Restaurateurs pinched by cost increase pressures


“As I talk to local restaurateurs, foodservice distributors and others in the foodservice supply chain, I hear the common theme and concern about rising costs. While cost issues and pressures are part of the territory in this and any business, there is currently a “perfect storm” that is making cost pressures more acute. So far, most in the business I have talked to have resisted raising prices, but unless some pressures abate, I think price increases are inevitable. Furthermore, it is the independent operators that are probably feeling the cost squeeze the most since they have less broad purchasing power than national chains. In addition to that, consumers are being hit hard at the gas pump and grocery store, which reduces their discretionary income to spend at restaurants.

There are several factors at play here, including last year’s winter storms in California, rising fuel costs for food transportation and how the rapid switch to cooking oils that don’t contain trans fats has disrupted the soybean market.

However, the biggest issue by far seems to be the blurring of the line between our country’s energy and food/agricultural economies created by high oil prices and the resulting expansion of the domestic ethanol (grain alcohol) market. This is a complex topic with many moving parts, but I think a good starting point is our dependence on foreign oil, increasing demand for oil in China and India, and Middle East tensions that have increased the price of oil to levels many experts do not see lessening any time soon. As a result, there have been several actions at the federal level, such as the 2005 Energy Bill, the CLEAN Energy Act of 2007 and President Bush’s proposal to lessen our dependency on foreign oil by reducing gasoline consumption by 20 percent in 10 years through the use of renewable fuels and other tactics. This, in turn, has fostered various incentives for biofuels and the expansion of ethanol production. Broad initiatives such as these to reduce dependence on foreign oil are well intentioned and, in many cases, great ideas. However, the ethanol issue is complex, with numerous trade-offs that are still in the process of being fully understood. Therefore I have selected a handful of facts that, when taken together, will hopefully enrich the readers’ understanding of a broad topic and national conundrum that will be with us for years and perhaps decades.

1. In simple terms, what has been created is a national “tug of war” competition for land and grain by energy and food producers. Fortunes large and small are in play here, as well as a myriad of economic impacts.

2. Currently corn-based ethanol is the leader in renewable fuel products in the United States. In some countries like Brazil, sugar cane is a major factor. Corn is a major feed cost input into the meat, poultry, pork and dairy industries. Less corn grown for these sectors means more competition and higher prices.

3. There are some components of the food supply chain that will be impacted sooner than others. For example, it takes only weeks to grow a chicken to market size, which means the poultry industry will be impacted sooner than the beef industry, in theory. An interesting possible ripple effect is that sustained high corn prices may accelerate the development of the grass-fed beef industry, which could hold tremendous potential for Kentucky.

4. Corn-based ethanol is controversial. Transporting it requires gas-consuming transportation. Corn for ethanol is driven by federal incentives, so taxpayers may be inadvertently subsidizing their own higher food bills. Also, as a leading agricultural expert at Cornell noted, the production of corn into ethanol is energy inefficient.

5. One mitigating factor is the emergence of the use of soybeans to product alternative fuels. This fuel, referred to as biodiesel, is a niche fuel product that you can learn about from the Kentucky Soybean Association at (www.kysoy.org).

6. Another promising mitigating factor is the use of cellulose to produce ethanol. The cellulose would come from sustainably produced plants that can be grown abundantly on land not suitable for crops. Central Kentucky can be proud that Nicholasville-based Alltech, Inc., is both a thought and scientific leader in this field and has proposed building biorefineries in rural Kentucky to produce ethanol from cellulose.

7. A related issue is the national move to eliminate trans fats from our diets. This increases the demand for alternative high-performance oils, which include those made from soybeans. So you have simultaneously increased demand for both alternative fuels and alternative vegetable oils, and this is causing growing and cost pains in the vegetable oil supply chain.

In closing, I do want to touch on the other factors previously mentioned that are pushing prices up. Last winter, there was a harsh freeze in California that damaged and destroyed many plants and trees that produce citrus and products like avocados. The time to recover the productive capacity for these products may take more than one growing season, which will push prices up. Increased fuel costs will certainly increase the cost to transport products throughout the country.

In summary, we live in interesting times when it comes to the energy and food economies, and our local restaurants can be expected to feel the impact in indirect ways for some time. The “perfect storm” currently driving cost factors is beyond their control, leaving them little choice in the near term but to try to ride it out, and hope for smoother waters in the future.

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