanol mandate and government land retirement programs. Reforming these programs today would have a beneficial impact on future commodity supplies and food prices.

ABA does not dispute the fact that inclement weather events, increased demand, and other factors have influenced food prices. “Government can’t control the weather, but there are other factors to high food prices, issues that government can and should influence,” said Cory Martin, ABA Federal Government Relations Manager. “The USDA oversees the Conservation Reserve Program, a federally subsidized land retirement program that essentially pays farmers to allow their lands to lay idle.” This program was originally intended to set aside truly environmentally sensitive lands, including river banks, swamps, marshes – all land that ABA agrees should not be farmed. Overtime, other land that was not in this category found its way into the program. Congress recognized this fact as we educated members during the farm bill dialogue and heeded our recommendations to decrease the program by seven million acres to allow non-environmentally sensitive land back into production.

“ABA strongly believes that more land should be released to allow farmers to respond to current market demands,” added Martin. ABA argues that at least one-third of the land within the program is not environmentally sensitive and should be permanently released for production to provide for additional opportunity to grow food crops.

Another factor of increasing food prices is the corn-based ethanol mandate. The Energy Independence and Security Act of 2007 increases corn based ethanol production to 15 billion gallons by 2022, a fivefold increase from current ethanol production levels. Today, over 30 percent of the nation’s corn crop is used to comply with the ethanol mandate.

“This legislation does little to change the nation’s short term fuel and energy challenges,” said Rasma Zvaners, ABA Senior Manager of Government Relations. “The baking industry is already experiencing adverse consequences from the government’s ethanol programs, and energy policy remains a priority for us. Bakers use natural gas for their ovens and we have the fourth largest distribution fleet nationwide. Energy issues are impacting the businesses on all fronts.

“ABA is asking Congress to reform the corn-based ethanol mandate, as it has a detrimental impact not only on food prices but has minimal impact on the nation’s energy needs,” added Zvaners. ABA supports reducing the corn-based ethanol mandate to 2008 levels while ensuring proper funding for second generation biofuels, eliminating the ethanol import tariff and domestic blender’s credit. “ABA believes taking these steps will help balance the need for an affordable, domestic food supply and a reliable source of energy,” said Zvaners.

Food inflation is a complex issue with multi-faceted factors that are impacting both bakers and the U.S. consumer. The newest factor is the unrest in the U.S. financial markets, which is likely to impact businesses’ ability to reinvest in itself and expand during these uncertain times. The only certain things in this current environment are change and the fact that ABA will need to continue to aggressively be the voice for bakers in 2009.

Rob MacKie is president and CEO and Lee Sanders, Senior Vice President, Government Relations and Public Affairs of the American Bakers Association, which represents all segments of the grain-based foods industry before the U.S. Congress, state legislatures, and domestic and international regulatory authorities. Visit: www.americanbakers.org.

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