[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON
FOOD PRICES AND SMALL
BUSINESSES
=======================================================================
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
MAY 15, 2008
__________
Serial Number 110-94
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
HEATH SHULER, North Carolina STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona TODD AKIN, Missouri
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas STEVE KING, Iowa
DAN LIPINSKI, Illinois JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa DAVID DAVIS, Tennessee
YVETTE CLARKE, New York MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
______
STANDING SUBCOMMITTEES
Subcommittee on Finance and Tax
MELISSA BEAN, Illinois, Chairwoman
RAUL GRIJALVA, Arizona VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
______
Subcommittee on Contracting and Technology
BRUCE BRALEY, IOWA, Chairman
HENRY CUELLAR, Texas DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania TODD AKIN, Missouri
MARY FALLIN, Oklahoma
.........................................................
(ii)
Subcommittee on Regulations, Health Care and Trade
CHARLES GONZALEZ, Texas, Chairman
RICK LARSEN, Washington LYNN WESTMORELAND, Georgia,
DAN LIPINSKI, Illinois Ranking
MELISSA BEAN, Illinois BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
______
Subcommittee on Rural and Urban Entrepreneurship
HEATH SHULER, North Carolina, Chairman
RICK LARSEN, Washington JEFF FORTENBERRY, Nebraska,
MICHAEL MICHAUD, Maine Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, PENNSYLVANIA, Chairman
CHARLIE GONZALEZ, Texas MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona LYNN WESTMORELAND, Georgia
(iii)
C O N T E N T S
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Chabot, Hon. Steve............................................... 2
WITNESSES
Buis, Mr. Tom, President, National Farmers Union................. 3
Tracy, Mr. Geoff, Chef Geoff's, Washington, DC, On behalf of the
National Restaurant Association................................ 5
Formica, Mr. Frank, Formica Brothers Bakery, Atlantic City, NJ,
On behalf of the American Bakers Association................... 7
Thomas, Mr. Daryl, Senior Vice President Sales and Marketing,
Herr Foods, Inc., Nottingham, PA, On behalf of the Snack Food
Association.................................................... 10
Dinneen, Mr. Bob, President, Renewable Fuels Association......... 11
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 28
Chabot, Hon. Steve............................................... 30
Altmire, Hon. Jason.............................................. 31
Braley, Hon. Bruce............................................... 32
Buis, Mr. Tom, President, National Farmers Union................. 34
Tracy, Mr. Geoff, Chef Geoff's, Washington, DC, On behalf of the
National Restaurant Association................................ 40
Formica, Mr. Frank, Formica Brothers Bakery, Atlantic City, NJ,
On behalf of the American Bakers Association................... 48
Thomas, Mr. Daryl, Senior Vice President Sales and Marketing,
Herr Foods, Inc., Nottingham, PA, On behalf of the Snack Food
Association.................................................... 55
Dinneen, Mr. Bob, President, Renewable Fuels Association......... 59
Statements for the Record:
National Cattlemen's Beef Association............................ 67
25x'25 National Steering Committee............................... 70
American Farm Bureau Federation.................................. 75
National Association of Wheat Growers and U.S. Wheat Associates.. 85
The American Bakers Association.................................. 90
(v)
FULL COMMITTEE HEARING ON FOOD
PRICES AND SMALL BUSINESSES
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Thursday, May 15, 2008
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:06 a.m., in Room
1539 Longworth House Office Building, Hon. Nydia Velazquez
[chairwoman of the Committee] presiding.
Present: Present: Representatives Velazquez, Altmire,
Cuellar, Clarke, Hirono, Chabot, Gohmert and Fallin.
OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ
Chairwoman Velazquez. Good morning. I call this hearing on
food prices and small business to order.
From coast to coast, Americans are seeing continued
increases in the cost of food items. According to the U.S.
Department of Agriculture, the average price of such basic
staples as bread, milk and eggs increased over 30 percent
during 2007. That was the largest annual jump in price in
almost two decades. But the trend is projected to continue
during the current year. Such increase have undeniable
repercussions on consumers, small businesses and the U.S.
economy as a whole.
Today we will discuss the relationship between food prices
and the entire economic chain from farm to grocer, to
restaurant and to home. We will also explore the various
factors contributing to the rising costs of food products and
examine the specific effect on family farmers and
entrepreneurs. It is an admittedly complex task that requires
carefully considering a full range of viables.
Some may be tempted to point fingers at a single industry
or sector, but there are many contributing factors to the
perfect storm that is driving food prices upwards. We need to
be mindful of every piece of this puzzle and gauge the specific
and collective impact. That holds true whether we are talking
about the corn used to make ethanol, the wheat used to make
bread, or the produce that is purchased in bulk by grocers.
As we will hear today, a number of troubling developments
are coming to a head simultaneously. For starters, rising
unemployment and fallout from the subprime mortgage crisis have
left our economy in a weakened state. This creates a difficult
environment for businesses. Consumers have less disposable
income, and tightening credit markets make it difficult for
small firms to access capital.
Restaurants, grocers and other food entrepreneurs are also
having to pay more for their raw materials. It now costs each
of them a great deal more money to bring the same products to
market. Their customers meanwhile have less to spend, and they
are more resistant than ever to paying higher prices. It is an
economic Catch 22 that hits small businesses from both
directions.
The problem is compounded further by rising global demand
for agriculture foods. Developing economies such as China and
India are putting new strains on supply and weather-related
production shortages of wheat, rice and other crops are making
these products more expensive for everyone, including American
firms.
Last, but certainly not least, the weakened U.S. dollar and
the continuing climb of oil prices have a sizeable effect on
what small businesses pay for basic staples. Just a few weeks
ago, this Committee delved into the economic implications of
the $115 barrel of oil. As we push north of the 120 mark, the
impact on food prices and the entrepreneurs who must bear them
continues to deepen.
The challenges posed by such a dramatic combination of
factors is considerable, but they are not insurmountable. As
history has demonstrated time and time again, our Nation's
small business economy is remarkably resilient. Entrepreneurs
can help us get things back on track. So we should not be
discouraged. Instead we should lend them our support. That
means continuing to focus on the root causes of these problems
and understanding how the many variables interact with one
another. With a clear sense of those dynamics, we can set about
formulating and implementing solutions that allow the market to
restore economic strength. It is a time-tested and commonsense
approach.
Arriving at policy solutions will require a comprehensive
dialogue. I am very pleased that to help us in that discussion,
we have a diverse range of perspectives represented on today's
panel. I want to thank each of today's witnesses for joining us
today. I am looking forward to your testimony and its many
insights into this critical issues.
With that I now yield to the Ranking Member Mr. Chabot for
his opening statement.
OPENING STATEMENT OF MR. CHABOT
Mr. Chabot. I thank the Chairwoman for yielding, and I
thank her for holding this hearing on food prices and small
business. I think this is a very important hearing this
morning. This is a critical issue affecting not only American
families, but also, as was mentioned, American small
businesses.
I also thank our witnesses for taking the time out of their
very busy schedules to be with us here today. I know we all
appreciate that very much.
Anyone who has been to a grocery store recently to purchase
basic consumer staples has noticed that the price of food has
been rising, and oftentimes quite substantially. According to
the Department of Labor, last month food prices edged up .9
percent to almost 1 percent, driven by increases in numerous
products including bread, and butter, and coffee, and
margarine, and milk and other products.
American families are paying more for food, and so are
America's small businesses. Small restaurants, grocers and food
manufacturers are also feeling the squeeze, forcing them to
raise their prices oftentimes. According to the Department of
Agriculture's Economic Research Service, the cost of food is
expected to continue to rise this year by 4 to 5 percent.
What is behind these increases? Rising demand for energy
and ethanol has caused the price of grain to jump. China, India
and other countries are consuming more of our grain and our
meat and other products, and the weakness of our dollar has
made our exported products an even better value.
This hearing is an excellent opportunity to examine how
small businesses are being affected by food price increases and
explore possible solutions to these challenges. Again, I would
like to thank the Chairwoman for holding this hearing and look
forward to hearing from our panel of experts.
One thing I might mention is I am the Ranking Member also
of this Committee and the Antitrust Task Force, and we have got
an important hearing. John Conyers, the Chairman of the
Judiciary Committee, is the full Chairman. I am the Ranking
Member. We have a hearing at 11:00. So I believe Congressman
Gohmert is going to fill in for me at that point.
I yield back.
Chairwoman Velazquez. Thank you, Mr. Chabot.
Now it is my pleasure to welcome Tom Buis. Tom Buis is the
president of the National Farmers Union, and Mr. Buis
represents farmers and ranchers in all States with organized
chapters in 32 States. As president, Mr. Buis oversees the
Government Relations Office which advocates the interests of
family farmers in Congress.
Welcome. Congratulations on the farm bill. And, sir, you
have 5 minutes to make your testimony.
STATEMENT OF MR. TOM BUIS, PRESIDENT, NATIONAL FARMERS UNION
Mr. Buis. Thank you, Madam Chair, for holding this hearing,
and other members of the Committee. It is a real honor to come
to the Small Business Committee to testify.
We would like to say we represent farmers and ranchers, but
they are small businesses, and I want to state for the record
probably one of the biggest concerns that I hear around the
countryside is this concern over the higher commodity prices
and higher food prices. And a lot of people want to seem to
point their finger at the farmers, but like any business, we
have to make a profit. And if you look at commodity prices over
the last 20 years, you will find very few years where our
industry has been able to get back the cost of producing the
commodities that we produce. In fact, over time, the average
rate of return for our business is less than 2-1/2 percent
return on investment. So it is not like every farmer is out
there going to the bank and getting rich.
Over the past 2 years, we have seen our input costs rise
faster than the price of the commodities. If you look at all
the energy that it takes to produce a kernel of wheat, a bushel
of corn or whatever, it is tremendous. John Kennedy once said
farmers are the only people who buy retail, sell wholesale and
pay freight both ways. That needs to be updated and modernized
to say we are also the only industry that pays the fuel
surcharge both ways. We are price takers, not price makers. We
can't pass on those costs. We are totally at the mercy of the
marketplace.
Having said that--I did put some extensive testimony
together on what we see as the causes, and I would be glad to
answer any questions. But roughly you can't blame corn ethanol,
and for those people who do--number one, have you ever tried to
eat field corn? The primary use for field corn is animal feed.
And if you want to look at the price paid to farmers on
livestock, dairy, it has all gone down in the past year. So
when people try to blame corn ethanol for all of the increase
in food prices, I think they are just using us as a strawman.
It no doubt has increased the price of commodities, which
needed to be, because the previous 10 years we averaged
producing feed for animals at 27 percent below the cost of
production. There was a very good study done by Tufts
University showing the real beneficiaries of that. It wasn't
the family farmers.
Energy. Energy has such a direct input--impact on food.
From the very start, all the fuel, the fertilizer, the
pesticides, the storage, the drying, the handling is a big part
of the farmers' input costs. But when it leaves the farm, then
it is transported somewhere, more fuel. Then it is processed,
which uses energy to process the product, whether it is corn
flakes or ethanol or livestock feed. After it leaves there, it
has to be trucked back to--either the distribution chain or the
retail chain or elsewhere. And by the time that consumer gets
it, the cost of $127-a-barrel energy is at least twice what the
impact of that raw commodity is.
Second big factor, weather-related production problems.
Wheat is a commodity that is used for food, primarily for food,
and last year in the growing season, we had worldwide weather
production problems in all the major wheat-growing countries of
the world. It wasn't that a bunch of wheat acres came out to go
into corn ethanol. It was Mother Nature.
Cause number three: the weak dollar. Since we left the gold
standard in the early 1970s under President Nixon's
administration, you can track high commodity prices with the
value of the dollar. When the dollar is weak--and we reached
30-year lows recently--commodity prices go sky high. Investors
want to put money in to hedge against inflation. Other
countries want to buy it with the cheap dollars that we are
sending for their trade deficit; makes it an attractive buy and
cheaper than it was when the dollar was strong.
Four, speculators in the commodity markets. If you look at
the real high, the record high commodity prices that we have
reached, they occurred when farmers didn't have the grain. They
didn't have the commodity. They occurred in a time period when
farmers were thinking about planting or waiting for the winter
wheat harvest. And those prices have now moderated in the
production of wheat as we are getting ready to have a good crop
in areas like Oklahoma, where we had a bad crop last year, and
Kansas and elsewhere. So we will see those prices come down.
And today the price of wheat in central Oklahoma is $7.70 a
bushel, not the $15 that a lot of people will quote.
I have got a lot in here I won't touch, and I know I am out
of time. Let me offer a few suggestions for how we address it.
Number one, we have to get a handle on the price of energy.
I have read a lot of people's statements saying corn ethanol is
the only thing we have any control over. I think that is
totally false. I think that is a cop-out. We can do something
about the high oil prices. We have recommended shutting off the
purchases for the Strategic Oil Reserve. We have recommended
opening the Strategic Oil Reserve. If it is not a crisis when
gasoline is $4 a gallon, I don't know what is.
And we also advocate for hunger, And the farm bill that was
passed yesterday makes the largest commitment ever in our
Nation towards hunger and nutrition programs. It needs to be.
There are 26 million people in the United States that
participate in these programs, and as a farmer I have to say I
am ashamed that anyone goes hungry, because year after year,
except in rare cases, we overproduce.
Thank you, Madam Chair. I appreciate the opportunity and
would be glad to answer any questions.
[The prepared statement of Mr. Buis may be found in the
Appendix on page 34.]
Chairwoman Velazquez. Thank you, Mr. Buis.
Our next witness is Mr. Geoff Tracy. Geoff Tracy is
established in Washington, D.C. He is testifying on behalf of
the National Restaurant Association. The NRA was founded in
1919, and it is the leading business association for the
restaurant industry. The NRA represents an industry comprised
of 945,000 food service outlets employing 13 million people.
Welcome, sir.
STATEMENT OF MR. GEOFF TRACY, PROPRIETOR, CHEF GEOFF'S,
WASHINGTON, D.C., ON BEHALF OF THE NATIONAL RESTAURANT
ASSOCIATION (NRA)
Mr. Tracy. Thank you. Chairwoman Velazquez and Ranking
Member Chabot and members of the Small Business Committee,
thank you for the opportunity to testify today regarding food
prices and the impact on small businesses like mine.
My name is Geoff Tracy. I own three restaurants all within
6 miles of where we sit here today. I believe in many ways I
represent the American dream. I have combined hard work,
education and an entrepreneurial spirit to create a small,
successful business that employs over 200 people and serves
more than half a million guests each year.
I am here today on behalf of the National Restaurant
Association, and I also serve on the board of directors of the
Restaurant Association of Metropolitan Washington. As you know,
restaurants have a huge impact on the U.S. economy. I am one of
over 13 million people who work in restaurants in this country.
And other than the government, we are the largest employer in
the United States. Sales for 2008 are estimated to be $550
billion. The industry serves 133 million guests a day, and
every dollar spent dining out generates $2.34 in business for
other industries.
In short, we buy and sell a lot of stuff, creating a
paycheck for a lot of Americans, and generating a ton of tax
revenue. I am told that the total economic impact is $1.5
trillion. That is a little bit beyond my scope of
understanding. And in a world of big business; in a nation
where big corporations outsource jobs to foreign countries; we
remain an industry of small businesses and local operators. We
are rooted in communities and our neighborhoods. Seven out of
ten restaurants are single-unit operators, and if you have been
to a charity gala and made a bid at a silent auction or looked
at the sponsor of your child's Little League team, you know
that restaurants contribute generously to the community. And,
yes, there is a Chef Geoff Little League team.
Right now we are facing a big challenge. The price of food
is going through the roof. Food and beverage costs are one of
the most significant line items for a restaurant in our P&L,
accounting for approximately 33 cents of every dollar in sales.
Profit margins are not big in the restaurant world; 9 out of 10
restaurants don't survive the first 2 years of business. And
those that do, the average restaurateur earns about a nickel on
every dollar in sales.
An increase in food costs can have a dramatic impact on the
bottom line. The wholesale food price inflation we are
currently experiencing is the highest it has been in 27 years.
Last year wholesale food prices jumped 7.6 percent, and on a
2008 year-to-date basis through March, wholesale food prices
continue to rise at 8.5 percent.
While the industry is used to fluctuations, recent
increases are creating significant challenges. When I check the
food deliveries in the morning and review the invoices, the
numbers are not good. This year flour has risen 87 percent,
eggs 73 percent, cooking oils 49 percent, cheese--one of my
favorites--27 percent, rice 25 percent and milk 20 percent.
This is on top of double-digit cost increases in the previous
year.
I am doing everything I can to keep my menu prices in line
with what my guests perceive as value. I am switching around
menus, modifying portion sizes, heckling my vendors. But I am a
chef, not a magician. With skyrocketing wholesale food prices,
the bottom line is going to get even smaller, or Americans will
have to dig a bit deeper into their wallets to enjoy a meal.
My vendors give me all the reasons why these prices are
going up so dramatically, and I am always talking to my
vendors. They tell me energy prices make it more expensive.
They tell me that billions of people in China and India want
the same items that I want, increasing demand and increasing
price. They tell me it is the weather. My produce vendor is
always giving me some excuse about the weather somewhere. My
cheese guy tells me it is the weak U.S. Dollar, and my nice
cheeses are going to cost me a few more bucks this year. And
many of my vendors tell me it is about the corn and the grain,
and that a larger share of the grain market is being diverted
into ethanol and biodiesel production. And since the chickens
and the pigs and the cows all eat the stuff, the price of my
eggs, milk, cream, cheeses, oils, flours and seemingly
everything else is going up and up.
While many of these factors are out of our control, there
are U.S. Government policies in place that are contributing to
food price inflation. Food-to-fuel mandates and subsidies that
encourage the use of grains for fuel instead of food should be
revisited. These policies pit Americans' need for food against
our need for fuel. While both are important priorities for the
Nation, the restaurant industry supports the development of
efficient, renewable fuels, including the promotion of the use
of recyclable restaurant oils, something I do, while
safeguarding against price distortions in the food supply.
These price distortions have and will continue to impact our
customers and small businesses. We urge Congress to examine the
impact the food-to-fuel price mandates and subsidies have had
on price increases.
In conclusion, the NRA urges Congress to examine the impact
of these mandates and subsidies in the context of national and
global priorities. There are certainly many factors
contributing to the sharp increases in wholesale food prices,
but this is one within our control.
Thank you again for the opportunity to testify today, and I
appreciate all the time. I would be happy to answer any
questions at the appropriate time.
[The prepared statement of Mr. Tracy may be found in the
Appendix on page 40.]
Chairwoman Velazquez. Thank you, Mr. Tracy.
Our next witness is Mr. Frank Formica. Frank Formica is the
third-generation owner and operator of Formica Brothers Bakery
in Atlantic City, New Jersey. Mr. Formica will be testifying on
behalf of the American Bakers Association. ABA is a voluntary
trade association designed to represent the interests of the
wholesale baking industry at the national and State levels.
Welcome.
STATEMENT OF MR. FRANK FORMICA, FORMICA BROTHERS BAKERY,
ATLANTIC CITY, NEW JERSEY, ON BEHALF OF THE AMERICAN BAKERS
ASSOCIATION
Mr. Formica. Thank you, Madam Chairman Velazquez, Ranking
Member Chabot, members of the House Committee on Small
Business. Thank you for holding this critically important
hearing on the impact of high food prices on small businesses.
The current crisis has greatly impacted my business. I hope
that today we can explore realistic solutions to the current
situation.
My name is Frank D. Formica, an Italian American baker
proudly continuing over a century of family tradition in the
baking industry. I am the owner of Formica Brothers Bakery in
Atlantic City, New Jersey. Over the past 92 years, millions of
customers have eaten sub sandwiches and bread made from Formica
Brothers Bakery, including Frank Sinatra, the Beatles, Jay-Z
and Garth Brooks, to name a few.
On behalf of myself and the American Bakers Association, I
appreciate this opportunity to highlight the critical status of
our economy and the epidemic that is afflicting bakers and our
customers across the country. In my case, over a century of
family tradition is at risk of becoming extinct.
The Formica Brothers legacy began over 100 years ago in the
year 1900 when my grandfather Francesco and my grandmother Rosa
emigrated from Sicily, Italy, and realized their American dream
by building Formica's Bakery in Atlantic City, New Jersey. I
grew up baking Italian bread alongside my grandfather, my
father and uncles, and today we produce 40,000 pieces of bread
a day, creating roughly 200 different varieties of handcrafted
European breads, which are sold both wholesale and retail in
the greater Atlantic City market.
Yes, I am one of the vendors he tries to get down, but I
don't deserve him.
Our daily retail base of over 500 retail customers and 300
wholesale customers and roughly 55 families who work for our
bakery depend on Formica staying in business, a responsibility
that I do not take lightly, and now one, quite frankly, that
keeps me awake at night.
Let me share a couple of examples of how the current
conditions are impacting Formica's and our customers. Formica
uses 50,000 pounds of flour a week. The price of flour had been
relatively stable over a 20- to 30-year period, between about
11 and 17 cents, an average of 14 cents. Starting in September
of 2007, the price jumped until it reached a peak of over 60
cents a pound. What did that mean for me? A year ago we paid
$7,000 a week, $364,000 a year for flour. Today we are paying
$20,000 a week, $1,040,000 a year for the same amount of flour.
In addition to flour, all other ingredients have
substantially increased. On top of the ingredients, the cost of
distributing our products has soared. Further threatening my
business and livelihood of the families--and my family, my
employees are the fact that we use 600 gallons of fuel oil to
deliver gasoline to our wholesale customers. Last year those
costs averaged 1,200 a week, 62,000 a year. This year it is
2,000 a week as we speak, $104,000 a year.
In addition to the increased cost of flour and fuel, we
have seen prices increase the entire inventory in products and
services that we depend on to run our business. We have been
able to pass on some of these increases to our customers
through higher prices, but we absorb the majority of the cost,
which has crushed our profit margin, a profit margin that I am
fighting to keep above water for the first time in 92 years,
and that includes the years of the Great Depression, which we
operated straight through.
Last year Formica successfully marketed high-protein whole
wheat products to a school program manufacturer that was
distributing to over 267 school districts on the east coast. We
invested a half a million dollars in equipment and facilities
to support this increase in business. As the price of
commodities jumped, especially flour, and we had to pass these
costs along to the manufacturer, the cost of producing these
healthier products outstripped the already strained school
budgets, and schools cancelled the program. As a result, I had
to lay off many employees, try to recoup the costs associated
with this lost contact.
Other bakers have had similar experiences trying to provide
healthy, low-cost meals to schools. High food and commodity
prices have caused many factors--caused by many factors,
including increased worldwide demand, a weakened dollar,
adverse weather conditions such as last year's drought in
Australia. We can't control them. We can't control the weather.
We can control government programs such as the ethanol program,
which distorts the marketplace by subsidizing crops for fuel
versus food. Also in our control, are government programs that
pay farmers not to farm land.
On behalf of my customers, my employees, my family and my
community, I ask that you consider and adopt the American
Bakers Association action plan to ease the pressure on our
foodstocks. Number one, the ABA urges Congress to ease ethanol
mandates by immediately waiving the renewable fuel standard.
That, coupled with eliminating the import tariff and the
blenders' credit on ethanol, will allow our country to make
progress towards renewable fuels, which we support wholly, but
not at the price of sacrificing foodstocks.
At this time with the worldwide food shortages, why is the
government continuing to incentivize corn for ethanol and not
corn for food uses? 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 ethanol mandates? U.S. cropland
is already stretched to the limit.
The ABA urges Congress to consider the needs of consumers
when supplies of wheat and other commodities drop to
dangerously low levels. Historically U.S. Wheat stocks have
averaged a 3-month supply. Current estimates have our wheat
stocks down to 24 days, which means there is 24 days' worth of
wheat based on our present demand, with an ever-increasing
worldwide demand, the lowest amount since 1948. While recent
USDA reports that the projected wheat plantings will increase
by over 4 million acres, the USDA recognizes that any increase
will be more than offset by the increased use and trade
prospects which this government supports; meaning that the more
wheat entering the food chain that we projected this year will
do little to alleviate the current food crisis, let alone
return us to the historical average stockpile, which was our
cushion for bad weather.
All of these assume normal weather patterns, but as farmers
can tell you--I am sure they can--there is no such thing as a
normal weather pattern. In fact, in March of 2007, the USDA
projected similar positive outlooks; but that Easter weekend, a
heavy freeze hit the Wheat Belt and devastated much of the
anticipated crop. Unfortunately, our margin for error is gone.
Lastly, the ABA urges Congress to address the increasing
pressure on available farmland in the U.S. Currently 34.6
million acres of U.S. cropland lay idle through a conservation
reserve program, a noble cause. A significant portion of CRP
acreage is located in large wheat-producing States. ABA
believes that as much as one-third of the acres under contract
for CRP could be returned to production without sacrificing the
environmental goals.
[The prepared statement of Mr. Formica may be found in the
Appendix on page 48.]
Chairwoman Velazquez. Thank you. Thank you, Mr. Formica.
Our next witness is Mr. Daryl E. Thomas. Mr. Thomas is
senior vice president of sales and marketing for Herr's Foods,
Inc., in Nottingham, Pennsylvania. Herr's Foods, founded in
1946, is a leader in the snack food industry. Mr. Thomas will
be testifying on behalf of the Grocery Manufacturers
Association. For 90 years, GMA's business initiatives have
represented the industry interests.
Welcome.
STATEMENT OF MR. DARYL E. THOMAS, SENIOR VICE PRESIDENT, SALES
AND MARKETING, HERR FOODS, INC., NOTTINGHAM, PENNSYLVANIA, ON
BEHALF OF THE SNACK FOOD ASSOCIATION
Mr. Thomas. Thank you very much. Madam Chair Velazquez,
Ranking Member Chabot and other distinguished members of the
Committee. We thank you for the opportunity to come and to
share with you today. I am also here today--I currently serve
as chairman of the Snack Food Association, And so I am also
representing those constituents.
To do some background on Herr's, Herr's is a family-owned
and -operated food company that was started 62 years ago by
James S. Herr, my father-in-law. He too. Served as chairman of
the Snack Food Association, and more recently served at
chairman of the National Federation of Independent Business.
Herr's employs 1,250 full-time employees. We are a full-
line manufacturer of salty snacks, including potato chips,
corn-based tortilla chips. And I will say that the corn we use
to make our tortilla chips looks like that corn, except it is
off the cob. So it is a corn product like that. Our wheat
flour-based pretzels--our company and our industry manufactures
a broad spectrum of products, using the raw materials of wheat,
corn, vegetable oil. Our products are affordable nutrition for
consumers. They provide energy and also pleasure. I am here
today to share the impact of rising fuel and commodity prices
are having on our industry and on our business.
Our cost to manufacture is skyrocketing. Consumer prices,
as a result, are going up. Job security is being threatened,
and, quite frankly, as a privately held company, one of the
things we pride ourselves in is being very generous in support
of charities and different causes, And that, too, is feeling
the pressure of these higher costs.
Herr's and our industry currently are facing unprecedented
commodity price increases. Typically we have seen a 2 to 3
percent increase over the years in rising costs, and in a
pretty predictable fashion have been able to pass a lot of that
on to the consumers to protect our bottom line and the well-
being of our shareholders and our stakeholders at Herr's. This
year our costs are up 15 percent. Corn itself is up 30 percent.
Vegetable oils that we cook with is up 124 percent, and wheat
flour is up 82 percent. So all these commodities are seeing a
dramatic increase. This current situation demands that we pass
these higher costs of doing business on to our customers and
the consumer.
Thus far this fiscal year that we are in, we had to
increase our prices 3 percent and anticipate another 5.6
percent on top of that to just break even on our commodity
prices that have skyrocketed. There has been a number of
factors that are contributing to this such as the weather,
surging economies around the world, market speculation. These
things are beyond our control and not necessarily all
unwelcomed. However, there is one thing that is most
controllable and we believe requires immediate attention, and
that is the Federal food-to-fuel or biofuels mandate.
Last year the U.S. devoted roughly one-quarter of its corn
harvest to ethanol production. That number is expected to
surpass 30 percent this year and will keep growing if the
alternative fuel mandates are met. Displacing such large
quantities of our corn harvest in the fuel production is
clearly having an impact on the stability of our food supply.
If there are to be any additional unforeseen shortfalls, we do
fear that there could be food shortages in the U.S. and around
the world, as some countries are seeing already.
Today as a representative of Herr's, of the Snack Food
Association and the Grocery Manufacturers Association, I am
hopeful that Congress and our legislatures will act quickly to
revisit the mandate schedule and bring relief to the food
manufacturers and consumers.
I appreciate the opportunity to come and share with you,
And I look forward answering any questions that you might have.
Thank you.
[The prepared statement of Mr. Thomas may be found in the
Appendix on page 55.]
Chairwoman Velazquez. Thank you, Mr. Thomas.
Our next witness is Mr. Bob Dinneen. Mr. Dinneen is the
president and CEO of the Renewable Fuels Association, the
national trade association for the U.S. ethanol industry. Mr.
Dinneen became president of RFA in July of 2001. Organized in
1981, RFA provides advocacy and industry data to its members,
Congress and Federal and State government agencies.
Welcome, sir.
STATEMENT OF MR. BOB DINEEN, PRESIDENT, RENEWABLE FUELS
ASSOCIATION
Mr. Dinneen. Thank you very much, Madam Chair and members
of the Committee. Thank you for the opportunity to be here
today and perhaps shed some light on solutions that we ought to
be looking at in terms of food price inflation.
I am very sympathetic to the plight of the witnesses here.
I have been to Chef Geoff's restaurant. I disagree with him. I
think he is a magician. And Mr. Thomas the snack food
association has no bigger fan than Bob Dinneen. Their pain is
real. The solutions they are suggesting are misplaced.
As has been discussed already today, including in the
Chair's opening remarks, the causes of food price inflation are
several. It is indeed rising demand. It is indeed weather-
related issues, droughts in Europe and Australia last year that
impacted wheat supplies. It is speculation in the marketplace.
It is a result of the falling dollar that has encouraged
greater exports. And it is most definitely the rising price of
oil. You can't grow $2.50 corn on $4.50 diesel. And the fact of
the matter is eliminating the "food-to-fuel" mandates, which
might be a very clever phrase that some high-priced PR firm
came up with, is really not based in reality.
The production of ethanol is actually producing food and
fuel because we are only using the starch in the production of
ethanol. What is left from that ear of corn when we are done
with it is all the protein, all the vitamins, all the minerals,
and much of the feed value, which is then fed to livestock and
poultry markets across this country. That is a very important
point, because it is not simply we are utilizing so much of the
corn crop, we are passing along most of the feed value from the
corn that we are utilizing.
Eliminating the renewable fuel standard, as has been
suggested, would be moving in the exact opposite direction of
what we need to do. We need to recognize the role of oil in
inflation all across this country, including most specifically
food price inflation, and recognize that the only thing that we
have available to us to address that effect are biofuels.
Ethanol is here today. The ethanol industry today is 147 small
businesses across this country that are producing 8-1/2 billion
gallons of high-quality renewable fuels that are blended into 7
percent of the Nation's motor fuel--I am sorry, 70 percent of
the Nation's motor fuel. Ethanol itself represents 7 percent of
the U.S. motor fuel supply. If you were to eliminate that
supply, the price of oil, the price of gasoline would skyrocket
even further.
A Merrill Lynch analysis that was quoted a few weeks ago
suggested that crude oil prices would increase about 15 percent
without world biofuel supplies. This morning we are looking at
the highest gasoline prices in our Nation's history, on average
$3.77. Where would they be were it not for the supplies of
ethanol across this country? An Iowa State University analysis
completed a couple of weeks ago showed that gasoline prices
across the country would be 30 to 40 cents higher today if it
were not for ethanol being blended into gasoline.
Just yesterday the International Energy Administration
noted that 63 percent of the increased demand for oil supplies
was being met by world biofuels, and they expressed a great
deal of concern about the backlash against biofuels, because
frankly, there isn't anything to replace it. A refinery hiccups
in this country, and gasoline prices skyrocket. Take 7 percent
of the U.S. motor fuel market off of the supply, and you will
see gasoline prices go through the roof, and that will hurt
Chef Geoff, it will hurt food companies all across this
country, it will hurt consumers directly, and hurt poor
consumers most specifically.
We have to continue the movement that this country has
made, the commitment that this country has made to domestically
produce renewable fuels like ethanol. It is the only tool that
we have to provide a hedge against skyrocketing energy prices
across this country.
Thank you.
[The prepared statement of Mr. Dinneen may be found in the
Appendix on page 59.]
Chairwoman Velazquez. Thank you very much to all of you for
being here this morning and providing important insights into
this important issue.
Let me just say that the role that this Committee plays
goes beyond small businesses sometimes, and in the sense that
anything that is happening in Congress regarding legislation
that is considered in other Committees where we can show that
it impacts small businesses, we can play a role, and we can
seek referral of those legislation to this Committee. And as an
example, I will mention that both myself and my colleague,
Ranking Member Chabot. We both were conferees on the farm bill.
So with that, I just would like to begin asking each
panelist to take a moment to discuss your thoughts as to what
is driving the higher food prices. Some will point--and we have
seen it this morning--to one particular thing, while others
will suggest it is many different factors creating the perfect
storm. So what do you believe is causing high food prices? And
what do you see as an immediate solution? Mr. Buis?
Mr. Buis. Thank you, Madam Chair. And thanks for all your
hard work on the farm bill, you and Mr. Chabot. We appreciate
it.
I mean, you have to look at a variety of factors, and you
have to address a variety of factors. Again, the price of oil,
the price of gasoline, the price of diesel fuel is driving up
everyone's costs. And food is very energy intensive from the
farm all the way to the consumer.
The second thing is definitely weather on wheat. You know,
I hear about egg prices going up. I don't think anyone
mentioned that. That was a disease in the laying industry that
caused a lot of chickens to be put into the food system as
opposed to use for laying eggs. It is not corn ethanol again.
I also think you have got the problem with the weak dollar,
without a doubt. We set record export levels on most
commodities this year at the same time we had record high
commodity prices. But those countries--other countries are
actually paying less for our products because they are buying
with the cheap, weak U.S. dollar.
So I think that is the big factors. You can't--you can
control a lot of them. I mean, by the time that food gets to
the chef's table, there is also a lot of other factors, labor
costs, health care. We can do something about health care in
this Nation. We have ignored that for decades as well as the
energy policy.
Chairwoman Velazquez. But do you see any type of action
that can be taken to address any of those factors that we are
seeing?
Mr. Buis. Absolutely. Again, open the Strategic Oil
Reserve. Dip into it. Take that pressure off of an already
short market.
Number two, I think you can start to address some of the
factors of distribution. We are getting ready to start a wheat
harvest here in 2 weeks. We are going to have a good wheat
crop, which will take pressure off of wheat, which is in short
supply because of the weather. You know, sometimes you kind of
have to be a little patient.
One response to roll back the RFS would be the biggest
mistake that Congress could make, because, number one, 30 years
ago we had this wake-up call when we had the oil embargo from
OPEC. We did nothing about it. We went to sleep time after time
after time. Brazil, they took action. They became energy
independent. It won't happen overnight. And if we pull the plug
now, we will be pulling the plug on those future-generation
biofuels feedstocks like cellulosic.
Chairwoman Velazquez. Mr. Tracy.
Mr. Tracy. Well, I am a chef, business owner. I don't
understand these global economic situations. It is a very
complex situation. I just know how it impacts me. And I guess
if there is anything that can be done, I would ask people to
consider every single option and--because it is multifaceted.
And look at every single one. And the National Restaurant
Association is saying in addition to looking at some of the
other ones is to look at the renewable fuel production from
nonfood sources, nonfood sources.
So that is just--I just keep looking at these numbers, and
they keep going up, and they are really aggressively going up,
and ultimately I have to pass these prices on as a business
owner because otherwise I am just not--I am not going to stay
in business. Otherwise I am taking it out of the pocket of
every American.
Chairwoman Velazquez. Mr. Formica.
Mr. Formica. Thank you again, Madam Chairman.
Again, I just think it is simple. It is supply and demand.
If there is not enough acres to grow the wheat here, and we are
exporting it under our programs, and the demand is high, we
have got to find a way to grow more wheat. To grow more wheat
we need more acres.
I want to make one statement about weather. Last year we
came down here, March 12th, and we met with the USDA--I guess,
department--Mr. Schafer--and he told us that we need--we need
good weather. That will help us. But weather is not a solution.
Last year we were told not to buy our wheat at 18 cents because
it went up from 16, and we are going to get a good crop; 3
devastating months later it was at 36. So weather is no the
solution.
And I think definitely relieving tariffs on importing
ethanol is hurting the objective. If that is our objective is
to get more ethanol-dependent in this country to get off of
foreign imports, then why wouldn't we relieve the tariff on
that as well as the blenders' credit? I think that will solve a
lot of problems for both of us.
Chairwoman Velazquez. Thank you.
Mr. Thomas, do you have any comments?
Mr. Thomas. Yes, thank you, Madam.
I think the idea of reducing our dependency on foreign fuel
and coming up with an alternative commodity is a commendable
endeavor. I think the problem is that there was a failure to
accurately assess the cost of that strategy.
You know, there is a lot of things that have been listed as
causes for the current situation that we are reporting to you
on today. It has been described as the perfect storm with
surging demand, weather, speculation, you know, all of these
things have contributed. But to me one of the basic things that
comes to mind is we are taking 30 percent of our corn crop and
moving it out of the food supply. That has to have an effect on
the prices of corn. When you take that much out of the market,
there is going to be a shortage of corn. That is going to drive
the price up, supply and demand. As the price went up, farmers
are changing--naturally so--they are changing their crop
strategy. They are moving from growing corn--or from wheat into
these other products. And it has been exacerbated by the
weather and the droughts that we have seen around the world.
There is a lot of--all these things probably go together to
contribute to the problem that we face, and the question in my
mind is how can we quickly respond and bring relief to food
companies, to consumers, because I think that we are on an
upswing here, and I don't think anybody here has any idea today
what this means going forward.
But just from our vantage point as a small business, we
can't take price increases fast enough to cover our costs, and,
I mean, it really--it is diluting our bottom line, and I think
it is going to have dramatic impacts that we are not going to
like, and it is just going to continue to get worse unless we
take a quick response. The easing of the mandate, I think, is
the quick response that makes sense.
Chairwoman Velazquez. Thank you.
Mr. Dinneen.
Mr. Thomas. Madam Chair, just quickly, because I know it is
not Mr. Thomas' wheelhouse, but it wasn't actually 30 percent
of the corn crop last year; it was 22 percent. And again, that
is of corn use. And you have to consider the feed value as
well, and that is ignored in that comment.
In terms of what we can do, $125 barrel oil, that is what
this is about. This isn't about food to fuel. It is about the
crude-to-food connection.
Chairwoman Velazquez. Let me ask you, either Mr. Dinneen or
Mr. Buis. And you mentioned it, but it caught my attention,
that Brazil, while we were sleeping at the switch, they were
producing ethanol and invested a lot of money and effort and
research in achieving energy independence. Can you--do you have
any insight as to how is the situation in Brazil with food
prices at this point?
Mr. Buis. What it would put the prices at?
Chairwoman Velazquez. On food.
Mr. Buis. They are a big food producer, as we are, but you
have to keep in mind also we are also big food exporters. And
while Mr. Thomas, with all due respect, is talking about how we
shorted the food market on corn, that is just not true. We
produced the largest corn crop in our Nation's history last
year in terms of acreage and in terms of volume, almost 3
billion bushels more. Now, that equates to about the amount
that went into ethanol. But on top of that, we exported the
largest amount of corn ever in our Nation's history, almost 2-
1/2 billion bushels of corn. We can produce.
An older farmer once told me the best solution for higher
prices is higher prices, and we are going to see it. You are
seeing transformation of corn acreage back to bean acreage this
year. So soybean prices will come down. You saw more acreage go
into wheat. Madam Chair, we can do all. And for those naysayers
that say the sky is falling from corn ethanol, they need to
take a long, hard look at the real facts.
Chairwoman Velazquez. Thank you.
Mr. Chabot.
Mr. Chabot. Thank you, Madam Chair.
Let me begin by just asking Mr. Buis on behalf of the
farmers union and Mr. Dinneen on behalf of the Renewable Fuels
Association--let me make sure I have got this straight. Both of
you gentlemen believe that the--one of the major reasons for
prices going up on food and wheat and everything else we have
talked here, you would dispute the fact that diverting a
significant amount of the corn crop and other crops is one of
the principal reasons that the prices have gone up, having that
go to ethanol basically. You would--you disagree with that
premise; is that correct?
Mr. Dinneen. Let me be clear. Certainly the increased
demand for grain for ethanol production has had an impact,but
the impact pales in comparison to all of those other factors
that have been discussed today.
Mr. Chabot. So an impact, but not a significant impact when
you compare it to the other things?
Mr. Dinneen. Nowhere close. And again, it gets right back
to oil as being the driving force.
Mr. Chabot. And I will get to that.
Mr. Buis, you would agree with that?
Mr. Buis. I do agree. I testified over in the Senate a few
weeks ago, and next to me was the chief economist at USDA who
said the same thing.
Mr. Chabot. Mr. Tracy and Mr. Formica and Mr. Thomas, you
gentlemen don't buy that, correct? You believe that is a
significant part of it, the diversion into ethanol and others?
Mr. Formica. Based upon the fact of how many acres that
were planted by corn that previously were wheat, I mean, it is
just a question of supply.
Mr. Dinneen. Wheat acres actually went up last year,
though. And they went up the last 3 years.
Mr. Chabot. Let me get the other two gentlemen.
Mr. Tracy. I guess on my side I think there are many, many
causes. And I just think that the ethanol issue, the corn-
driven ethanol as opposed to other nonfood sources of ethanol,
is just one reason.
Mr. Chabot. Would you say a significant reason?
Mr. Tracy. I have no idea.
Mr. Chabot. Mr. Thomas?
Mr. Thomas. I would say it is a significant reason. When
you look at the crop reserves, they are at an all-time low.
That went someplace. And it obviously has an effect on supply
and demand on driving the price up.
Mr. Chabot. Let me just stop there. I have got another
question now.
So there is just a disagreement on that particular issue
relative to the fact that oil being so high right now, $125,
$126 a barrel right now. It has been going up when people--it
was thought that it could actually get to $100 a barrel, and we
are beyond that now, and it wasn't that long ago. But obviously
that is running up the price at the gas pump that consumers are
paying.
But the fact that oil is so high, then--that we are so
reliant upon foreign energy, you would all agree that that is a
big problem; is that correct? I am noting by the nodding of the
heads that everybody agrees with that. Also you, Mr. Dinneen?
So that is a problem. And I would argue--not necessarily
argue, but make the point that I think to a great extent we are
reaping really bad decisions that our government, whether they
were Presidents or Congress, made over the years in doing a
number of major things, one being restricting where we can go
after energy that we have under our control, for example, in
ANWR up in Alaska and the Outer Continental Shelf; that we have
made it virtually impossible to build refineries in this
country. We haven't built one since 1976. So even if we have
the crude, we can't refine it quickly enough to actually
utilize it. Boutique fuels, having to have this one in this
State and that area makes it tougher to get the supply around
efficiently. Not building nuclear power plants in 20 years in
this country. France has 75 percent of their electricity
generated by such facilities. So a number of decisions that the
government made up here in Washington, D.C. That has affected
these.
Is there anybody that would disagree with the premise that
that is one of the major problems that we are all facing now in
these high costs at the gas pump, heating our homes, and what
we are paying for food, a restaurant, whatever? Is there any
disagreement on that point amongst the panel members here? Does
everybody agree basically? I think everybody is affirming that
they do.
Let me--if I go to the restaurant industry, Mr. Tracy, how
significant did the minimum wage increase have on your
business? Was it a factor? Was it insignificant? What would you
say?
Mr. Tracy. I am--fortunately my wages are well above the
minimum wage for all of my employees, and, you know, with the
exception of if it had increased dramatically for tipped
employees, which earn a lot more than minimum wage, but that
has always been kept down to a level--a dollar increase on
tipped employees would be a very significant cost. But over the
last 5 to 6 years, there hasn't been any dramatic effect. Our
wages have stayed well above minimum wage.
Mr. Chabot. In your conversations with others in the
restaurant industry, do you believe there has been an impact?
Mr. Tracy. Minimum wage is something that the restaurant
industry on a whole is concerned about. We have a lot of sort
of beginning, entry-level members of our workforce.
Mr. Chabot. Thank you.
Mr. Formica, I think you were going to say something there.
Mr. Formica. Similarly, we are well above minimum wage, and
we have 300 accounts that are restaurants or delis or grocery
stores, and it has never been discussed as a major issue.
Mr. Chabot. Okay. And I am almost out of time here, but I
do want to mention--I know we have been getting a lot of
letters and phone calls from our local bakers making us aware--
not that we are not aware of it, but making us even more aware
of the impact that the high cost of wheat--I think you
mentioned on average 14 cents, and now it is up to 60 plus.
Mr. Formica. It was 60. It is 40 right now. But I
appreciate that.
Mr. Chabot. So I would commend your colleagues for their
effort to make us aware of it.
I can't honestly say that Congress has acted to the degree
it really needs to act to do really do something about that,
but I would completely agree with the entire panel here that I
think it is our responsibility to do something about these high
gas prices.
I know in Cincinnati, for example, Monday when I came up
here, I bought gas in the morning, and it was like 3.69 a
gallon. By the time I went to the airport a few hours later,
all the ones that I had passed had gone up to $3.95 in
Cincinnati, and it is really hurting an awful lot of people,
and we absolutely need to do something about it. So thank you
very much, and I yield back, Madam Chair.
Chairwoman Velazquez. Thank you.
Ms. Hirono.
Ms. Hirono. Thank you, Madam Chair. Is this on? Thank you
very much.
I think one thing that this panel does point out is I think
there is general--there is agreement that the high cost of oil
is really driving much of everything, including gasoline, cost
of fuel, transportation, all of that. And there may not be
agreement on what part ethanol production has, et cetera. So I
think it is really important as we proceed that we need to have
fact-based solutions. We should not go charging off into so-
called solutions that really may not address the problem
accurately.
I do want to note that Mr. Buis--is that how you pronounce
your name?
Mr. Buis. Buis. You can tell I am bias.
Ms. Hirono. Yes. I noted that you suggested that one of the
things we should do is cut the subsidies, multibillion-dollar
subsidies, to Big Oil, and that is a start. I would be curious
to know what the other panelists think about that as an
immediate kind of a thing that Congress could do.
Mr. Tracy. Well, again, energy policy is not my level of
expertise, but, you know, again, I think a comprehensive review
of all of the factors is very critical. And as you said, so
that we have some hard numbers and some real data so that we
don't just act and then have to deal with the, you know,
negative or positive results down the line, that we make some
real positive and sort of long-term plans.
Ms. Hirono. And that is what we are attempting to do in
many of our Committees, not just this Committee, but the
Transportation and Infrastructure Committee, the Energy
Committee, all of these Committees. But as a start in a
situation where Big Oil is making multibillion dollars in
profit, record profits, does it make sense to you that we
continue to give them huge subsidies, taxpayer subsidies?
Mr. Formica. It depends if the subsidies were put in place
for them to perform in the marketplace. They were supposed to
go out and find other sources, find other resources, do
search--I mean, I would not know, again, similar to a
restaurant owner or the baker owner, not having the expertise,
but certainly knowing good business practice, if the government
put those subsidies in place so that it could stabilize our oil
supply, maybe it is just the enforcement of what they are
getting the subsidies for that would solve the problem.
Mr. Dinneen. I guess I am shocked to hear the bakers defend
subsidies to oil and at the same time be suggesting that we
should be eliminating subsidies for the domestic renewable
energy industry. I find that hard to believe when we are
looking at $125-a-barrel oil.
I agree with you, Congresswoman. We ought to be looking at
this issue and from a fact-based standpoint. But as some people
have suggested on this panel, and Governor Perry from Texas has
called for eliminating the renewable fuel standard as the thing
that is going to help reduce food price inflation--in fact, we
looked at that very closely, and we determined that if you were
to eliminate the renewable fuel standard in the way that
Governor Perry from Texas has requested, gasoline prices would
actually increase from $3.68 to $4.79. Now, I got into this
business because I was never very good at math. But I think
that is $1.11 on top of record-high gasoline prices. That will
impact consumers. That will impact each one of these gentlemen
and their businesses in a very meaningful way.
Ms. Hirono. Mr. Thomas, did you want to add something to
this discussion?
Mr. Thomas. I would just echo that that is not my area of
expertise either. I think any and all things should be looked
at, and I think your point of the fact-based--there is
information that I think at--we need to also keep in mind with
the biofuel issue, and one of the points that was not brought
up that I would like to just mention is that there is a lot of
question around the efficiency of that as a real fuel source. I
have seen a study reported on CNN that it requires over 20
percent more fossil fuel to manufacture, refine and actually
burn one of these biofuels.
So I think the other piece is looking at the shortage. We
can say that it is all of these petroleum products and the
profits that these companies are making that is driving the
fuel--the food price up, but the fact of the matter is there is
a shortage. We have an all-time low reserve on our grain
products. In fact, it was just recently reported that a
national retailer is having to ration some of their products to
their customers and stuff. I think there is a shortage, and it
comes back to the supply and demand thing.
Mr. Buis. I have to correct the record. There is not a
shortage. In fact, we added to the surplus of production almost
every year. We are short in wheat. We are short in some
specialty rice that is imported into this country, not because
of our production of rice. We have more rice than we have had
in the last 3 years in the United States.
Ms. Hirono. I think my time is almost up. Again, this
discussion we are having points out how important it is to get
our facts straight. I appreciate your comments.
Mr. Formica. Just one comment, Madam Chair. I am just
surprised that the Renewable Fuel Association wants to get rid
of the subsidies for the oil companies, but wants to keep them
for themselves, and I find that making my argument. Thank you.
Chairwoman Velazquez. Ms. Fallin?
Ms. Fallin. Thank you, Madam Chair.
It is an interesting discussion. We appreciate all you
gentlemen joining us here today. It is quite evident that the
cost of food is rising for our families and our consumers and
our businesses and the cost of fuel--
I am one of those people who believe that we have to
diversify our fuel sources and use all sources of fuel. And I
am very concerned that our Nation spends so much money--it is
estimated to be about $500 billion--in buying foreign energy
from foreign countries and that we import about 62 percent of
our energy needs for our country. To me, that is a national
security threat and an economic threat to your businesses and
our country itself.
But I am very concerned about the cost of food and families
and the price of gasoline and how it is affecting everyone. So
I am interested in all your discussions about do we have enough
corn? Do we not have enough corn? Are we taking away from the
wheat market and the land that is producible for wheat? And is
that driving up the cost that affects the food supply and
everything else?
But I was interest in your comment a minute ago--is it Mr.
Dinneen?
Mr. Dinneen. Dinneen.
Ms. Fallin. Tell me again the costs if you were to
eliminate ethanol corn production. You said the price of
gasoline would go from $3 something to $4 something?
Mr. Dinneen. When the analysis was run, the price of
gasoline was $3.68 a gallon. That was a week ago. It is now
$3.77. It was run based off of Governor Perry's request, which
would be to eliminate 4.5 billion gallons of the 9 billion
gallon renewable fuels standard. So only half. Some of the
gentlemen have today testified that it should all go away, but
just eliminating half of that and having to find 4.5 billion
gallons of replacement energy would drive up gasoline prices
$1.11 in the near term.
In the longer term, the marketplace would adjust and the
impact would only be about 13 percent. But, nonetheless, it
would still have a dramatically negative impact, and the
skyrocketing effect in the beginning would be very painful.
Ms. Fallin. Well, my question was, in looking at $1.14, and
I hope I read your--I was trying to follow the testimony. But
didn't someone say that ethanol makes up about 7 percent of the
fuels in the United States?
Mr. Dinneen. Yes. I did.
Ms. Fallin. So if it makes up 7 percent of the fuels, why
would we have such a large increase in the cost of gasoline if
we did away with it or even cut it in half?
Mr. Dinneen. Because refinery supplies are so tight. There
just isn't an additional 4.5 billion gallons of fuel supply to
suddenly satisfy the increased demand.
Ms. Fallin. And we have been talking about the increased
demand of fuel.
I have a report here--it is kind of interesting that it is
from the U.S. Energy Information Administration--that states
that if we discovered the renewable oil in ANWR it would give
the United States 10.4 billion barrels of economically
recoverable oil, which is twice the proven oil reserves in all
of Texas, Mr. Gohmert. And I guess my question is, do you feel
that if we were to allow more exploration production in the
United States that it would help reduce the price of fuel, open
up more supply in the marketplace and maybe have an effect upon
food costs?
Mr. Dinneen. Well, I absolutely believe that we need to be
encouraging all forms of energy, particularly renewables, but
all forms of energy. And our energy crisis right now is so
significant we need to take aggressive steps to assure that we
are maximizing supplies.
I do think, though, that with respect to ANWR it would be
10 years before you would see any gasoline from that region;
and you have to look at what is available in the near term and
what the consequences of actions might be in the near term.
Ms. Fallin. You know, it is interesting that you say that.
I was reading some reports from 1991, 1994 and debates in
Congress about whether we should drill in ANWR or not; and back
then one of the congressmen said that it is not economically
feasible to drill in ANWR because a barrel of oil is $17. Well,
if you look at it 10 years today when we didn't do it 10 years
ago, now it is $124 a barrel. And 10 years ago we didn't think
it would be worth it then, and here we are today in the mess we
are in.
Mr. Dinneen. Good point.
Ms. Fallin. And, actually, we did pass it in Congress; and
it was vetoed in 1994.
Mr. Dinneen. And in 1990 they also didn't envision a
renewable energy industry in this country as significant as it
is today. But, thankfully, we made the investment then; and we
need to continue it.
Ms. Fallin. That is right.
I think my time has run out. Thank you.
Chairwoman Velazquez. Mr. Gohmert.
Mr. Gohmert. Thank you, Madam Chair.
Let me ask, you use the 10-year figure. I am on the
National Resources Committee as well. And the most recent data
that we have gotten makes me ask you, how recent is your data
that says 10 years? That has been said for 10 years, but that
is not the most recent data. How recent and current--I mean,
you were testifying that 10 years--how recent is that
information that you have?
Mr. Dinneen. I think the last time I saw a figure might
have been a month ago. But I would defer to your expertise on
that. The fact of the matter is, it wouldn't happen in the near
term.
Mr. Gohmert. People in Alaska have said we now have a
pipeline 74 miles from there, and we could have it online in 3
years now. So that was the most recent information in the past
week that I have heard. And I didn't know if yours was more
recent than that.
We just this week did a nice thing. We passed a bill that
would hold up putting any--you know, 40,000 barrels a day into
the Strategic Oil Reserve. Nice gesture. If we brought ANWR
online, then you have a million to a million and a half barrels
a day.
We are playing around the edges with this thing. Natural
gas--national farmers, you know what that does to the price of
fertilizer. I mean, I am hearing from my farmers, the
fertilizer is killing us. It is not just the corn that has
gotten more expensive. The fertilizer is more expensive. And in
some areas we have had too much rain; other areas we have had
drought.
In my area, we have more livestock, raise a lot of
chickens, a lot of beef. Not so much the row agriculture.
But it just seems that we have kind of a perfect storm
right now between fuel costs and our refusal to deal with what
we have before us. Some of the information that I have heard in
the last few weeks, it is no secret that some--that the so-
called experts are saying 20, 30 percent of the price of a
gallon of gasoline is speculation, and the speculators aren't
stupid. They are looking at what we have done in the last 17
months and they are saying, gee, everything you are doing puts
your own energy off limits.
We have made it more difficult to go after coal. We have
put more of that off limits.
We had a report in the last couple of weeks--some indicate
there may be a trillion barrels of oil left in the entire
Middle East. Schlumberger says if they would be allowed to go
for it, they can recover 3 to 5 trillion barrels of oil from
the shale in Colorado, Utah and Wyoming.
We have got people that we thought were going to be onboard
for doing what France did. And I am not an advocate for doing
what France does on anything, but nuclear seems to work over
there. And we have made that too difficult. We keep making it
harder and harder to bring refineries online.
So I did want to ask--and tell me how you pronounce your
name.
Mr. Buis. Bias.
Mr. Gohmert. You touched on this in the written statement,
it seemed. But how much acreage of corn is used for food stock
versus that used for energy production right now? Do you know?
Mr. Buis. Last year, it was 22 percent used for corn
ethanol of which you still had a third of that value that went
back into livestock feed. There is about I think 8 or 9 percent
that goes into food uses. The biggest food use is fructose corn
syrup.
You know, I think, contrary to a lot of public opinion,
what we are talking about using for ethanol is not sweet corn.
It is not canned corn. There may be some tortilla snack food
chips made. But tortillas and that tortilla protest in Mexico
last year that corn ethanol got blamed for it, it is made out
of white corn. And the United States is prohibited from
providing Mexico with any more than 2 percent of their white
corn needs under trade agreements.
It is not used to make beer. Last year, before the Fourth
of July, which is probably the biggest beer-drinking holiday in
America, the beer breweries all blamed corn ethanol for raising
the price of beer. Beer is made out of rice and barley. I am a
corn farmer originally from Indiana, and I know they make
drinking spirits out of corn. It is called whisky. It is not
called beer.
Mr. Gohmert. And it depends on the beer.
Mr. Buis. Right.
Mr. Gohmert. I don't drink alcohol, but I had a friend that
said they sent in some beer--they were concerned about it--to
be analyzed. And a report came back, we are sorry to inform you
your horse has diabetes. So you never know what is in this
stuff.
But, anyway, this hearing is short. You have come a long
way to give us your time and your information, and we will be
looking at that. But it doesn't have to stop at this hearing;
and I know, Madam Chair, we welcome their input after the
hearing. Please don't let your thinking stop here. We need your
help. We need your information. Put it together and try to come
up with something that helps all of us. Thank you for your
time.
Thank you, Madam Chair.
Chairwoman Velazquez. I have some other questions.
Mr. Formica, in the Farm Bill that we passed yesterday,
there is a program called the Conservation Reserve Program,
which is a land retirement program. Farmers agree to not
produce crops on this land for a duration of time because that
land previously had been overused. There has been a lot of talk
lately about opening acreage of that land to plant crops. Would
you favor that?
Mr. Formica. Absolutely.
Chairwoman Velazquez. And do you believe that that will
help alleviate some of the pressure on the market by planting
the crop?
Mr. Formica. Just by the mere fact we are only at a 24-day
wheat supply when we usually depend on 3 months, that would
have to add to our cushion in the case of another perfect storm
down the line that we could depend on.
Chairwoman Velazquez. Does any person on the panel have a
different perspective?
Mr. Buis. Absolutely, Madam Chair.
The Conservation Reserve Program was created in the mid-
1980s to stop soil, wind and water erosion on farms. Much of
the land that has been removed from production was done so
because it wasn't suitable for farming. And now we have had
some land come out of production. It is not at its all-time
high. We are probably at the limit of what could come out and
be reasonably farmed.
That is not the cause of today's crisis. If you really want
to look at wheat production, and despite what these gentlemen
have been told, that corn is displacing wheat acres, that has
occurred since the 1980s. Where a farmer can plant a higher
value commodity like corn or soybeans or rice or cotton, they
will do so because of the economics of it. And I don't know how
you force people to plant a crop that they are not going to
make a decent return on their investment.
The wheat acreage that is displaced by corn is very
minimal; and to open up the Conservation Reserve Program would
open our country up to a lot more environmental challenges,
whether it is silt running into the rivers, the tremendous
erosion that occurs. You know, it was done for a purpose; and
just opening up without looking at it I think is a big mistake.
If the market says to that producer, I can make more money
growing wheat than I can make growing corn, the farmers will
grow wheat. We have just subsidized the end user of wheat for
so many years. And we can see by that chart on the bagel. Even
at today's record high prices on wheat, we are 7 cents out of
that 95 cents. And the reason I used the bagel was The
Washington Post had a headline story complaining that a bagel
shop in Bethesda was going to have to raise the bagels from 95
cents to $1.15 because of corn ethanol. No connection
whatsoever. We could give them the wheat. They were raising it
by more than that.
Chairwoman Velazquez. Mr. Formica.
Mr. Formica. I just wanted to ask, we are talking about two
things. The Conservation Reserve Program is an environmentally
sensitive program, is that not correct? So I am not talking
about replacing wheat for corn. We are talking about farmers
getting subsidized not to plant on their land at all. And
studies have shown by smarter gentlemen than me and ladies than
me that some of this land can be released out of the program
for wheat production. I don't see how that impacts, you know,
the corn for fuel program.
And my question is--and I will defer to Mr. Buis--are there
not farmers right now contracted in the reserve program that
now at the price of wheat per bushel could make money by
farming that for wheat?
Mr. Buis. If you guaranteed them that speculative price we
had in February and March, you might have. But, right now,
wheat prices are barely above the cost of production.
Mr. Formica. There was some interest in that not only 6
weeks ago.
Mr. Buis. This has to be factual based, and anyone who
thinks that every farmer is getting $20 a bushel for their
wheat is mistaken. The price in central Oklahoma today is
$7.80.
Chairwoman Velazquez. I will be the one asking questions.
Mr. Formica, let's go back to corn and ethanol. Yesterday,
in the Farm Bill that we passed, there is a provision contained
in the Farm Bill that reduces the ethanol tax incentive by 6
cents and creates a program for cellulosic ethanol made from
grasses and biomass. Wouldn't this approach encourage
alternative inputs by taking pressures off corn markets?
Mr. Formica. Well, I don't pretend to understand the
mechanics of that. But if anything--I don't know--it would seem
that it would when I read this report. And I just was curious
as to if we relieve the tariff import on ethanol, we really
wanted to relieve the stress of this country, dependent on
taking the 7 percent and maybe getting it to up 9 percent,
couldn't that be done by importing through ethanol?
Chairwoman Velazquez. Okay. Mr. Dinneen, do you believe
this will solve part of the problem, by shifting from corn to
alternative imports?
Mr. Dinneen. There is no question that the industry is
continuing to evolve. The foundation of the industry today is
providing the base upon which a cellulosic second-generation
ethanol industry will indeed develop. The legislation that you
have introduced will encourage research into cellulosic
ethanol, will certainly help.
I would point out, however, that you are not going to have
a second-generation ethanol industry if you don't have a first-
generation ethanol industry providing the markets, providing
the infrastructure upon which that next-generation industry can
grow.
And just really quickly, because Mr. Formica has mentioned
the secondary tariff on ethanol a couple of times, you should
know that we actually do import a fair amount of Brazilian
ethanol today. We imported about 450 million gallons last year.
We are likely to import significantly more this year.
The secondary tariff is not there as any barrier to entry.
It is only there to offset the tax incentive that they then
get. And if you were to eliminate the secondary tariff as he is
suggesting, it just means that the U.S. taxpayer is subsidizing
already highly subsidized Brazilian ethanol, and I am not sure
that makes a great deal of sense.
Chairwoman Velazquez. Okay. Mr. Gohmert, do you have any
other questions?
Mr. Gohmert. Yes. Thanks, Madam Chair. Just to follow up.
And, actually, you stopped them going between themselves. I was
enjoying them doing it instead of us up here.
Chairwoman Velazquez. We will be here tomorrow at this
time.
Mr. Formica. We might still be here ourselves.
Mr. Gohmert. But it does point out the problem we have. I
mean, we disagree on the different ways to do things, but
everybody here wants to be able to say we had the successful
plans. So it is not like anybody is going into anything to
fail. Everybody wants it to work. And you know, there is a
great point that if the money is there, people are going to
grow the crop.
I have seen a presentation on Jatropha. Have you heard of
that? It is a plant that grows in some areas where a lot of
stuff won't grow, supposedly 10 times more efficient at
producing ethanol. It is an impressive presentation. But I am
sure there is a disagreement over that, too.
But any solutions anybody has to propose we would welcome.
Because one thing seems clear. It is going to take everything--
there is no one silver bullet. It is going to take everything
we can.
With regard to--I mean, coming back to the corn again, I
mean, obviously, that has caused a great disagreement. And we
have people on both sides of the aisle that disagree on that as
well. I would just like to figure out what the truth is.
So I would like to ask, any other thoughts?
Yes, sir, Mr. Thomas.
Mr. Thomas. Just one of the things that occurs to me--I
mean, it is interesting. We are all sitting here, and with due
respect to each of our individual organizations and companies,
I mean, there is an economic incentive that, you know, we all
have to kind of, you know, see the prices either come down or
to protect income.
I think the Farmers Union, obviously, their position is
that they are getting a higher price for their grain products;
and they want to protect that. I think the Renewable Fuels
Association is likewise protecting the interests of their
industry.
It is interesting that I think that we are sitting here,
though, and the argument today is about corn. And just a simple
fact of supply and demand is, if the supply is as plentiful as
is being suggested, I wouldn't think we would be having this
argument. So I do think there is a force out there that has
absolutely reduced the supply of corn. It is driving the prices
up.
And, Madam Chair, you mentioned about it, some suggestions,
some ideas as to alternative things we might do. The concern is
is that the mandate says 25 percent I think this past year, 30
percent this year, and that number continues to go up, whether
or not those ideas will help to ease the burden.
But there is also going to be an increasing burden as we go
along, and I would just plead for a quick response in whatever
manner we can to bring the relief to the industry. But you
know, I think, we appreciate your taking the weight of our
concern; and it seems like you have personalized it as well. So
thank you.
Mr. Gohmert. Well, and I appreciate that.
One of the things that seems could be the most immediate
effect on the price of gasoline would be if the people who are
driving the price up by 20 or 30 percent by speculating that it
is going to go up were all of a sudden to think, uh-oh,
Congress is really getting serious about this. They are really
going to address this. Well, then the speculation takes the 20
to 30 percent out, you know, in a week's time.
So it would be nice if we could come up with a game plan
that the leaders in Congress, Speaker Pelosi and Leader Reid,
could announce that might just take that dollar off of gasoline
right off the top quickly.
But, Mr. Formica, do you have a--
Mr. Formica. I appreciate it once again.
I think it is great. I mean, at the end of the day
everybody here has an interest that has to do not only with
money but with families and lives and livelihoods. And on my
mother's side of the family--I told you about my father's side.
We had the largest farm in western South Jersey at the turn of
the century. So we come from farmers on my mother's side,
bakers on my father's side.
I am sure, regardless of what anybody doesn't like about
fuel industries, Mr. Dinneen's business has to do with that,
too, but I just think that we have to come up with a solution
when it comes to the food prices that are affecting us at the
very base level of society, something necessary. If Congress
was to come up with something that would at least put in a stop
gap, when we go below 23 days, 20 days, whatever the
intelligent people tell us, that Congress will step in and
maybe do something about the speculating for commodity wheat.
You know, I am even talking about corn or fuel now. I am just
saying that we have got to do something that can maybe
interlace all of the programs to stop the supplies from getting
low.
Mr. Gohmert. Regarding the bakers, one of the concerns that
I hear--and we have really diverse interests up here pushing
both sides--sugar. Any comments about that?
Mr. Formica. Well, sugar right now is like people do not--
unfortunately, everybody can't just raise their prices and pass
them on. People are changing recipes, getting out of
different--making products. Sugar looks like it is going to go
through the roof based on the most recent bill passed. And I
can't even begin to, you know, know what prices are going to
do. But, yes, it is a huge concern.
Mr. Gohmert. Are you talking about the Farm Bill yesterday?
Mr. Formica. Right. Right. What was done with sugar in that
Farm Bill, again, just coming out as a reader of it, not an
architect of it, looks unconscionable for people that depend on
that commodity.
Mr. Gohmert. Thank you, Madam Chair.
Chairwoman Velazquez. Mr. Buis?
Mr. Buis. I would like to comment about the sugar program.
Actually, the way it is designed we are about to have a flood
of imported sugar from Mexico because of the NAFTA agreement.
And to help not disrupt the U.S. sugar production, that is
going to be diverted to ethanol production. It is going to go
into corn ethanol or to help relieve the pressure on corn.
So, you know, we hear these fears all the time about high
sugar prices; and you know it is--it is a domestic industry
that has been here a long time. And just to displace it with
imported sugar that is produced with labor standards way below
the United States, environmental standards and health and
safety standards that are not up to par with us does not make a
lot of sense either.
Chairwoman Velazquez. Okay. Mr. Cuellar, do you have any
questions at this point?
Well, gentlemen, let me just say that this has been one of
the most exciting, enthusiastic, spirited hearings that we have
held in this committee; and definitely we will continue to
monitor the food price situation.
Also, we will look at exercising our oversight role
regarding some of the Farm Bill implementation impacting
farmers and impacting small businesses.
I want to thank you all for being here today, and I ask
unanimous consent that members will have 5 days to submit a
statement and supporting materials for the record.
Without objection, so ordered.
This hearing is now adjourned. Thank you.
[Whereupon, at 11:34 a.m., the committee was adjourned.]
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