Tyson Foods CEO Dick Bond has a $550 million problem, and its name is ethanol.
The bottom line of the world’s largest protein producer, which had more than $27.4 billion in sales last year, is being battered by grain costs.
The Springdale-based company projects higher grain prices will cost the company more than a half-billion dollars in fiscal 2008 versus 2007 and Bond has directed the ire of his industry squarely at federal subsidies and targets for corn-based ethanol as the root cause.
“The fact is we can’t grow enough corn in this country to make a dent in our petroleum dependency,” Bond said on an April 28 conference call. “Diverting corn to ethanol doesn’t make economic sense. It is inefficient because it raises the prices on feedstocks to artificially high levels, which increases costs for other uses, such as food. It is inequitable because higher food costs disproportionately affect the people who can least afford it.
“Essentially, it’s a regressive tax on the poor – and not only on the poor in America. Ethanol mandates and subsidies, along with tariffs on ethanol imports, are causing a world food crisis. Shortages and higher prices mean many people around the world are spending the majority or all of their income on food. Those who can’t are starving.”
Energy policy – from ethanol mandates to offshore oil drilling – stands to have a huge impact on Arkansas food producers and trucking companies like J.B. Hunt Transport Services Inc. Energy and infrastructure are issues that has been front and center during the 2008 election cycle.
Illinois Senator and Democratic nominee Barack Obama is in favor of ethanol subsidies and against offshore drilling; Arizona Senator and Republican nominee John McCain didn’t even contest the Iowa caucuses because of his opposition to federal ethanol policy and reversed his opposition to offshore drilling after gas prices spiked past $4 per gallon this summer.
However his positions may favor the positions of the food and trucking sectors, McCain is trailing Obama by a statistically significant margin heading into the Nov. 4 vote and companies like Tyson and political action committees like the American Trucking Associations have been shifting their donations accordingly in anticipation of a Democratic sweep of Congress and the White House.
According to the Center for Responsive Politics, the Tyson PAC donated 62 percent of its contributions to Republican candidates at the federal level in the four election cycles from 2000-2006. The American Trucking Associations PAC had an even greater ratio of 82 percent for the GOP.
In 2008, Tyson’s giving has completely flipped, with 61 percent to the Democrats and the ATA has made a 40-point swing toward the Democrats.
Tyson has donated $657,410 since 2000, including $136,659 so far in 2008.
J.B. Hunt has no PAC, isn’t a donor to the ATA and declined to comment for this story.
The sharp increase in food inflation – which saw a $3 per bushel jump in corn prices early in 2008 and a corresponding record in soybean prices – has refocused attention on the “unintended consequences” of ethanol policy.
The Renewable Fuels Standards enacted by the Energy Independence Act of 2007 requires 10.5 billion gallons of ethanol to be produced in 2009.
At 2.75 gallons of ethanol per bushel, that would amount to more than 3.8 billion bushels or nearly a third of the total U.S. crop.
In May, Obama allowed he would rethink ethanol policy if prices continued climbing at an unsustainable rate.
“If it turns out we need to make changes in our ethanol policy to help people get something to eat, that has got to be the step we take,” he said on “Meet the Press.”
“We have rising food prices around the United States. In other countries, we’re seeing riots because of the lack of food supply, so this is something we’re going to have to deal with.”
Several studies have contended that the increase in food prices tied to ethanol mandates are minimal. The true culprits, they argue, are increased global demand, high oil prices that affect production and fertilizer costs, and dollar weakness that led speculators to flood the commodities market.
Ethanol opponents counter that while the industry generated $12 billion in household income in 2007, it cost the economy $24 billion. The high price of corn is even robbing the profitability from ethanol production and in effect, the federal subsidies paid to growers have essentially become windfall profits for farmers.
Bond, in a July 28 conference call, noted that food inflation had him hopeful Washington was finally paying attention and that the summer’s high gas prices could also lead to a rethinking of import tariffs.
He joined Texas Gov. Rick Perry in asking the federal government to suspend 50 percent of the RFS, eliminate the 51-cent per gallon subsidy for corn-based ethanol and remove the 54-cent per gallon tariff on imported sugarcane ethanol from Brazil.
“There is more talk around mandates and tariffs now than there ever has been,” Bond told an analyst from Deutsche Bank on the July 28 call.
“It’s just a matter of generating enough bipartisan support to get anything done prior to an election. I really do believe that in time that these mandates will be altered. I firmly believe that will take place.
“The ‘when’ is the big factor.”
The nation’s crumbling infrastructure, funded through the Highway Trust Fund that needed its own $8 billion bailout in September thanks to shrinking fuel tax revenues, is one area both McCain and Obama appear to agree.
Government spending is traditionally a way to kickstart a stalled economy, and Arkansas Sen. Mark Pryor notes that every $1 billion in infrastructure investment supports 47,500 jobs.
Clogged transport routes create as much as a $200 billion drag on the economy annually, according to the U.S. Dept. of Transportation.
The ATA has actually said it would support an increase in the federal fuel tax to support the HTF under the right circumstances.
Namely, the ATA wants the U.S. to develop new, centrally planned “freight corridors” that would ease congestion and pollution while increasing safety.
“Coupled with a vision for a highway program that begins in the short-term to address freight bottlenecks and congestion and culminates longer-term in a program of “truck ways” or freight corridors, the trucking industry will support increased investment to achieve industry objectives,” the ATA states in a policy paper. “In short, we will pay for value received.”
Proposing to tax itself underscores the severity of the problem for the trucking sector, especially given that diesel prices have increased more than 70 percent in the last year.
Estimates indicate the U.S. needs $225 billion in annual funding over the next 50 years to revamp its infrastructure. Total federal, state and local funding is around $90 billion annually.
“That’s a pretty clear sign of need when you’re talking about taxing your own industry,” said University of Arkansas political science professor Andrew Dowdle.
Pryor said he would “explore” options to fund the HTF, but neither he nor Congressman John Boozman, who represents the Arkansas 3rd District that includes four publicly traded transport companies, would commit to a tax increase.
While the economy has doubled in size over the last 20 years, the total number of Interstate lane miles increased only 18 percent between 1980 and 2005.
More relevant is the pace of highway construction, which slowed over the same period. In fact, between 1991 and 2005, states added only 1,594 miles or 4 percent to the highway system.
Boozman, who sits on the House Transportation and Infrastructure Committee, said efficiencies need to be discovered before tax increases are considered.
He noted the Interstate 35 bridge that collapsed in Minneapolis – becoming a deadly symbol of America’s infrastructure shortcomings – was rebuilt within a year.
“That project, which normally would have taken multiple years to complete, was done in a year because everyone worked together to get it done,” Boozman said.
“If that bridge project can start and finish in one year, there is no reason other projects cannot be completed just as expeditiously. Instead of raising taxes, we should decrease the red tape and focus on moving these projects to completion safely and quickly, which saves us money.”
Both Boozman, a Republican, and Pryor, a Democrat, agreed on a need for expanding domestic oil production. The 26-year-old federal ban on offshore drilling outside select areas of the Gulf of Mexico was allowed to expire on Oct. 1.
House Republicans, fearing a Democratic sweep in November and a revisiting of the drilling issue, have proposed streamlining the drilling permit process as part of a new economic stimulus package.
Drilling opponents mostly shrugged off the ban being allowed to expire with the expectation that a President Obama and a Democratic Congress would enact new restrictions that would essentially reinstate the ban.
Sen. Pryor, also an ardent advocate for conservation measures, said continuing to restrict offshore drilling would be a mistake.
“In my opinion, the United States cannot afford to abandon traditional supplies of energy while we wait for the next generation of alternative energy technology to be developed,” he said.
“While we must continue to aggressively pursue alternative energy technologies, such as cellulosic ethanol, biodiesel, and carbon capture and sequestration, we must also increase development of domestic energy resources.
“This includes more exploration and drilling on the Outer Continental Shelf and building more nuclear power plants.”
“It is in our best interest to allow us access to our natural resources to develop American-made energy,” he said. “We need to improve conservation and efficiency and promote renewable and alternative energy policies.
“We need an all-of-the-above approach to decrease America’s dependence on foreign sources of energy. Allowing offshore drilling, increasing the capacity for nuclear power and oil refining are steps we need to take to accomplish this goal. We need to use all of our country’s resources in a responsible, environmentally sound way and quit sending billions of dollars overseas to people who generally don’t like us.”