Special Report | April 2012 | By Stephanie Ogburn

The State of Our Water

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Stith, who runs 15 Pizza Huts in east Texas, says business is fine, but he has had to absorb a big increase in ingredient costs because the drought is hurting the surrounding dairy and beef industries in the state.

“Our ingredient costs have gone through the roof; with the drought the price of meat and price of cheese have really gone up. We have seen an increase of meat and cheese to where it’s affecting our food costs 1–2 percent,” he says.

Stith also experienced decreased sales in one of his establishments, which is near Cedar Creek Lake, in Gun Barrel City. Much of the traffic to that restaurant comes from boaters and recreationists, and since the lake level went down, he got much less summer business last year.

“This summer, people couldn’t get their boats in the water,” he says.

If the drought continues, he adds, it might affect the local timber industry, which is a key economic driver in the area, and that could hurt business.

Stith, who has operated Pizza Hut franchises since 1967, is used to hard times, though, and in his long-term view, there have been worse periods than this drought. He says the biggest hurdle his businesses have ever faced was the oil embargo of 1973, when gas and energy prices skyrocketed after Arab oil-producing nations withheld supplies to the U.S. and other Western countries.

It’s not just Texan restaurateurs feeling the crunch of the state’s water shortage. Restaurateurs across the country are watching the drought’s effects play out in their own operations, says Hudson Riehle, director of research for the National Restaurant Association.

“The drought in the Texas region has put upward price pressures on, for example, beef, and there’s been some premature liquidation of herds just because the grazing opportunities weren’t available,” he says. “But when you basically think that it takes a few years to grow a cow, that means that for that commodity group, obviously it will likely remain a challenging environment.”

As a result, the Texas drought will likely decrease supply for a number of years in the future, pushing up the price of beef and possibly affecting quality, too.

Hans Hess, the CEO of multistate franchise Elevation Burger, is also keeping an eye on Texas.

“If you think of the effects that water shortages will have on cattle, the short-term effect of that is it affects supply, and therefore price goes up, ” Hess says. “When a situation like a drought comes, like in Texas, that has the potential to really put pressure on everyone because of its impact on the commodity market.”

When prices for commodity items like corn, soy, and grains run up, it pushes up wholesale prices for restaurateurs, from large chains like Burger King to Hess’s boutique franchise.

Commodity prices have already been affecting restaurants’ bottom lines, Riehle says, and they haven’t been able to pass all of that cost along to the consumer. Although all the data for the year isn’t in yet, he estimates 2011 had the highest wholesale food inflation in 30 years. Yet average menu prices have only increased 2.2 percent, which is even below the general inflation rate of 3.3 percent, and almost half of the 4.4 percent increase consumers have seen at the grocery store.

When Rain Fails to Fall

Western states like Texas and California are no strangers to drought. But the science of climate change says future droughts will spread far outside of areas accustomed to dealing with water shortages. In much of 2007, 2008, and 2009, the Southeast experienced water shortages, and states like Georgia are still short on the resource and fighting over access to rivers they share with their neighboring states.

Mike Aquaro is the Southeast district manager for Bon Appétit Management Company, which provides café and catering services to institutions like colleges and restaurants, including Duke University in Durham, North Carolina. He has relationships with several farmers who supply fresh vegetables and beef to the company’s college and corporate foodservice operations in the Southeast. When the rain failed to come in Georgia and the Carolinas, he noticed.

“Probably the worst conditions that we experienced were happening between 2007 as it started in the fall-winter months, and then certainly through 2008 and continuing on and probably reaching the most severe point during that summer of 2008.”

Bon Appétit’s goal is to source at least 20 percent of its food locally, and the drought made that commitment difficult.

“We were seeing averages during the time of the drought dropping down to a low of 12–14 percent,” he says.

And food quality suffered, too. Aquaro’s chefs saw greens with burnt edges, a result of too much heat and not enough water.

It was with the smaller, more local vegetable producers that the company saw the most change when water was short, Aquaro says, probably because many of them did not have the infrastructure to irrigate.

“Producers that provided us with things like tomatoes and squash and cucumbers were really impacted, and for us that meant that supply levels were impacted,” he says.

But Aquaro, and Bon Appétit, got lucky with beef. His main beef supplier, Harris Acres, had, with Bon Appétit’s support, recently switched to fish emulsion as an organic fertilizer on his pasture, rather than synthetic nitrogen fertilizer. It was part of an effort to use more organic products on the farm. It turns out there was a beneficial side effect: The alfalfa hay treated with fish emulsion grew deeper roots than hay treated with conventional fertilizer. Those deep roots were better at reaching water farther below the surface, whereas most farmers’ hay had short roots and dried out. So, even while other beef producers saw their hayfields turn brown, Harris Acres continued to have enough hay to feed its cows.

“So we were lucky, I’ll tell you,” Aquaro says. “That was one of the areas that was a major concern as we were not only entering the catastrophic drought conditions here, but also in the midst of them, how that was going to impact our producer of grass-fed beef.”

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