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    At Mother Nature’s Mercy

  • California’s historic drought is just one way the climate is pressuring the supply chain. But the foodservice industry is finding ways to live in better harmony with Mother Nature.

    Thinkstock images / Scott Olson / Getty Images
    Marion Kujawa, an Illinois farmer, looks over his drought-ravaged land. Drought has affected several regions in the U.S., from the Midwest to the Plains to California, leading to climbing commodity costs.

    Kevin Kester’s family has been farming in the U.S. for generations. And it’s not just a couple of generations they’ve been farming; more like generations upon generations, way back to the 1600s, specifically in California since the 1860s. Today, Kester owns a 22,000-acre beef cattle ranch in California’s Monterey and Fresno counties, near Paso Robles. In the middle of the state, it’s at the “bull’s eye,” he says, of the worst drought that he—and several generations before him—has ever seen.

    “It’s been devastating,” Kester says. “Because of the drought, with a lack of feed and lack of water out in the hills, we’ve had to reduce and sell off our cow-calf [breeding] operation very significantly, in fact more than half. … It’s a very significant impact on our income.”

    Kester is one of thousands of farmers who have been affected by drought in a state that is the largest agricultural producer in the country. Data from the California Farm Water Coalition suggests California could lose a total of $5 billion in agriculture revenue from the drought, which entered its fourth year in 2015.

    But farmers aren’t the only ones feeling the pinch. Restaurant operators, especially those in the tight-margin limited-service industry, are also taking a hit, helpless as some food costs have soared to unprecedented levels. It’s been a frustrating reminder that in a world of big data, enhanced technology, and efficient supply chains, Mother Nature still has the final say on the state of our food supply.

    The new reality

    As of December 30, about 32 percent of California was in “exceptional drought”—the most extreme designation for drought—according to the U.S. Drought Monitor. Nearly 78 percent of the state, meanwhile, was experiencing at least “extreme” drought conditions. University of Minnesota researchers reported that the ongoing California drought is the worst the state has seen in 1,200 years.

    California suffers from two big problems: First, water demands are immense in the nation’s most populous state; some 38 million people call California home, according to the U.S. Census Bureau, applying astronomical pressure to the state’s water supply. Second, the last few years have been some of the driest on record, with very little rain and snowfall in the winter, the state’s wet season. Without the rain and water from the Sierra Nevada Mountains’ snowpack, the state’s reservoirs and groundwater are drying up. The National Oceanic and Atmospheric Administration (noaa) reports that natural oceanic and atmospheric patterns are driving the drought, from which many say it will take several years—and perhaps an El Nin~o–type wet weather event—to recover.

    In other words, the supply and demand for water is out of whack and could be for some time. For farmers in the state who rely on water to maintain their operations, it’s a tough pill to swallow. “When it comes down to it, you have to have grass and water,” Kester says of cattle ranches. “That’s the bottom line. When you run out of those, technology can’t replace that.”

    California isn’t the only state that’s been hit by drought in recent years. Texas and Oklahoma suffered through a severe drought of their own in 2011, while the Midwest was faced with unseasonably hot and dry weather in 2012.

    Drought in these states is dangerous to quick-serve operators for several reasons. The Midwest is the largest producer of corn and soybeans in the U.S., and a hit to corn in particular hikes up feed costs for chicken, pig, and cattle farmers, thus affecting commodity costs for meat, dairy, and eggs. And Texas, California, and Oklahoma are the Nos. 1, 4, and 5 largest producers, respectively, of cattle in the U.S.; combined with No. 2 Nebraska and No. 3 Kansas, which also felt the effect of drought in the last four years, those states account for about 50 percent of the nation’s cattle supply, according to the National Cattlemen’s Beef Association (NCBA).

    Beef might be where limited-service operators take the biggest hit from the recent droughts. The burger category is a $75 billion–plus industry, according to Technomic, and the better-burger segment continues to explode. Beef prices hit an all-time high in 2014, with the U.S. Department of Agriculture (USDA) predicting that beef and veal costs ended 2014 roughly 11–12 percent higher than the previous year and will rise between 4.5 and 5.5 percent this year.

    “Since we’re not looking to impact the quality of our raw materials, we had to look in different directions,” says Josh Kern, chief marketing officer for better-burger chain Smashburger, in an email, referencing the cost increase’s effect on the company. “To decrease freight cost, we implemented a new distribution model that created better freight efficiencies along with expanding our supplier base so that our FOB points are closely aligned with their destination points.”

    Beef prices are climbing because droughts, especially in cattle epicenters like Texas, force ranchers to downsize—sell off or slaughter—their herd, thus reducing supply; the number of cattle in the U.S. today is the lowest it’s been since 1951, according to the NCBA. It takes a few years to recover the supply as ranchers breed calves, says Mike Miller, senior vice president of marketing and research at the NCBA. He believes beef will stabilize by 2016 or 2017 now that the drought in Texas has improved.

    “The thing that makes beef unique is that the climate is always an issue for beef because the cattle spend most of their lives outside,” Miller says. “So ranchers fundamentally are beholden to whatever Mother Nature provides.”

    Mother Nature provides more than just drought. Flooding, deep freezes, and any number of other unseasonable weather patterns can have a profound effect on cattle, poultry, produce, and the rest of the raw materials that make up restaurant menus. And these days, those patterns appear to be increasingly severe.

    The U.S. Global Change Research Program reports that rainfall events are becoming heavier and more frequent, and that property and crop damage from flooding averaged around $8 billion per year between 1981 and 2011. The program also says the average U.S. temperature has increased nearly 2 degrees Fahrenheit since data started being recorded in the 1890s, most of the increase occurring since 1970. Meanwhile, 2014 was the hottest year on record, 2013 and 2010 tied for the third hottest on record, and prolonged (more than a month) extreme heat in the U.S. is worse than it’s ever been, according to the program. Higher temperatures are contributing factors to drought conditions.

    Even last year’s frigid winter might become a more common occurrence; a group of scientists recently published a report in the journal Nature Communications that connected the Polar Vortex to melting ice in the Arctic Sea. According to the USDA, fresh-fruit prices were up 4.5–5.5 percent in 2014 partly because of frigid temperatures on the East Coast last winter.

    “Weather does go through cycles and it can impact agriculture and therefore impact the cost of goods for anybody who relies upon agriculture, like restaurant chains and grocery stores,” says Jim Greco, chief operating officer of Mississippi-based fast casual Newk’s Eatery. “Then there’s the other thing that’s going on here, and that’s the whole issue of long-term climate change and what impact that might have on agricultural commodities. That’s a lot harder predict. And of course the impact on a chain like Newk’s would be very, very gradual, so there’s really not much we can do about it.”

    The U.S. Global Change Research Program does show that climate changes over the long term could pose a problem for restaurant operators. It found that climate disruptions to agricultural production have increased in the past 40 years and are projected to increase over the next 25 years. The climate uncertainty has created a volatile food-cost environment that is keeping restaurant executives up at night.

    “When we survey restaurant operators, currently their top challenge remains food costs. About one out of three operators reports that food costs are their top challenge,” says Hudson Riehle, senior vice president of the National Restaurant Association’s Research and Knowledge Group. “If you look at a year ago, it was under one out of five restaurant operators who reported that food costs are the top challenge. So it’s come close to doubling over just the past year.”

    USDA data shows operators are right to be worried. In its “Food Price Outlook, 2014–2015” report issued in December, the agency reported that, to go along with record-high beef costs, pork prices increased 8.25–9.25 percent in 2014 and were expected to rise 4.5–5.5 percent in 2015; poultry prices were up 1.5–2.5 percent in 2014 and should climb 2.5–3.5 percent in 2015; egg prices increased 7–8 percent in 2014 and are expected to be up another 1–2 percent in 2015; and dairy prices climbed 3–4 percent in 2014 and should finish 2015 another 2.5–3.5 percent higher.

    Some chains have already raised their menu prices because of climbing food costs. In-N-Out Burger, Chipotle, and Starbucks all bumped prices up at least slightly last year in response to the new cost reality.

    Traditionally, restaurant companies have sustained volatile food costs through hedging, in which they lock in prices on certain commodities—often through futures contracts—for an extended period of time. But one industry expert believes this model exacerbates the climate problem. Arlin Wasserman is a partner with the sustainable food consultancy Changing Tastes, as well as the chair of the Sustainable Business Leadership Council for Menus of Change, a sustainable food conference for chefs and operators held by the Culinary Institute of America and Harvard. He estimates that climate issues in the U.S. have become a $40 billion problem; food-cost volatility in the last five to six years has been unprecedented, he says, a volatility that he chalks up to climate changes, sourcing foods from marginal lands at risk of poor output, and financial trading on commodity markets.