Baker in Washington: Commodity situation 'perilous'

by Josh Sosland
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WASHINGTON — "Explosive price increases for just about every commodity we use have created a perilous situation that threatens our ability to continue doing business," said Richard Reinwald, owner, Reinwald’s Bakery, Huntington, N.Y., on Long Island.

In May 1 testimony before a Congressional Joint Economic Committee (J.E.C.), Mr. Reinwald painted a bleak picture of the baking ingredient situation and its impact and bakers and consumers. He called for congressional action to ease the burden through changes in the ethanol program.

The hearing was convened by Senator Charles Schumer of New York. Mr. Schumer said he hoped the hearing would help determine how rising food costs are affecting American families and what steps could offer relief. For the baking industry, the hearing offered the largest stage yet for the group to air its views on rising prices and government action it is seeking.

A fourth-generation retail baker of pies, bread and cookies as well as birthday and wedding cakes, Mr. Reinwald represented the Retail Bakers of America, McLean, Va., and the American Bakers Association, Washington. His remarks were supplemented with supporting comments prepared by the baking groups for the J.E.C.

Elaborating on the "perilous" situation, Mr. Reinwald told the committee that the cost of a 100-lb bag of flour has risen to $52 from $17 in 2006 and that soybean oil and egg prices have doubled in the past year.

"Our bowl cost, or the cost of dough coming out of the mixing bowl, went from 22c per lb to 51c per lb for rye bread," Mr. Reinwald said. "Rye flour, used to make the best part of a deli rye sandwich, has not only doubled but is now in short supply, and we are beginning to import rye from Europe as long as it is available."

Mr. Reinwald described a manageable situation in 2007 in which bakers employed a "classic business response" to rising costs of raising prices, cutting costs, eliminating waste and pressuring suppliers. He said the strategy worked through December but that prices reached new highs in January.

"In February, we were forced to institute dramatic price increases across the board," he said. "Prices on bread items in particular increased significantly. A 1-lb loaf of rye that sold for $2.65 in April 2007 today costs $3.45. In talking with bakers across the country, these kinds of increases are fairly common."

The price hikes have resulted in a volume decline of 5% to 7%, Mr. Reinwald said.

"While this may not sound like much, it is the difference between profit and loss, staying in business or closing the door," he said. He said he knew of a baker in Tampa, Fla., who experienced an 18% volume drop since October.

Mr. Reinwald described for the committee the March Band of Bakers gathering in Washington in response to the higher prices. He added that the baking industry understands that many factors have contributed to the high food prices, including expanding world demand, the weak U.S. dollar and poor weather.

He added, though, that the ethanol program and "other government programs that pay farmers not to farm their land" also have contributed to the current farm crisis.

He continued, "Why are we putting food in our gas tanks instead of our stomachs? As bakers we have no gripe with the farmer — they are trying to make a living like everyone else. But it is difficult to explain to my customers that flour prices are increasing because farmers are choosing to grow crops for fuel and not for food — that the government is incentivizing farmers through subsidies to grow corn for ethanol and not corn for feed and food uses. Wheat acreage continues to dwindle because farmers can make more money growing government subsidized fuel than they can growing food. Even with current record prices for flour, the response to grow wheat is greatly diminished because of mandates for ethanol production. The U.S. has a finite number of acres to use for farming, and fuel crops have taken over many acres that were previously used to grow food. Where will the land come from to grow more crops to meet new ethanol mandates? U.S. cropland is already stretched to its limit."

Calling for congressional steps, Mr. Reinwald urged to "take necessary steps to waive the renewable fuel standards passed in the Energy Independence and Security Act of 2007."

In their supporting comments, the A.B.A. and R.B.A. offered a broader picture both of the effects of the rising commodity prices and offered a more comprehensive description of potential remedies.

Food inflation in 2007, at 4.9%, was 2 percentage points above the recent average, and prices rose another 5.3% in January-March 2008m the groups said. Grain-based foods in particular have climbed 15.7% during this period, they added.

The surge likely has not yet run its course, they warned.

"The prices of many food products, including baked goods, do not yet reflect the impact of increased ingredient and other input costs," the groups said. "For example, a bakery may enter into a contract to purchase wheat flour for $50 per 100-lb bag, but may not pay for the flour until it is delivered, which could be three to four months from the date of contract. This means that baked goods purchased today may reflect input prices from three months ago; higher wheat prices today will translate into higher bread prices three months from now."

Elaborating on the ethanol issue, the statement noted the 2007 ethanol act mandates production of biofuels to 36 million gallons in 2022 from 7.5 billion in 2012. The groups said the baking industry already is "experiencing adverse consequences form the ethanol program," and said their ability to bring "cost-effective products to the marketplace has been dramatically hindered because of fuel crops taking land from food crops."

The A.B.A. and R.B.A. echoed Mr. Reinwald’s call to waive the renewable fuel standards until domestic supplies are replenished.

"It is imperative that the ethanol program be postponed until food stocks are adequate to provide nutritious, low-cost products to consumers and allow for further exploration and creation of alternative fuels," the A.B.A. and R.B.A. said. "This will also require that Congress re-evaluate the corn-based ethanol program and include a clear mechanism to periodically evaluate the nation’s grain situation, allowing for future waivers in cases of projected food shortages or drastic consumer price increases, adverse weather conditions leading to low commodity stocks, environmental challenges, infrastructure bottlenecks or other adverse consequences stemming from the current ethanol program."

The groups went on to urge the elimination of the domestic corn-based ethanol credit and the ethanol import tariff.

Turning to the C.R.P., the bakers termed the program a "major contributor to the dangerously tight wheat supplies." They noted that harvested wheat acreage in 2007 was smaller than in 1898, the year the A.B.A. was established.

"In most years, U.S. production of hard red spring wheat for bread is insufficient to meet total usage," they said.

The groups reiterated their position that up to a third of the acreage under contract in the C.R.P. could be returned to production "without sacrificing environmental standards."

"A.B.A. and R.B.A. continue to call on the U.S.D.A. Secretary to immediately use his authority to waive penalties for farmers wishing to follow market signals and return land retired through the C.R.P. to production," the groups said. Because an Environmental Impact Statement may be required for an early out, the bakers asked the U.S.D.A. to immediately begin the process which could be time consuming.

"A.B.A. and R.B.A. also strongly support decreasing the total acreage allowed within the program by one-third," the groups said. "This compromise will continue to protect environmentally sensitive lands, increasing the focus of the C.R.P. to lands that should be protected, such as waterway filter strips and similar areas, while at the same time allowing farmers to return to production viable lands that can be used to meet current commodity demands."

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