The Food Cost Crisis Hits the U.S.

The impact of price hikes on American consumers and the food industry

Food prices chart

Corrected on 4/2/08: An earlier version of this article incorrectly reported that General Mills had reduced the number of chocolate chips in its Turtle Cookies. The company said it had not reduced the number of chips, but changed how they were distributed in the cookie dough.

When Sam's Club, the nation's second-largest warehouse retailer, began restricting bulk purchases of rice last month, the immediate reaction was nervous disbelief. "Time to Stockpile Food?" one headline read. The company urged calm, noting that it was merely trying to keep overzealous customers from depleting stocks. Customers seemed not to listen; reports of rice runs and empty shelves soon followed.

In the days since, Sam's Club and rival Costco, which imposed similar rice restrictions, have been accused of acting prematurely and promoting panic. It's true that food riots have become frequent abroad, their critics note, but the United States has safeguards, including a higher standard of living and a modernized supply chain, that protect against the dangers of rising costs. So, analysts say, widespread shortages are unlikely. Yet the rice restrictions are the most visible example yet that the global food crisis, affecting everyone from consumers to restaurant owners to giant corporate manufacturers, has hit home.

In the United States, the primary victims are the poor and lower middle class, a group already burdened by housing woes, stagnant wages, and record fuel costs. As a result, food banks have seen a 20 to 25 percent spike in the number of people seeking help in 2008. Food stamp enrollments are up sharply, too: 1.3 million people joined the federal program since 2007, reflecting high food prices along with creeping economic misfortune.

At the same time, pantries are thinning out. Corporate donations have dropped off measurably, and funding from the U.S. Department of Agriculture has declined since 2003 by hundreds of millions of dollars. "This is the worst situation that we've seen in the 27 years we've been involved," says Vicki Escarra, president and CEO of America's Second Harvest, the nation's largest food bank network.

One particularly ominous trend has been the unprecedented influx of nontraditional patrons. Normally, food banks serve mainly the elderly and homeless; in recessions, they pick up the jobless. But now, says Atlanta Community Food Bank Executive Director Bill Bolling, "almost half of the people coming to us have jobs. People are literally having to decide whether to pay the doctor bill or to buy food, to pay the heating bill or to buy food."

Red ink. For Americans of greater means, the impact has been more subtle, but no less real. The U.S. restaurant industry added more than 160,000 sites in the 1990s, many in the casual-dining category, including Chili's and Ruby Tuesday. But many chains are now hurting. The National Restaurant Association says 54 percent of all U.S. restaurants had reported a decline in customers in January. Earnings have been off, too. Some of these losses can be attributed to surging commodity prices. But thrifty consumers share the blame. Even some fast-food chains, which can better weather bad economic times, are seeing red ink: In March, McDonald's reported its first monthly loss in five years.

Grocers will benefit from the exodus; when consumers eat out less, they dine in more and spend relatively more on groceries. Indeed, supermarket sales were up 6.3 percent in January. But even here a new trend is taking hold: Shoppers are starting to favor cheaper versions of the same product. "With dairy, juices, even meats, you are starting to see people trading down, going for mass brands or more private-label brands," says Brian Morgan, senior research analyst for Chicago-based Euromonitor International.

Food manufacturers have been adapting. Waste is being aggressively cut; unnecessary ingredients are being eliminated or reduced; boxes are being downsized to save money on fuel. Pillsbury, a unit of General Mills, recently replaced the pecans in its popular Turtle Cookies with cheaper walnuts and changed the distribution of the number of chocolate chips in the recipe. The savings: $5 million. Likewise, General Mills has shrunk boxes of Hamburger Helper and reconfigured the pasta to allow for tighter packing. Similarly, by switching from glass to plastic jars for Miracle Whip, Kraft Foods says it is saving 87,000 gallons of fuel per year in shipping.