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Food Without Borders

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Feb 10, 2005
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Food Without Borders

QSR MAGAZINE | ISSUE 80 | September 2005 | By Lea Davis | page 1

As the world moves toward global free trade for food, America’s small farmers are scrambling to survive on the changing landscape.

As its first fiscal quarter closed in late June, CKE Restaurants announced the company had missed the mark on quarterly earnings by a full nickel. The news sent CKE’s stock down 7.2 percent as markets closed. Sounding a common refrain, CKE, the parent company of Hardee’s and Carl’s Jr., blamed the miss on higher food costs—in this case, for beef.

If one new lobby group achieves its goals, food prices might be cited a lot less often in SEC filings and news releases. The Global Alliance for Liberalized

Trade in Food and Agriculture launched in January with about 40 member organizations, including the National Restaurant Association, the Food Marketing Institute, Consumers for World Trade, the National Retail Federation, the National Council of Chain Restaurants, Consuming Industries Trade Action Coalition, and other trade associations and companies. The group, which shortened its name to the Food Trade Alliance, has added its name and agenda to the roster of groups pushing the World Trade Organization (wto) to work toward global free trade of food and agriculture.

Taken to the extreme, that means the wrapper around CKE’s burgers could one day enclose a world’s worth of ingredients, all sourced at the cheapest possible prices. The beef might be imported from Brazil, wheat for the bun from India, cheese from Canada, and lettuce and tomatoes from Mexico. A squeeze of ketchup could add Central American sugars to the mix.

Clearly, multi-national brands could benefit from the opportunity to bid suppliers around the world against each other, without the constraints of tariffs or other protections. Even major domestic chains might be able to source foods more cheaply from overseas. But for mid-sized and smaller restaurant companies—or those brands that feature specialty or organic ingredients—the benefits of global free trade are less certain, perhaps even irrelevant. As a result, the prospect of free (or freer) trade brings mixed reactions from quick-serve industry and from the suppliers who serve them.

O’Naturals, a small Northeastern quick-serve chain, buys from local farms and suppliers and offers a menu based on fresh, healthy foods, many of them made from organic and naturally raised ingredients. “We are such a different kettle of fish from a McDonald’s or Wendy’s,” says chief operating officer Jay Friedlander, who directs purchasing for the four-unit chain. “Are we members of the Food Trade Alliance? I really don’t know. We are members of our National Restaurant Association chapter, so maybe we’re de facto [FTA] members.”

O’Naturals offers items like carrot-ginger soup, New England clam chowder, and a range of flatbread sandwiches, according to what’s seasonally and locally available. The company’s Maine locations serve Maine-sourced water and apple juice. Goat cheese, root beer, fruits, vegetables, and even bison meat are brought in from nearby farms and processors. Unlike many other restaurant companies, Freidlander says O’Naturals has seen food prices decrease as “natural” has gone mainstream and distribution channels have become more robust.

O’Naturals plans to expand through franchising, something Freidlander says should not interfere with the strategy of local sourcing. “Even on a regional or small national scale,” he says, “you still could work with local farmers.” The key, he says, is planning and communication. O’Naturals builds connections with farmers near each location and agrees upon set pricing and other business arrangements. Farmers then plant the crops and plan yields that will meet O’Naturals’ needs. At the same time, local farm associations communicate with the company about specially available items, bumper crops that might be offered at lower costs, or unavailabilities. “We e-mail back and forth all the time,” Freidlander says. “Everyone’s got to be extra devoted to making it happen, but as long as it’s planned out, there is the ability to [source locally].”

Martha Putnam, operations director of Farm Fresh Maine, a sustainable-farming network and quasi-distributor that has been helping connect O’Naturals with Maine farmers for about a year. She uses an e-newsletter, faxes, and the phone to let buyers like O’Naturals know what’s available from the farms; in turn, she communicates with farmers about the needs of her retail clients. She says Friedlander recently told Farm Fresh he’d like to buy local zucchini and squash. She’s taking that request to farmers, who, she says, will plant what the market wants. “On the other hand,” she says, “I might tell Jay the farmers have unbelievable strawberries, and he might say, ‘Great, let’s put them on a salad or make smoothies.’” The system works fairly seamlessly, she says, although she is not able to move all of her farmers’ products every week.

Putnam says the growth of free trade puts a priority on cheap food and promotes the notion that more is better. “With O’Naturals and my other clients,” she says, “the goal is not cheap food. An operation like O’Naturals says, ‘My kids and I live in this environment. I want my food to taste good and be grown in a healthy way.’” Reasonable prices, she says, can be part of that equation.

Steve Wilson, owner of Blue Sky Farms in Wendell, North Carolina, supplies produce for a Bruegger’s Bagels franchise with 15 locations, delivering to a warehouse and commissary. Blue Sky has also supplied three Wellspring grocery stores, now part of the Whole Foods chain, for 10 years, as well as casual- and fine-dining restaurants. He rotates crops on 15 acres and maintains three greenhouses dedicated to year-round herb production.

Blue Sky’s relationship with Bruegger’s started when Wilson approached the franchisee in person. Working with restaurant chains is viable for today’s small farmers, he says, if the farmers are willing to market themselves. “You’ve got to go and knock on doors, present what you have available and how much,” Wilson says. “But, the franchisee has to be able to make that decision independently.”

Indeed, says Putnam at Farm Fresh Maine, support for local, sustainable sourcing has to come from the top. “O’Naturals, as a company, is willing to back up the small, independent farmers,” she says. “It’s a style of business.” With the support of headquarters, franchisees and company buyers can link small farmers with successful restaurants, good food, and happy customers. “Those are the farms,” she says, “that stay in business.

To the north, farmer Paul Beingessner has sketched out the future of farming in his part of Western Canada, and it’s looking bleak.

Beingessner drew a five-mile circle around the outskirts of his Saskatchewan farmlands and counted 33 occupied farm sites in the area. Of those, only five farmers had a potential successor. “It really begs the question, and we [farmers] have been talking about this at meetings: Who is going to farm the land?,” says Beingessner. “We truly don’t know.”

Beingessner is an outspoken opponent of the FTA’s global free-trade agenda. The Canadian groups that have joined the alliance, he says, are mostly small groups with memberships in the hundreds, funded by large, multi-national interests. Those groups include the Western Canadian Wheat Growers and the Western Barley Growers Association, among several others. He fears the effects of unfettered trade on Canadian small farms, where lower population density and lower yields can make farming more challenging.

In his 23 years as a farmer, Beingessner says he has witnessed the consolidation of agricultural suppliers and processors, the advent of agribusiness, and the surging power of large-scale retailers like Wal-Mart and large restaurant chains, which, he says, exert influence down the line to the end of the food chain: the farmer. Along with policy changes in Canada, such as the reduction in railway subsidies and the resulting constraints on processing, all of these factors have made farming prohibitive except on the very large scale.

Young people, he says, are not becoming farmers. “The small communities are disappearing,” he says, “unless they are close enough to a city center to become a bedroom community…. Even in the larger communities, the retail sector is suffering a great deal because of the lack of farm income. Farmers tend to spend in the local community.” That, he says, should be a warning to retailers and restaurant chains—communities that don’t have cash to spend wouldn’t support new Wal-Marts or McDonald’s.

In the United States, contrary to popular perception, today’s small farmers continue to make a living—albeit a small one—from the land. The number of small farms in the United States is increasing steadily, according to Ron Macher, publisher of Small Farm Today magazine. In the mid-90s, says Macher, small farms, defined as 178 acres or smaller with annual income of $40,000 or less from the farm and at least one off-farm job, began growing at least 2 percent annually and should continue to do so.

Though the Food Trade Alliance, or FTA, is lobbying its agenda as WTO negotiations continue, such free-trade prospects remain uncertain in spite of big-money backers—see the rough journey that the Central American Free Trade Alliance, or CAFTA, took through Congress this summer, where it was challenged by U.S. sugar companies and lawmakers from both sides of the aisle. But should the FTA achieve its goals, economists and industry observers say the benefits to the chain restaurant industry would vary.

The FTA says it is the first coalition to bring together consumer advocates, companies, and trade associations from all major industries that purchase food and food products. It is unclear which entity founded the Food Trade Alliance. Some reports point to the Canadian Agri-Food Trade Alliance, which advocates a similar agenda in Canada, while others say Yum Brands, parent company of Taco Bell, KFC, and Pizza Hut, founded the FTA and is asking other multi-national brands, like McDonald’s and Wendy’s, to join. (Yum Brands did not respond to a request to comment for this story.)

In April, FTA members issued a declaration calling on WTO nations to commit to achieving a comprehensive agreement on agriculture during the current round of negotiations. FTA wants the WTO to pledge deep cuts to what the FTA calls “overall trade-distorting subsidies,” as well as an early date for the elimination of all export subsidies. The group also seeks enhanced market access for all products, including “sensitive” products, through deep and harmonizing tariff cuts and substantial expansion of minimum access requirements. For developing countries, the FTA is pushing special and differential treatment that would provide “the flexibility to reach their full competitive advantage potential.” Last, the group wants “rules based on sound science to avoid their use as non-tariff barriers”—referring to food safety and genetic engineering rules that affect international trade.

Among other goals, the FTA seeks to allow companies, such as restaurant companies, to source key products overseas at the lowest available prices. The group also says U.S. consumers pay significantly more for food than world market prices—a 40 percent premium for cheese, 60 percent more for butter, and almost 110 percent more for raw cane sugar. The FTA says such premiums hit low-income Americans, like single working mothers and senior citizens, the hardest.

Other industry figures muddy the FTA’s arguments. For example, retail prices for food at the supermarket rose just under 2 percent in the first quarter of 2005, according to the latest American Farm Bureau Federation Marketbasket survey. Although the survey showed food prices up from the fourth quarter, prices are down slightly from a year ago and almost exactly the average of the preceding four quarters in 2004—indicating that recent volatility in prices might now be stabilizing. In addition, Americans spend just 10 percent of their disposable income on food each year. That’s the lowest average of any country in the world.

Even supporters of the Food Trade Alliance admit that its proposed policy changes could threaten the survival of some small or mid-sized farms. In an op-ed piece for Knight Ridder News Services, Pam Slater, legislative director of FTA member group Consumers for World Trade, writes that, should these policy changes be implemented evenly among WTO nations, “…there is a risk that the additional competition from abroad would put some American farmers out of business. No one,” she writes, “wants to see that happen.”

In the same piece, Slater contends that if all WTO member nations eliminated or equitably reduced barriers to food imports, then American farmers could gain access to export markets in Europe, Japan, and other countries, while consumers (including farmers) could benefit from lower food prices. Citing estimates from the U.S. International Trade Commission, she argues the U.S. economy could gain $3 billion annually if trade barriers on key food imports were eliminated. Further, she writes, new jobs would be created in food processing and exporting.

The share of the average food dollar received by America’s farm and ranch families has already dropped—part of a longtime trend. According to USDA numbers, farmers received about one-third of consumer retail spending 30 years ago. Today, that figure is closer to 22 percent.

One caveat of a free-trade agenda is that food prices don’t behave like those of other commodities, such as DVD players and TV sets, says Daryll Ray, director of the Agriculture Policy Analysis Center at the University of Tennessee. Economically, food is much like insulin for a diabetic, he says: When insulin is expensive, the diabetic still has to buy it, but if you drop the price, the diabetic won’t buy more. Similarly, we don’t eat five meals a day when there is more food, but only one meal when there is less. “Food does not correct quickly from the demand side,” Ray says. “[…] As an economist, I believe in competitive advantage, but I also believe you have to consider some of the special attributes of food before you can perceive free trade as being necessarily what would be in the best interest of countries in total.”

Nevertheless, says Ray, the world continues to move in the direction of free trade. As trade barriers are reduced or eliminated, he says, nations like China and Brazil will do their best to become agricultural powers. Given the expansion possibilities and yield potential in those and other countries, excess worldwide capacity will occur, Ray says. “Agribusiness will set up shop in countries it could not set up in before,” he says. “There would be continued downward pressure on prices, and we would feel that pressure in the United States.”

Freeing global trade has political impact, as well. As the United States signs WTO agreements, says Ray, the country agrees to operate under the rules of a world body. “That’s the bigger issue,” he says. “Do we determine our own food policy, or are we subject to an international body that will essentially dictate the rules? […] As a society, we have not taken kindly to international organizations that would constrain us in how we run our country.”

The FTA is preparing for the next round of negotiations at the Hong Kong WTO ministerial meeting in December. With an effective deadline for WTO agreement set for March 1, 2007, farmers like Beingessner and retailers like CKE Restaurants will have to wait to learn how trade policy might change.

Lea Davis is QSR’s founding editor. She last wrote about Carrol’s Corp. in August 2005.


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