Washington Insider -- Thursday

Wall Street and Whole Foods Markets

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

CBO: RFS Repeal Would Not Lower Food Prices Significantly

Food prices would not be significantly lower if Congress were to repeal the Renewable Fuel Standard (RFS) while complying with the renewable fuel requirements under the 2007 energy law would pose major challenges for the industry, according to Congressional Budget Office testimony delivered to the Subcommittee on Environment and the Subcommittee on Oversight for the House Committee on Science, Space, and Technology.

The requirements under Energy Independence and Security Act of 2007 (EISA) “would be very hard to meet in future years because of two main obstacles,” Senior Advisor Terry Dinan said. “First, fuel suppliers have had trouble meeting the annual requirements for cellulosic biofuels because making such fuels is complex, capital-intensive, and costly. Second, EISA’s increasing requirements for the total gallons of renewable fuels to be used each year, combined with a projected decline in gasoline use, suggest that the average concentration of ethanol in gasoline would have to rise to well above 10% — the maximum concentration that is feasible to avoid corrosion damage to the fuel systems of older vehicles.”

As for food prices, Dinan said that the extent the RFS raises demand for corn-based ethanol, it would increase corn prices. “Under the EISA volumes scenario, CBO estimates that the resulting increase in the demand for corn would raise the average price of corn by about 3% relative to the 2016 volumes scenario,” he stated. “However, because corn and food made with corn accounts for only a small fraction of total US spending on food, that total spending would increase by about 0.1%.”

Even if the RFS were repealed, Dinan said CBO believes fuel suppliers “would probably find it cost-effective to use a roughly 10% blend of corn ethanol in gasoline in 2017 even in the absence of the RFS. Therefore, food prices would be only slightly lower in 2017 (by less than 0.1%) if the RFS was repealed than under the 2016 volumes scenario.”

Regarding fuel prices, CBO said that compared to the 2016 volumes scenario, the EISA requirements would impact fuel prices in the following way in 2017:

· The price of petroleum-based diesel would rise by 25 cents to 45 cents per gallon;

· The price of E10— a blend containing up to 10% ethanol and which is currently the most commonly used transportation fuel in the United States—would increase by 15 cents to 30 cents per gallon; and

· The price of E85, containing up to 85% ethanol, would decline by $0.80 to $1.20 per gallon.

However, repealing the RFS would have only small effects on prices. “Specifically, CBO estimates that repealing the RFS would have essentially no effect on the 2017 price of E10, would lower the 2017 price of petroleum-based diesel by roughly 5 cents, and would increase the 2017 price of E85 by about 15 cents,” Dinan said.

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Some Cotton Growers, Industry Lobbyists Set to Push Big Change for Cotton Policy

Concerns about cotton price levels leading to still few cotton plantings ahead and an anemic farmer safety net relative to the 2014 Farm Bill have some cotton growers and industry lobbyists gearing up to push for a major change in farm policy that would not need new legislation but would need approval from USDA.

The push is to make cottonseed an eligible minor oilseed and by doing so would allow cotton growers an option to choose the Ag Risk Coverage (ARC) or Price Loss Coverage (PLC) program option of which they currently are unable to do.

No immediate change along these lines is expected, as political support in Congress and other matters must first be addressed, sources inform. But any such change would not take a reopening of the farm but would take a USDA announcement authorizing the program option. That could be a high hurdle with expected costs for any such change.

If cotton growers ahead were to become eligible for ARC or PLC, they would also remain eligible for their current farmer safety net option: the Stacked Income Protection Plan (STAX), a crop insurance product that provides coverage for a portion of the expected revenue.

Some economic analysis of the proposed change signals the potential of around $80 an acre payouts for some producers should the cottonseed change become available.

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Washington Insider: Wall St and Whole Foods Markets

Retailers of organic and natural products have typically been attracted by the prospect of substantially higher prices than can be charged relative to those for conventional foods. At the same time, there have long been worries that the higher prices could choke off growth. Now, something may be happening along those lines, according to a recent article in the New York Times.

Wall Street has a love affair with Whole Foods Markets, the Times says, but notes that share prices now are almost 50% lower than they were in February. Even worse, investment analysts are uniformly negative on the company as competition from mainstream retailers has intensified.

Costco, for instance, now claims to be the biggest seller of organic foods, the Times notes and Walmart is offering Wild Oats products, an organic brand, at the same price as similar conventional brands.

“Their single biggest problem is their price image,” said Meredith Adler, who follows the company for Barclays Capital.

John Mackey, co-founder and co-chief executive of Whole Foods told the Times that he agrees that there is more competition, but objects to the conventional wisdom that the cure is lower prices. Walter Robb, the other co-chief executive, argues that Wall Street’s relentless pressure to reduce prices is “a race to the bottom. Our products are not the same” as what other grocers are selling, he said.

Besides, he said, Whole Foods has worked hard to address price when it feels it can and the effort upset Wall Street because it put a slight dent last quarter in the dollar value of the average basket at checkout.

The company’s financial performance has long been one of the envies of the grocery industry, along with its absence of debt. That, combined with its low stock price, is making it a target of takeover rumors. Still, natural grocers, like other high-end retailers, tend to argue that they have a relationship with their customer that goes way beyond the transactional and is very hard to put a value on.

The Times suggests that those close customer relationships took a hit recently when New York City Department of Consumer Affairs called out Whole Foods for mispricing some merchandise. The department found an average discrepancy of $2.75 between prices Whole Foods was charging for things like fruit plates and packaged chicken and the prices it should have been charging based on weight. Violations were found at other grocers, as well.

After the City’s findings went viral, sales at Whole Foods plummeted. “It actually hurt us worse outside New York City,” Mr. Mackey said. The company apologized for the problem and has hired a third-party auditor to monitor weights and measures in its stores.

Since then, Whole Foods has announced a number of changes aimed at appeasing Wall Street. It said it would cut its employee ranks by 3,000, though 1,500 of those employees are likely to get different jobs in the company, Mr. Mackey said. It is working with Infor, an enterprises software business, to build a system that will help it get a better read on its supply chain, improve its data analysis and reduce costs. And, it is offering prepared food items in some stores.

But what everyone is waiting for, the Times says, is the first of its new stores, called 365, which will be smaller and sell a more limited mix of cheaper goods.

“It’s going to be interesting to see what Whole Foods does differently with 365.” said Joe Dobrow, who has worked at several natural foods companies and is the author of “Natural Prophets,” a history of the business. “Or will it just be a downsized version of Whole Foods with a particular attention to price? I hope it’s not too little too late.”

The first of the stores will open in Los Angeles next year. But Mr. Mackey and Mr. Robb believe 365 will do more than just add valuable new business to the company; it will help Whole Foods introduce its philosophy of food and values to neighborhoods that cannot sustain stores selling

$40 blocks of cheese.

Well, it will be important to see how its new ventures change investor’s image of Whole Foods, and how the industry’s competitive profile changes. If pressure from the larger companies leads Whole Foods and other higher-end organic, natural retailers to substantially change their pricing policies, the industry could grow substantially, although such changes risk weakening the current customer base. Thus, it will be critical to watch how the industry deals with its current investor pressure over the coming months, Washington Insider believes.


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(GH/SK)