The Star Tribune asked CEOs of four of the state's largest food companies to help explain the rising cost of food and the commodities that make it. 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. Following is the complete transcript.
Q: When did this begin? When did you first notice food prices rising?
Russell "Tres" Lund III, chairman and chief executive officer, Lund Food Holdings, Inc.: We look at inflation for the industry pegged at about 6 percent year over year this first quarter, January, February, March. We saw it in two phases at retail, and I'm not going to say any consumers have spoken directly to me about food inflation. That's not where the communication takes place. We're aware of inflationary moves on products, from the manufacturers and suppliers to our products. It's going to go back beyond last year because 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 come up as oil goes up.
I'm not sure it's consumer but it's an internal customer of ours: our staff and employees. I have a chance to do all of our orientations for our new staff. And about when we started seeing gas move, I believe from $2, $2.50 upwards, unanimously throughout the staff coming into our company, I would hear, because I ask 'What brought you to Lunds or Byerly's?', and the overwhelming number of younger people coming to work for us were coming for gas money.
And so that's one of my audiences for hearing about inflation pressures and job needs. 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. That's probably one of the first points that we started to become aware of it. But not so much directly hearing that conversation from our customers as much as it playing out in the media and business journals.
Ken Powell, chairman and chief executive officer, General Mills: I would just underline something that Tres just said, and that's that we began to see inflation 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. I think there was a year in there where it was 5 percent. And it was a little bit of this, it was a little bit of that. One year it was corn, one year it was oil, one year it was packaging, but the trend was that the general inflationary pressure that we were seeing, the input pressure, was increasing. And so 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. Many of us had worked internationally previously in our career. We spent time in China, India, Eastern Europe, and sort of had a feel for what was going on over there. We said 'These economies are going to continue to go. There's going to continue to be more demand.' So we've had to change the way we approach productivity in order to offset as much of that as we can.
Q: As we've talked about the food issue here, among editors, one of the questions we've had is are we entering an era of permanently increasing food prices, in other words, the end of cheap food. And is what you're saying, `Yes?' What you're seeing now is a steady increase?
Ken 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. And I don't think we had to take any list price increases that year, because we were able to absorb most of that inflation through productivity. This year we just finished, inflation was higher. We took price increases, and we think this year we've already said publicly we think it will be a little higher. 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. But I think for the last couple of years, I think for a variety of reasons -- nobody predicted $140 oil, nobody predicted the corn issues in the Midwest this year -- for a variety of issues it spiked this year, but we think we will be able to mostly manage it. But I think the base level of input cost inflation, we believe, will be higher over the next several years than it was during the '90s, and it's because of this global demand.
Q: People talk about Cargill having hedges, it's on both ends of the food chain. What has it meant for Cargill that these price pressures going up?
Greg Page, chairman and chief executive officer, Cargill: It's the pro and con of being a diverse and dispersed organization. Clearly for our meat businesses, where high grain prices are an input cost, Cargill employees working in the meat businesses have faced the burdens that Tres and Ken talked about. On the other side of the coin, the opportunities to move more commodities to trade in volatile markets have afforded opportunities to Cargill. Our investment in Mosaic with fertilizer being an input to farmers who are enjoying higher prices and producing crops has been a positive. So -- pretty typical for a diverse organization -- we have parts of Cargill that have struggled with these costs and parts that have benefitted. The net for Cargill, in particular as a result of global trade patterns and market price volatility, has been net good for the company.
Q: About a year ago, and it was yet another record. And here, another year later, still another record. It's been a phenomenal period of growth for Cargill these past few years.
Greg Page: That's true, and it has been. We try to think about it in two contexts because fertilizer has become such an outsized part of the company. Historically fertilizer business represented probably 10 to 13 percent of Cargill's investment and 10 to 13 percent of our earnings, and now that ceased to be the case with the explosion in fertilizer prices. If you take the non-Mosaic part of Cargill it has continued to prosper and grow.
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, in investments that need to be made. 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 or $12 million more capital just to fill. So while your earnings go up, our cash flows have gone down dramatically. And John may be able to collaborate. But 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 so 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. Historically it's been organizations like CHS and Cargill that have been called on to carry that burden. And as private companies and co-ops it's been a strain, so we have this dual reality of we are in an environment that's good for our company, at the same time we have enormous pressures because of the shear amount of capital required to carry all these stocks.
Q: Is any of the liquidity crisis affecting other businesses seeping into your business at all?
Greg Page: It does. It did more emphatically in February and March. We went through a period of, it seemed like the markets wanted to calm down in April and May, and now in June, again as you've seen, the costs of debt start to widen again and access that the bankers have historically turned to they don't have any money either. 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, since CHS has oil refineries. You're seeing a lot of these pressures as well.
John Johnson, president and chief executive officer, CHS: I'd start off by saying this whole phenomenon around food values that comes from grain-based proteins, you've got to talk about energy. It starts with energy. You really can't talk too much about the grain values until you start talking about the energy values. I've been around the grain business all of my life, and the energy business the last 10 years since we put the merger together and when we first started our company 10 years ago there were totally unrelated discussion between energies and grains. Today you bring your senior staff together the first thing you talk about isn't where do you think grain's going to be, the first think you talk about is where do you think crude's going to be? And once you get that decision made then you can start having a pretty good conversation about where the fundamentals are for grain. See I don't think you can unlink them anymore.
Someone asked 'Are we 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 at $140 a barrel, it was only three years ago that it was some $50 a barrel. I don't think we're going back to those days again. The availability of crude, although it's there, it's more costly to get, you have more demands around the world for it. I think it's just a fundamental shift. People ask me what's the range? I don't know the range. We ain't going back to no $50 a barrel anymore.
So we're in a range of $100 or something greater. It gets me very nervous when I see Iran throwing rockets around last week. Any geopolitical turmoil in the Mideast is going to cause tremendous reactions in the energy markets. Well, having said that, the same thing with grain. I think we have fundamentally shifted the values of grain. Again 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.
The only unknown there: Are the world economies going to continue to grow at their present rate or is there some hiccup that could happen that could reduce that demand? I think technology is going to be the one avenue that is going to help the world become more competitive in grain production. I was just coming from London and spoke at the International Grain Council over there. As you know the European community has been very reluctant to use grains from genetically modified origins and all of a sudden they're rethinking that. And they're saying 'Wait a minute. You mean we could grow more, and grow it more competitively if we use GMOs?' Yeah, yeah. So they're rethinking some of these things.
You know when things are cheap you can be very fussy about what you want. But when things get a little more expensive then all of a sudden some of the things that may be frivolous in your opinion around what you buy and what you don't buy goes away. I can concur with what Greg has said. Even in our company -- you know we're in energy, we're in fertilizer, we're in grains and we're in foods and other services -- and the amount of capital it takes to run these organizations today, ours has almost quadrupled in about 18 months. And so organizations can go to the marketplace and put that more capacity into your company to sustain the inventories, sustain positions, feed the world and your customers on a 365 day basis when the harvests come off in short periods of time, no matter where it is in the world, has been phenomenal. And what complicates it is typically the liquidity in the banks has been quite good, . If your company's got strong balance sheets, you could access that money quite easily. Today's market, because of the financial crisis, has created a lot of liquidity issues. So even around good credit it becomes pretty challenging to make sure you can get the resources in place.
What scares me a little bit is the industry is running into somewhat of a liquidity crisis for some companies and there could be a lot of things that would happen in the supply chain if companies can't do the appropriate things to buy the inventories, hedge the inventories, provide it for our customers long term, and so you get more into what I'll call the cash market and when the cash market happens all of a sudden you're going to have even more volatility would be my personal opinion.
So the two things we face as an organization, again, these prices at relatively higher values, but it's also just the relative volatility. Greg, I think you would concur that in my 30 some years I have never seen anything that can move so rapidly. We use to talk about grain moving 10 cents a bushel or 20 cents a bushel in a year. Now here we could move it dollars a bushel in a day or two. So that volatility creates a lot of turmoil in the supply chain.
I think we had a lot of customers that panicked this spring when wheat was starting to race. I know they stepped in, and some of them bought 12-month supplies of grain at the peak. And guess what it's done now? It's dropped off. So when you think about the consumer I think you've got a lot of higher-valued products in the channel that will not reflect the down we've had here in the last month or so.
Q: John, you talked about a lot of good things, one at the beginning was about some of the causes. And I wanted to ask Tres, do you think consumers at the retail level understand the causes or do they pick one?
Tres Lund: I think your initial question was about our customer and I tried to explain that I may not have a direct dialogue from our customer. But there is data out there that is very fresh this year comparing first quarter of 08 to first quarter of 07 and that consumer data says that 93 percent of customers surveyed are very concerned about inflationary prices in their grocery store. Across all categories, I think clearly the dialogue around inputs is profound. We saw early reaction to downsizing and going to 2X packaging, concentrated detergents. The larger that package is for holding laundry detergent, the more oil consumed to produce that product. And I don't know how you weave this into that bit of your story, but we live in a society that kind of overserves and overconsumes. And what I mean by that is if you think about restaurants and the size of portions of meals, you know we're all kind of reacting.
There's a health and wellness push to how we're reacting. The prevailing thought is that five small meals a day may be better than two large or three very large. But we've also overserved in all of our packaged goods. And we manufacture about 5 percent of the products we sell. We're a little guilty of that, too. There's a point therein as some of the pricing has risen from wheat and wheat-based products, we've never seen a half pie in our stores until now. Half packages of cookies. Some of that is in an effort to bring a retail price point on those packages down. We saw this before there was great food inflation on some of the large detergent companies in bringing concentrates down and changing the package. There was a little reluctance to it. I would hear 'Well that's not what I'm used to,' and the average consumer says 'That's my detergent. That's my package That's the format.' There's a sustainability effort playing out right now. What that's creating is a consumer acceptance for change in the way they buy their products, how they're packaged. I would love to touch on that a little bit later, but that goes to the heart of what I believe. I think we are at a point where there are some structural shifts in inputs or ingredient costs or commodities that aren't going to, they may come off some of the highs and come down but they are at a new high. But it does mean there's a new food cost out there. I'm not sure it's quite done elevating just yet.
79 percent of consumers in this study said they will actually start shifting their behavior in continuing inflation, not just food, but all products or commodities.
So, I'm trying to get back to your question. I think there is a structural elevation in the cost of food and it probably is driven by global demand. And it's also, I believe, driven by overusage, I mentioned overusage and how we're served. Our customers -- and we all do this -- we buy our stock up groceries and at the end of the week we're throwing stuff out that we haven't consumed.
What's encouraging is that there are elements of change in consumer acceptance that are coming and are being led by some of the more progressive retailers in the country right now and manufacturers, downsizing their packaging lowering their costs to produce that plastic package. Either for absorbing some of the costs and producing a better value for the customer or for an environmental concern. If you look at how we package products, there's a lot going into the waste room and that is something that consumers are very concerned about.
Q: Ken, a year ago General Mills did the 'Right Size, Right Price' initiative. We covered it. It was done, it was executed, it as transparent. But there can be some pushback to that and maybe customers feel like you're playing them. And that's an issue. And also, international growth, that demand may be pushing prices up, but that's been a huge area of growth for General Mills.
Ken Powell: For us, the 'Right Size, Right Price' initiative in cereal which, as you pointed out, we did that a year ago, almost precisely one year ago, we announced that. The specifics of that exercise were that our cereal packages were on average larger than sort of what was the median for the category and therefore we had more than our fair share of large sizes, really large sizes. And that's something that just evolved over the last decade. We realized that our boxes were bigger than average and our prices were higher. And so basically what we did is we moved our package sizes to the average and we took prices down at the same time, although, as we were very clear to say, not as much as the box, but they did go down. And so what the exercise allowed us to do was to basically make our box size more competitive, we got our price points more competitive. It was a good thing for us to do and just aligned us with consumer preferences today and that's behind us now.
On the international piece, I think you're right, that is the flip side of global demand and the pressure that global demand puts on most input costs. Not just grains but energy and metals and meat. The flip side of that is that those economies are growing at a very rapid rate, and for companies like General Mills, we're delighted we're able to participate now.
If you go back 7 years our total international business was around $500 million and this year it will be close to $3 billion. And that's very broad based growth around the world. It's Europe, China, Latin America, Australia, Southeast Asia, so it's been good growth. For us we have a large number of people in Minneapolis whose jobs basically are supported doing R and D and technical development and engineering, to help us expand these businesses around the world. So I think it makes General Mills bigger, better, more powerful and innovative company because we're more exposed to global trends now. It really helps us to think how to innovate in foods. So it's been a very positive flip side of this global demand.
The other point if I could, Matt, if I could just tack on to something that Tres said about consumer behavior. One of the shifts that we're seeing is, remember that half of whatever gets spent on food in this country is spent away from home. It's spent in restaurants. It's not spent in grocery stores. That food away from home [spending] is very entrenched behavior. People are buying and eating in these places because the value is good, it's convenient, we're a time pressed society. All of those things that have driven those behaviors are still in place and so they're still eating there. It's very entrenched. I would call it cultural now. But we are seeing restaurant counts, and we see this through our food service business because we're supplying products to the food service industry and restaurant industry, we're seeing restaurant counts decline a little bit. It's not falling off a cliff. It's down one or two percent. So that is one way I think consumer behavior is changing, just to make the food budget go a little further.
Q: We're talking about the food chain, but that means we're talking about the supply chain. Are supplies getting thin? Is that a problem, that we might run out of food because of a problem elsewhere?
Greg Page: A couple of things: the headlines that always concern me, as people think about this very important issue of food, is that we face famine. And it's the furthest from that. The world this year will produce more products of photosynthesis than in the history of mankind. So I would argue that, in terms of the number of calories grown in the world, we are the furthest from famine that society's probably ever been. Now the way in which we allocate those products of photosynthesis, and what we produce with them, and we could get into the biofuels discussion, that's a different issue.
And, second, the number of countries that have disrupted the flow of food from where it's produced to where it's needed [has grown.] And, 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 intervened as a way to control domestic prices. So if you're the president of the Phillipines and you've relied for many, many years on other countries in Southeast Asia for your rice and they intervene their exports to you, solely as a result of a desire to control domestic food inflation in the producing countries, it's a very frightening thing. So if you're Hosni Mubarik in Egypt and you've typically fed your country with wheat from the Black Sea nations and they put embargoes on that preclude you from fulfilling your role, the sense of vulnerability gets pretty high.
There are to date 41 countries either through price subsidies or through export embargoes that have intervened the messages of the market to allocate food from where its produced to where its 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 than say a year ago?
Greg Page: Yes. So that's a real concern. It does two things. 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.
I think the other thing that's important for people to understand: only about 14 to 15 percent of the world's calories cross borders. So the sense that all of our world's food goes into ships and goes from here to there, it just isn't supported by fact. But that 14 or 15 percent, because of changes in weather in countries that just have no ability to be self sufficient because of geography or population density, you may have countries that have less than 50 percent self sufficiency, but if you take the whole globe, 14 percent of the calories are going to cross borders this year. 86 percent of food calories are highly local. But the impact of those 14 percent of calories that do cross borders on price discovery and on the messages about gaining a supply response are enormous. So we're not running out of food. Disruptions to the flow of trade causes lots of bad behavior -- muted signals to raise supply and hoarding -- which are the two things that ultimately drive prices higher.
Q: There does seem to be this sense, this kind of rethinking at least in some parts of the world the notion of open trade and the benefits of it. The sense that food security has been undermined by open trade in food products. How do you account for something like that, when you've got countries now limiting exports or suppressing prices because there is a sense that our people can't afford to buy anymore, we have to feed our people first.
Greg Page: I think the issues have to be separated whether 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're going to get exactly what you're trying to prevent. So to be intellectually dishonest about that, that's a mistake for governments in total.
This year the Egyptian government will spend upwards of 4 and a half percent of GDP subsidizing the price of their wheat imports. On one level that may be the role of a government in a country with relatively low standards of living, but ultimately it doesn't send any of the right signals and it clearly precludes any of the same money being invested in infrastructure or education or health care or any other needs. So you're starting to read more and more about it.
I think one of the facts that a lot people miss and it goes to the issue of why agriculture and food haven't been in the newspapers for a few decades. Since 1975 the share of global GDP that's represented by basic food stuffs has fallen 75 percent. It went from 4 percent to less than 1. We were uninteresting!
But food had become an increasingly good bargain. Ken talked about it with portion size. Tres talked about it, we're overserved. and there's lots of different messages but one of the consequences of the percent of global GDP that was being ascribed to the basic building blocks of the food system dropping by 75 percent was relatively less capital moved into agriculture. So the quality of the railroads, all of the infrastructure that surrounded agriculture basically went through a period because the price signals were not that good. Farmers suffered. Most of the agricultural farm bill discussions were not about how to increase supply and how to feed the world, they were about how to take acres out of production, how to restrain supply to support price. And so you do three decades of one thing and then try to shift gears and go from restraining supply and underinvesting to promoting supply creation and putting capital in.
Last summer I drove, I don't know why I did this now that I think of it (laughter), I drove 2,000 miles across Russia and the Ukraine to get out of the plane and see what was going on. The number of trucks driving down the roads in those areas hauling brand new John Deere combines and tractors would astound you. And it's just the recapitalization of agriculture. You can see it there and you can see it in other places.
I think we have to be careful that government policy continues to get the supply response that it expects. We certainly got it from wheat this year and price of wheat is down 50 percent from its peak or more. So supply stimulus as a result of price signals still works, unless we intervene.
Q Your predecessor about two years ago was one of the first to sort of very publicly raise the whole issue of food vs. fuel and then of course this week 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?
Greg Page: I wish he was here to answer that. (laughter) John [Johnson] introduced that subject. One of the first graphs you can pull up at Cargill every day if you wish is the zero margin value of corn. What that is it takes the price of ethanol and the value of the subsidy and the value of the byproducts that are left when you make ethanol and it calculates the numbers. So today clearly with oil up $4, that number's going to rise. Yesterday that value for corn was over $11. So of that $11 which is the value of corn in your car, is basically what it's a measure of, is $11 a bushel. And then you have to take out the cost to actually make the ethanol. And then it gives you a good gross sense. You back that number off and it shows the linkage between the two. But the subsidy today, if you want to look purely at the subsidy, is 46 cents a gallon which is $1.20. So of that $11, a dollar and 20 cents of all other things being equal, is represented by the inducement that we give to ethanol production. So what is it? 12 percent or something. So that is one way to portray it. What is its contribution to the price signal, the subsidization. And so our objection has been even preceding some of the media coverage that Warren [Staley, the former CEO of Cargill] received, is we think mandates are the real hazard, because mandates create inelastic demand. Which is the worst thing possible when you're growing a crop like food where weather's an involvement, because any inelasticity that you put into the system will get outsized price reactions.
At this point in time I think it's a fair argument to make is how big should the subsidy be to contribute to that $11 value of corn, $11 per bushel? So to finish the circle, the price of corn then determines what the price of all the other crops are, because the farmer has the choice of what to plant his land to. People say, 'Well rice isn't used in ethanol,' or 'Very little wheat is put into ethanol in the U.S.,' but in point in fact, our view is that most acreage allocation decisions start first with the decision of how the U.S. allocates acres to corn which then determines how much wheat and beans to grow and then the rest of the world fills in around that. And so arguably today at these prices we are overstimulating the demand for acres to grow corn by some level of subsidy.
Q: John, you had talked about technology and what that's going to mean? We're talking about needing more supply of food. What sort of technology are your members using and will that help us meet the demand?
John Johnson: Let me just back up and tag on to Greg a little bit. As you know 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. But it was predicated off the idea of a lot of surplus corn with very low values with energy prices going up. And if you had told me today that we would have $140 a barrel oil and not have a very profitable, viable renewable fuels industry, I would say, 'What went wrong?'
There's one component that hasn't been talked about here today, and that is the value of our dollar. Because even when the ethanol industry was building up, the buffer factor that was predicted was exports. They said, 'Well, you know what? We'll supply this ethanol industry and the exports will go down.'
Didn't happen. Exports went up. Why? Global demand kept growing and the value of the dollar meant every place in the world had more buying power than the U.S. So other places in the world could outbid ethanol players, outbid livestock players in buying that respective grain. I think it gets underestimated but certainly the value of the dollar is an impact from a global perspective of who has the buying power to buy the grain.
I concur with Greg [Page], the ethanol industry, although my farmers wouldn't like me saying this, but I think the industry has a place for a portion of the stream of energy. I think that the government intervention, whether it's the mandates, or whether it's the tarification or whether it's the excise tax, distorts it.
And if I look at some of the issues that food manufacturers and or livestock producers have against the ethanol industry it's that there's an unfair playing field to buy the corn. If that was gone away, guess what? The market would determine who has the buying power for the grain and it goes away. Now the Renewable Fuels Association certainly wouldn't concur with me on that, but at the end of the day I think it would be a more viable industry if that stuff went away and let the industry compete for corn just like every other industry that needs corn. So I start with that.
Your question was more about the technology side. If you think about corn, or grain, starches for either the purpose of calories for food or energy for fuel, and if corn is one of the major based, and I think in the U.S. we're a long ways away from any cellulosic breakthroughs, it will come, but we're still a ways away. Corn will be the feedstock, and that's where technology comes in.
We have been on a pace for the last 30 years in the yields per acre have been just like this [makes upward motion with hands] -- straight up. This last year we hit 154 bushels an acre [or corn, a national average from the U.S. Department of Agriculture]. There is pretty good confidence with technology providers, the Monsantos of the world, that in the next 15 years that probably could be 300, in other words, double it.
Now we've got global demand that's going to continue to increase, and the question is how much biofuels will absorb it. When you think about doubling the productivity of an acre of ground in producing corn all of a sudden some of these things look like less of an issue. The question is how fast? It's not going to happen tomorrow. It's not going to happen two years from now. It's a lengthier period of time.
When I look at the idea of supplying food and have a portion of renewables, maybe corn based, and with the advent of technology being in seed production that creates better yields, it seems to me that that formula will work. It's a question of timing. When does it all come into play? So today, we're facing a situation where the yields did not go up, not that much. And created a demand for corn, what 25 to 30 percent of the corn crop, here in the U.S. now goes to biofuels. But even that's starting to get rationalized now. If you watch the news, a lot of the new plants that were ready to start up will not start up. You have some of the plants that are going that will be shutting down. Why? They can't convert $7.50 corn into $2.80 ethanol and make it work. So it's starting to rationalize itself also. The other thing is if you look at the ethanol industry and where that dollar goes, the 46 cents on the excise tax, everyone thinks that goes to the ethanol manufacturer. It's not. The issue is its put into the blender.
Think about this: a person that's buying gas retail at $4 a gallon and you've got ethanol at $2.80 a gallon and you blend it up to 10 percent or 20 percent, there was as much as $1.50 a gallon blending opportunity for people to put ethanol into the gas stream. That's a big incentive when you think about it but that $1.50 was not going to the ethanol manufacturer. It was the blender, in other words retailers and people that buy the product and put it in at the pumps.
I would say today that the ethanol industry is really at a bubble. I think you could really take away all of the supports around it and it wouldn't change much right now today. The lack of money that they're making probably wouldn't change much. The question is longer term what would it do? And would it sustain the industry.
I believe that at the end of the day, if you look at it from the longer term perspective, we need to use the available technologies that are out there for yield improvements, not just the United States, because this is being deployed big time right now. I think 92 percent of the corn being produced here in the United States today is all using genetically modified seed. The only thing that's not is where it's specifically grown for a customer who wants a non-GMO product. So the U.S. farmer has absolutely embraced all of the new technology that's available to them to increase their yields. They're incentivized to do that. There are other places around the world for other reasons that do not do that. So if you can apply the current technology across the globe, think what that might do for the productivity of grain stocks for feeding the world. So I think it's a key, a big key for the future.
Q: Tres, you're a manufacturer. You're introducing a lot of new private labels. Where is that headed? Some of that seems to be in response to these price pressures.
Tres Lund: Two elements. You referenced private label and there's a Lunds/Byerly's private label at the premium tier. We've introduced several private label lines that are at a value tier in the health care category. Minnesota Creamery, La Crosse Dairy, those private labels represent a value for the consumer. We did introduce a line of value oriented in addition to the more premium. We've had growth in those segments because consumers are making those choices. In the industry we've always been aware that during economic tough times and the average recession runs between three to five months. No one's yet declared where we are, but there's enough going on in the economy that it's safe to say this has already extended beyond your typical recession. And we're in something that's very different. Take housing, take gas, take food inflation. We left something off the table but it's back there percolating: health care costs. For the last five years, whether they've been single digit 9 percent or double digit 20 percent, depending on the business you're in, those costs have crept up. Businesses are supporting a lot of that, but a lot of it has been pushed back into consumers as well. You've got so many moving factors that are foundational to our economy and disposable income. I go back to it's a structural shift. So some of our move to private label was to address elements of value for our customer. Ken mentioned some of the shift from food service. And that typically happens in your typical recession. This is, I don't know what they're going to call it yet, but this is not typical. I think this is structural and longer term, but food service will trend down.
Some of the drivers, gas, there is a cultural element to how we eat out. It's part of us being on the fly. I think consumers paying attention will start to eat at home more.
One of the items that we launched out of our kitchen was meals for four, and were specifically sampling those products during that pre-dinner window.
One of the items is $23 for four people. If you compare that to a family-style restaurant of an equivalent nature for a chef quality meals, it's about half of what you would incur for the cost of that meal out at a restaurant. Plus drive time is somewhat limited.
So our focus has been on how do we meet our customers needs in creating value points throughout. Deli happens to be one of those categories all customers, lower, upper, middle income, will drop out and trade down with continuing inflationary pressure and deli price increases.
Now, what part of the deli, you've kind of got to get a little deeper on the analysis of the category. But our view was, if we can prepare meals for consumption at home that represents a real value in comparison to the food service trip, if that's where they're starting to shift back into our stores, then we're advocating for our customer.
John Johnson: Can I ask a question. Watching trends and if my daughters and my wife have the television on, all these different cable channels on, is it just my imagination or not. The amount of cooking shows on tv. Now is it just a spectator sport or are other people looking at that and saying, 'Boy, I could use that at home.' Because it's noticeable. The amount of cooking shows that are on cable television.
Tres Lund: Last week the USA Today was saying, and it was a tongue in cheek kind of piece, but it was basically claiming that with Youtube, anybody can be a star chef now, regardless of your credentials. There's a proliferation of shows. I think some of that goes to an aspirational element of today's customer. We want to know how to cook better. There were a couple of generations where cooking at home probably wasn't something that was always passed on. During the holidays when I'm in the store and see the customer asking, 'How do I baste this turkey?' and 'How do I dress this?'
We're there to answer those questions. Those shows are proliferating because there's obviously an appetite. I'm sure there's a celebrity element to the chef and people want that. I don't know how you correlate that to the 80s when we were building trophy kitchens and eating more and more away from home.
I think there's a trend back to cooking at home.
Q: The theme that I'm picking up here is let the markets work their magic. During this momentous presidential election, where food is increasingly becoming a big policy issue, what kinds of things can policy makers in Washington do to help alleviate the situation that we find ourselves in?
Greg Page: This is a very narrow U.S. question? Because that's the challenge, I think this is bigger than one country, but the question is specifically about the U.S.
I would say one of them is to consider the level of subsidization during a period when prices are this high. That doesn't mean they have to go away for ever and if supplies return in abundance and if these yields that we achieve occur, then there may be times when the safety net for agriculture is still appropriate so we don't have to make it go away forever. But certainly corn's at $7.25 and many shoppers are facing a real challenge in their budget there may be a chance for moderation so I think that's one.
I think another controversial issue is to look really look carefully at the land that was taken out of production and see what the best parts of that that have the most agricultural value and the least environmental sensitivity and if those can be promptly brought back in because it's at the margin.
It's interesting yesterday's Wall Street Journal had an issue on world hunger. 982 milion now are below the 2,100 calorie World Health Organization standard, and they say it would take 35 million tons of food to bring all 982 million people to the World Health standard of 2,100 calories. We raise 3 billion tons a year. You think it's just a 1.2 percent change in the supply would provide enough supplies if appropriately distributed to bring all 982 million to the World Health standard. We have to be careful that the rhetoric doesn't get out ahead of the degree of the issue.
What would you guess, John [Johnson]? The average GMO crop -- 8 to 10 percent more productive than the non-GMO equivalent?
John Johnson: Minimum.
Greg Page: Eight. So we have 1 or 2 percent more to bring all 982 million to the World Health Organization standard. GMOs in those crops where it's appropriate would bring those crops, on the same acreage without bringing any more land under the plow, 8 to 10 percent productivity increases. I think we have to be careful not to overlegislate and overgovern this issue and I don't mean to diminish the size of the problem and the burden on people's budgets, but there's also a risk that this can be overpoliticized and that that won't be good.
Ken Powell: You have to decide your own conclusions, but I guess I would argue 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. It's a very enterprising country and 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 and the fact that they're eating vastly more quantities of protein than they did 10 or 15 years ago is a direct cause for why we're paying more for food here in the U.S. today.
I would guess that most consumers don't understand this phenomenon of global demand. We think one of the key imperatives for us is to find new ways to offset the inflation that's going to happen and new ways to absorb it. We're starting to look for all of the ways we can find efficiencies and eliminate waste from our supply chain and we're finding that there are many, many, many thousands of ways to do that. While we've not been able to offset all of the inflation, in particular in the last couple of years, we think we're getting better at absorbing more. And we're going to get into a balance where we can get food prices back to some general level of stability through productivity.
Tres Lund: This is where I would add a sustainability comment to add to Ken's point. They took a lead role on downsizing packaging. I don't know if the capacity back then was able to measure the implications of that. Obviously we know we got lower packaging costs into that. Where are country is headed is, 'What's the footprint of that packaging reduction?'
There is going to be across industries a focus on trying to be advocating for consumers desire for sustainability. Not only on how food is produced and sustainable agricultural practices, or aquaculture practices. Those are red hot areas of how to respond to the consumer. But in the background of the sustainability thing there's some really interesting things. When we took our stores off of 24 hours, one of the elements of that was energy consumption. These are early statistics but, for the grocery industry, 50 percent of our carbon footprint is utilities and energy consumption. I think 35 percent of it is refrigeration.
I would just focus on utilities for a moment. One of our energy audits just involved taking the background lighting down in wattage through investing in relamping and refixturing throughout the store. That's just one area and this is just one store.
You can look at it as a reduction of oil. I believe it's 451 barrels of oil for one store on an annualized basis. That's one of our stores out of 21. There are approximately 32,000 grocery stores across the country. You start to do the math, and everyone's energy consumption is going to vary, but there's 14 million barrels of oil. That's a very small part of our total consumption, but our consumers wanting us to advocate for sustainability for all of the environmental reasons.
And I think this whole notion of overpackaging, overserving, is something we can deal with. I think in today's world the consumer is coming around to, 'I get what you're doing.'
Ken Powell: I would just add that this is very new thinking for our industry. If you go back ten years, fifteen years ago, we weren't looking at the light bulbs in the grocery stores. It just was not on the table. I will tell you we have an enormous percentage of our organization now looking for ways to eliminate basically what is waste. And it does have a huge overlap with sustainability, which is increasingly an agenda for our consumers.
You know, the things are mundane, but a good example that we like to talk about is an everyday product, Hamburger Helper, that comes in a certain size box and was made a certain way. We just started looking at that product and instead of saying, 'How can we add more flavors or add more pouches?' we started saying, 'How can we simplify this product without in anyway compromising product quality?'
We started eliminating pouches. We actually found a way, just because of the sort of architecture of the pasta that was in there, made it all nest together better in the box. So the product was exactly the same, but the volume of the components fit into a smaller box. Those boxes then fit into smaller cases, and we increased the number of cases we could put on a truck by 30 percent. Across a business that size, it's a very big business, you're talking about thousands of trucks that are suddenly off of the road. Without one iota of change to the product that the consumer ends up with. So we have thousands of examples like that across our company. And it is a new mindset. Where is that waste? Where are we doing things that really aren't adding any value at all to the consumer?
Q: What sort of things do you think we should be writing about?
Ken Powell: It's a global world for us, and anything you can do to broaden perspectives. John just got back from London. Greg's driving his car across the Ukraine. My team is traveling around the world and learning about consumer behavior and looking for opportunities. If you look at the broad base of Minnesota companies, it's really astonishing. 3M is more international than they are domestic. So we live in a global world and the whole food equation is profoundly impacted by global trends and global growth. And I think you'd be doing a great service if you highlighted that development.
John Johnson: Whether it's high values for energy or high values for food, we as companies that participate in either one of those industries, we're going to be better at it because of this. We're going to find innovation to lower our costs. We're going to find other ways to produce the products that will lower the values going forward.
I was amazed...I was coming home last night, at how many of these Toyota Hybrid, what do you call them? Prius. The Interstate's full of those things! That's a good thing. That is a good thing. I would suggest that if we go back to $2 gasoline, you know what? We're going to buy pickups and SUVs again.
So as a society, I'm not so sure that these higher values we're seeing both in energy and grain, and rationalize it with world demand, is not a good thing. We're going to be better companies because of it. We'll find ways of dealing with the industry in innovative ways and we'll be better users of the resources of the world.
Ken Powell: I just want to acknowledge that we have two guys here who are in the ethanol business saying, 'Get rid of the subsidies. We'll all be better off.'
Greg Page: Mandates first.
Moderator: Thanks everyone for your time.
[Roundtable discussion ends.]
