A new study conducted by Price Waterhouse Cooper (PwC) for the National Council of Chain Restaurants (NCCR) estimates the impact of the federal Renewable Fuel Standard (RFS) on the chain restaurant industry.
PwC used the following research strategy. First, PwC examined 11 public and private sector studies estimating the extent to which the RFS increases ethanol utilization beyond what would occur in a free market. Estimates range from an additional 1.0 billion gallons per year at the low end to an additional 6.0 billion gallons per year at the high end. Next, PwC estimated the impacts of these RFS-driven increases in ethanol consumption on the demand for and price of corn and other agricultural commodities. Then, PwC combined these price impact estimates with survey information on chain restaurant food commodity purchases.
Here are the results.
If the RFS in 2015 increases annual ethanol consumption by 6 billion gallons (“Scenario I”), quick service restaurants are projected to spend an additional $2.5 billion (10% of major food commodity spending) and full service restaurants an additional $691 million (8.9%). Costs at a typical restaurant increase by $18,190 in quick service restaurants and $17,195 in full service restaurants.
If the RFS in 2015 increases annual ethanol consumption by 1 billion gallons (“Scenario II”), quick service restaurants are projected to spend an additional $393 million per year (1.6% of major food commodity spending) and full service restaurants an additional $110 million (1.4%). Costs at a typical restaurant increase by $2,894 in quick service restaurants and $2,736 in full service restaurants.
Of course, it’s not just the restaurants that will bear those costs. Their customers will pay higher prices too.
Below are some charts and graphs from the study that provide more detail.
Corn consumption for ethanol has increased dramatically since the RFS was enacted in 2005. In 2010-2011, ethanol consumed more corn than livestock agriculture for the first time. As of marketing year 2011-2012, ethanol consumed 45% of the U.S. corn crop.
Corn, wheat, and soy prices in early 2012 were 161%, 116%, and 83% higher, respectively, than they were in Jan. 2003.
Corn is a key input in livestock production, so higher corn prices increase the cost of meat, poultry, and dairy products. Rising corn prices also bid up the price of other crops that compete with corn for customers and/or land. The chart below estimates the RFS’s impact on agricultural commodity prices under Scenarios I and II.
The 2015 RFS is projected to increase annual expenses of a typical quick service restaurant by $18,191 under Scenario I and $2,894 under Scenario II.
The 2015 RFS is projected to increase anual expenses of a typical full service restaurant by $17,195 under Scenario I and $2,736 under Senario II.
Percentages in the charts below give a sense of how much more restaurant customers may have to pay for specific food items due to the RFS.