Fear of a food shortage

Fears of a food shortage never have left us. It was front-page news then; it's front-page news now, with stories spilling out of some of the poorest corners of the world of riots sparked by the rising price of food.

And though we don't face a shortage in the United States, the rising prices of milk, eggs, bread and vegetable oil have been hard to miss and have some people cutting back on what they eat and when. Economists project food inflation will run at 5 percent this year, with no immediate end in sight.

There's no one single thing to blame for the crisis, with biofuels, drought, surging global demand for food, the rising price of oil and climate change each chipping away at food security.

The Star Tribune asked CEOs of four of the state's largest food companies to help sort it out. Greg Page, chairman and chief executive officer of Cargill, the agribusiness giant with units that stretch across the food chain; John Johnson, president and chief executive officer of CHS, an energy and agriculture cooperative formerly known as Cenex Harvest States; Ken Powell, chairman and CEO of General Mills, the international food company behind Cheerios, Betty Crocker and Yoplait, and Russell (Tres) Lund III, chairman and CEO of Lund Food Holdings Inc., the high-end grocer in the Twin Cities, sat down with the newspaper this month for an open discussion about whether the era of cheap food is over. 

Q When did you first notice food prices rising?

Lund: It's going to go back beyond last year. As oil started ticking up, one of the first elements that we started to see were packaging supplies: Any plastic, resin-based product starts to go up as oil goes up. ... I'm going to guess that we all started becoming concerned a year ago about inflationary pressures, being aware of corn as a feed for beef cattle and aware that there are pressures on that for biofuels.

Powell: We began to see inflation [of] input costs really at the beginning of this decade. If you go back to the middle '80s and through the '90s, all of our input costs were relatively stable. There was some inflation, but it was moderate inflation and we were able to absorb most of that through productivity. As we moved into this new decade, you go back three or four years ago, at General Mills we had seen several years of inflation of 4 percent. One year it was corn, one year it was oil, one year it was packaging, but it was the trend. ... We concluded basically three years ago that that trend of a higher level of inflation and input costs was likely to continue. We see the fundamental cause as growth in global demand for all commodities, really -- food grains, energy, metals, you name it.

Q Are we entering an era of permanently increasing food prices -- in other words, the end of cheap food?

Powell: I don't think so. For instance, three years ago, our input cost inflation was 5 percent, which is significant, especially when you look back at the '90s when we had inflation around 2 percent. So I think we're in a period now where it's 7. This year it might be 8. I think it will moderate. I'm not going to predict when, but we think it will moderate and we'll be able to cover it with productivity.

Q The past few years have been a period of phenomenal growth for Cargill.

Page: That's true. We try to think about it in two contexts because fertilizer has become such an outsized part of the company. Historically, the fertilizer business represented probably 10 to 13 percent of Cargill's investment and 10 to 13 percent of our earnings, and now that has ceased to be the case with the explosion in fertilizer prices.

I think the thing that's sometimes not well carried in the media is that in the last two years it's taken about $17 billion more in the balance sheet to run the company. If you own a country elevator and you previously filled it up with $3 corn and $4 wheat and now you're filling it up with $10 wheat and $7 corn, a single elevator can cost $10 million or $12 million more capital just to fill. So while your earnings go up, our cash flows have gone down dramatically. We have hundreds of elevators and if it costs $10 million more to fill up every one of those, you can quickly do the math and see that the strain on the lending system to agriculture has been enormous, because all of these crops are harvested in a very short period and consumption takes place over 365 days and somebody has to finance all of that.

Q Is any of the liquidity crisis affecting other businesses seeping into yours?

Page: It has filtered in, but it was far more pronounced in the early winter than it is at this exact moment.

Q John, you're in food and oil, because CHS has oil refineries. You're seeing a lot of these pressures as well.

Johnson: This whole phenomenon around food values -- you've got to talk about energy. It starts with energy. Someone asked if we're on a permanent change. I don't think we're going to continue to race these values like we have for the last year or two but I personally feel we have fundamentally shifted. If you look at crude oil ... we ain't going back to no $50 a barrel anymore. The same thing with grain. I think we have fundamentally shifted the values of grain. I don't think necessarily we are going to race these things up, but I don't think we're going back to $2 corn again.

Q We're talking about the food chain but that's really the supply chain. Are supplies getting thin? Is that more of a risk today, that we might run out of food?

Page: A couple of things: In terms of the number of calories grown in the world we are the furthest from famine that society's probably ever been.

And second, the number of countries that have disrupted the flow of food from where it's produced to where it's needed [has increased]. In most cases, if it was solely about preserving crops for the use of their own citizens, which is a rightful role of government, I don't think that there'd be a problem. In fact, most of them have been intervening as a way to control domestic prices. ... There are, to date, 41 countries [that] either through price subsidies or through export embargoes have intervened [in] the messages of the market to allocate food from where it's produced to where it's needed in the most efficient way, and that kind of anxiety leads to hoarding. It leads to a lot of unnatural behavior.

Q Are you seeing more now?

Page: Yes. So that's a real concern. In the countries that hold prices down, they send a less vibrant message to their farmers to expand production. So I think it's easy to make the argument that in Argentina, by dramatically suppressing the price of grain in the country at the same time they have to pay world price for fertilizer, they mute the signal to the farmers of Argentina to produce more to feed the world's need.

Q There does seem to be this sense, this kind of rethinking in some parts of the world, the notion of open trade and the benefits of it.

Page: I think the issues have to be separated if it's an importing country or an exporting country because, if you mute the signals that would precipitate more supply, you're ultimately going to lead to higher prices. You will get exactly what you're trying to prevent.

Q The biofuels debate has moved front and center. How real a factor is that in the things that you're dealing with in your business?

Page: We think mandates are the real hazard, because mandates create inelastic demand ... any inelasticity that you put into the system will get outsized price reactions.

Johnson: We're involved in the ethanol industry, too. I've never seen an industry go from the sweetheart of the world to almost being the bastard child of the world in 24 months. The ethanol industry, even though my farmers wouldn't like me saying this ... has a place for a portion of the stream of energy. I think the government intervention, whether it's the mandates, or the [tariffs] or the excise tax, distorts it. ... At the end of the day, I think it would be a more viable industry if that stuff went away.

Powell: I would argue [that] another theme that you hear pretty strongly is this notion of global economic growth. Literally, your food prices are higher today because the Chinese economy has developed so rapidly over the last decade. They have a very large middle class now and they're eating more chicken and beef. They want their diets to improve. They have the money to pay for it. So, seeing that, we think that inflation ... will moderate [but] it isn't going to go away.

Matt McKinney • 612-673-7329