New Faces at the Capitol: Changes to the State Legislature in 2023

from California Grocer, Issue 4, 2022

by California Grocers Association

Strength in Togetherness

CAPITOL INSIDER

New Faces at the Capitol

LOUIE BROWN

IN THE SACRAMENTO OFFICE OF KAHN, SOARES AND CONWAY, LLP

2023 will bring a number of changes to the Legislature

Brown

We will see the largest new class of members since 2012, new leadership in the Assembly, and a much different economic outlook than the last two years. The class of 2012 was set to term out in 2024 and was to be the year with the first major transition since the new term limits kicked in. However, due to the outcome of the redistricting process, a number of members chose to retire early. Add to this a couple resignations and a handful of gubernatorial appointments, and you had nearly one-quarter of the Legislature made up of new faces at the December 5 swearing in ceremony. Of the 20 Senate seats up for election in 2022, nine are sending new members to the Capitol. In District 16 Sen. Melissa Hurtado pulled slightly ahead of David Shepard, but he refused to concede and formally request a recount. You may recall the early drama with Sen. Hurtado who originally wanted to run in her hometown, District 14. However, this was heavily discouraged by Senate Leadership as she would have challenged Sen. Anna Caballero. After convinving Hurtado to move to Senate District 16, the Senate committed significant resources to the race as it became the top priority to protect. Even with those resources committed to the race, this was the closest state Senate race in over a century. In the Senate, some notable members will not be returning due to term limits, including Sen. Jim Nielsen, Sen. Pat Bates, and Sen. Bob Hertzberg. Sen. Jim Nielsen, the Dean of the Senate, officially retired after 40 years of public service. Sen. Pat Bates, former republican leader, was elected to the Orange County Board of Supervisors. Sen. Bob Hertzberg, former Speaker of the Assembly and well-known deal maker, was also termed out but lost his bid to the Los Angeles Board of Supervisors. Of the 80 Assembly seats up for election in 2022, 23 are sending new members to the Capitol. And suprising no one, the Democrats retained their supermajority status. Leadership of the Assembly will also transition in 2023. Asm. Robert Rivas was elected to be the next Speaker of the Assembly, beginning July 1. Rivas’ trek to become Speaker started in May when he challenged current Speaker Anthony Rendon during a Monday afternoon floor session. The caucus met for six hours that day with no vote being taken. Two days after the November election, the caucus met again for another six hours. However, this time a vote did take place and a ‘peaceful’ transition of power was agreed to, which allows Rendon to serve until June 30, 2023. 2023 will also bring drastic change to the budget. The State of California had record surpluses the last two years, thanks to significant funds from Congress and capital gains tax revenue. These surpluses resulted in the triggering of the Gann Limit, which required the state to return money to taxpayers. According to the Legislative Analyst’s Office (LAO), that will all change in the 2023-24 fiscal year with the state facing the possibility of a $25 billion deficit. Even though Gov. Newsom and Legislature have done a good job building the rainy-day reserve fund, the focus during this next budget cycle will not be on district goodies, like skate parks and community pools, but on how to minimize the cuts to social programs and education. This is a stark difference and a bitter reality for the new members. If the election and the budget are foreshadowing the 2023 legislative session, then we can definitely expect it to be a doozy! ■

Understanding Food Prices

and Where They’re Headed

By Dr. Ricky Volpe, Ph.D.

Cal Poly San Luis Obispo Agribusiness Department

In 2022, the United States saw food price inflation reach levels not seen since the 1970s. Consumers don’t have the luxury of buying less food when food prices increase, and therefore food price increases have real economic impacts on American households. According to the United States Department of Agriculture (USDA), grocery spending in real terms has increased by an average of about 0.8% every year since 2000. But it increased by 4% in 2020 and 2.7% in 2021. Accordingly, during this time, the share of household income spent on food in the U.S. ticked up, reversing a trend of increasing food affordability since the post-World War II boom years. The food expenditure numbers are not yet available for 2022, but we are on track for grocery prices to increase by about 10% over 2021 levels, compared to an annual average of about 2% since the turn of the century. This will almost certainly have implications for food access and food insecurity in the U.S. Everybody from consumers to folks in the food industry want to know: Has this wave of inflation finally crested, and when will food prices return to normal?

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To understand where food prices are headed, it is important to understand where they stand right now. The Consumer Price Index (CPI) is the best measure of national food price changes. To nobody’s surprise, the prices in most food categories remain considerably higher than they were one year ago. For some categories, including eggs and soybean-based oils, the 12-month percent changes are at or near all-time records. But the trajectory of prices in the last three months of data, from July to October, is more promising. For most categories prices are nearly flat, and prices for beef, milk, and fruit have fallen. We are

still seeing strong inflationary pressure for eggs, which have been severely impacted by the avian influenza, and fats and oils, which are a function of oilseed prices and have been affected by the conflict in Ukraine.

Looking ahead to 2023, some of the key inflation drivers of 2022 are abating, others remain doggedly persistent in their impacts of the food supply chain, and new concerns are emerging on the horizon. The Producer Price Index (PPI), which measures national prices paid by companies within the supply chain, is helpful for understanding where retail prices are headed. The story told by the PPI numbers is a mixed one. On one hand, the prices for goods and services that are central to food price formation are almost uniformly much higher than they were one year ago. This suggests that costs remain high for food companies throughout the supply chain and that transportation, storage, and raw and intermediate goods are continuing to

apply inflationary pressure. For every PPI shown in the charts, two things are true. First, the 12-month percent change in September 2022 is higher than the average 12-month change since the pandemic began, meaning that costs remain higher than normal. But second, the maximum 12-month change is behind us, and therefore upward cost pressures have begun to subside. With the current situation in mind, USDA forecasts food-at-home, or grocery, prices to increase 2.5 to 3.5% in 2023. This is a significant fall from 2022 levels, though it reflects inflation higher than the historical average. Our discussion begins with the reasons why we can expect food price inflation, if not the prices themselves, to come down in the coming year.

Perhaps the most important factor in relieving food price inflation is lower energy prices. The food supply chain is energy intensive and higher energy costs drive ripple effects through every sector of the food system, from production, to manufacturing, to transportation. Crude oil prices remain high but the price per barrel is down 24% from the high in June 2022. This translates into significant relief in operating costs that will filter through to retail prices into 2023 and beyond, barring another spike.

The food manufacturing sector was hit particularly hard by COVID-19, with plant shutdowns occurring regularly through 2020 and 2021 due to labor shortages and safety concerns related to the pandemic. Shutdowns and reductions in capacity resulted in shortages and price hikes for foods ranging from beef products to breakfast cereals that continued into early 2022. The manufacturing and processing sector has largely recovered from these impacts and productivity has returned to normal levels, alleviating both price inflation and volatility. In an additional spot of good news, ports around the world have cleared up significantly in recent months, with wait times and logjams falling. Ocean freight rates, which in some cases increased about tenfold in 2022, have begun to come back down as well, which has helped reduce the price of imported food.

50.0

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CPI Percent Changes

:Percent Change 10/21-10/22 :Percent Change 7/22-10/22

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-10.0 Food at HomeCereals and Bakery Products MeatsBeef and Veal Pork Poultry Eggs Dairy MilkFresh FruitsFresh VegetablesFats and Oils

Rounding out positive news for food price movement, the outlook for domestic grains and oilseeds, the fundamental building blocks of the food supply chain, is strong. Yields are up for corn and soybeans, and while total wheat production is slated to be flat or even slightly down, exports are also expected to decrease, leaving the domestic supply unchanged going into 2023. Looking ahead to 2023, the World Agricultural Supply and Demand Estimates forecast corn and wheat prices to be flat, animal feed prices to be down about 14%, and soybean oil prices to fall slightly. Some commodities, such as sorghum and barley, are expected to increase in price, but the current outlook is not a recipe for strong inflationary pressure from commodities.

Transportation and labor costs have driven food price inflation in the U.S. for years, but their impacts accelerated with the onset of the COVID-19 pandemic. The shortage of truck drivers in the U.S. continues to worsen in most parts of the country, and average driver age continues to increase. This has translated into challenges for food companies to find transportation, which is an acute issue for highly-perishable foods. According to the USDA Agricultural Market Services, the incidence of refrigerated truck shortages has increased by more than 50% since 2019. As a result, truck rates have increased considerably, amplifying costs as food moves through the supply chain from farms to factories to supermarkets. Long haul rates increased 70% in the U.S. between the first quarter of 2012 and the first quarter of 2022. As points of comparison, the food-at-home CPI increased 19% over that same time, while the all-items CPI, which measures the average prices of all goods and services in the economy, increased 25%. Labor remains a challenge for food companies across the spectrum of the supply chain. According to the U.S. Census of Business, separations have outpaced hirings, on average, for producers, manufacturers, and retailers since the pandemic began in 2020. This has translated into higher turnover, which is costly and problematic for firms. Independent supermarkets throughout the country remain understaffed, which in many cases means that managerial employees are carrying out tasks typically designated for entry-level staff. As workers increasingly demand flexible schedules and the ability to work from home, hiring and retaining employees is projected to continue to be problematic throughout the food sector, and this will continue to drive up operating costs.

There are additional factors with the potential to affect food price inflation in 2023 and beyond, but quantifying their impacts at this point is guesswork. The war in Ukraine continues to affect international commodity markets. The U.S. is not a major importer of grains from that region of the world, but the extent to which Ukraine is able to export wheat during the conflict directly affects the global demand for U.S. wheat, and therefore the domestic price of cereals and bakery products. Ukraine and Russia are also major exporters of cooking and vegetable oils, and this is a major factor behind the surges in soybean prices in the U.S. and the resulting inflation for fats and oils in the supermarket. The war has also disrupted global metal and fertilizer markets, which has caused shortages and price spikes for many materials vital to the food supply chain, including aluminum. The resolution of the war in Ukraine, when it takes place, will initiate a process that will gradually alleviate inflationary pressures on various food prices in the U.S.

Manufacturing PPI Percent Change, 9/21-9/22

20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

Food ManufacturingRetail Bakeries Grain & Oilseed Manufacturing Flour Milling & Malt ManufacturingFats and Oils Refining Sugar & Confectionery Products...Breakfast Cereal ManufacturingFrozen Food ManufacturingFruit and Vegetable CanningDairy Product ManufacturingSnack Food Manufacturing

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Industry PPI Percent Change, 9/21-9/22

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Water Transportation Deep Sea Freight transportationRail TransportationLine-Haul RailroadsAir Transportation Domestic Nonscheduled Air Freight Services...International Nonscheduled Air Freight Services... Inland Water TransportationTruck TransportationGeneral Freight TruckingSpecialized Freight TruckingWarehousing and Storage Refrigerated Warehousing and Storage

Finally, severe weather, exacerbated by climate change, is arguably the single greatest x-factor shaping food price inflation moving forward. The drought in the western U.S. has now become the continental drought, as drier conditions are affecting agriculture markets throughout the country. Water levels in the Mississippi River have fallen so low that barges are unable to travel on it, limiting the options for bringing grains and oilseeds to the port of New Orleans. This primarily affects U.S. exports and further tightens the global food supply during an already challenging time. And domestically, this adds more stress to our truck and rail sectors as the crops grown in the Midwest, which in many cases have already exceeded storage capacities, must be moved by other modes of transportation. In California, acreage for crops including tomatoes, rice, citrus fruits, and more has already been scaled back due to drought conditions and further reductions are expected in 2023. Throughout the western U.S., drought conditions have driven up alfalfa and hay prices, which, in turn, increases costs for ranches and dairy operations. And the U.S. is hardly alone in facing extreme weather that affects crop production. The past year brought floods in Australia, an unprecedented drought in China, a summer heat wave in most of Europe, and more.

Severe weather, conflict, and supply chain bottlenecks in any region of the world affect imports, exports, or both. In today’s interconnected global market for agricultural commodities and food products, this means that these events, even those taking place halfway around the world, have ripple effects for food prices domestically. Many of the major factors that drive record food price inflation in the U.S. are subsiding, but the global food market is tight and under a great deal of stress from multiple angles. Currently, we are on track for a significant reduction in food price inflation in U.S. supermarkets in 2023, which will bring relief to millions of households. Food companies, from growers to retailers, continue to make investments in automation, renewable energies, controlled and indoor agriculture, and traceability that will help to ensure the long-run sustainability of our food system. But in the short term, it is still quite possible that heavy inflation will rear its head again. ■

CGA gives me a voice in Sacramento that I otherwise wouldn’t have. Through CGA I’ve been able to lobby directly with elected officials and their staff on issues that effect my business.

RICK STEWART, PRESIDENT SUSANVILLE SUPERMARKET ONE STORE – SUSANVILLE, CA

Want to learn more about the benefits to CGA membership?

Contact Sunny Porter to learn more and start the conversation with your fellow industry peers at sporter@cagrocers.com or call (916) 448-3545.

Foods Etc. – Dennis Darling

to Serve as 2023 CGA Board Chair

By Jessica Love

During the California Grocers Association annual meeting on November 30, outgoing board chair Renee Amen passed the gavel to Dennis Darling, who will serve as the next CGA Board Chair for 2023.

Darling and his wife, Ruth, have owned and operated Foods Etc. in Clearlake and Susanville, California for 25 years. At the end of 2024 the couple is retiring, and their daughter and son-in-law will take over the business. In the meantime, Darling is going to step back from the day-to-day operations and take on a more strategic role while he serves as CGA Board Chair.

As a longtime owner of an independent grocery store, Darling is especially familiar with the grocery industry from the perspective of an independent business. He has experienced many challenges over the years, most recently with the challenges of COVID compliance and labor issues. But Darling also believes wholeheartedly in the benefits of running his own business, noting that it’s been a rewarding experience that allowed his family to be an integral part of the communities they serve. Prior to his membership and work with CGA, Darling was active in the California Independent Grocers Association (CIGA), which represented the voice of independent grocers for many years. In 2013, Darling and Bob Parriott began working with CGA to discuss a merger. CIGA was struggling with leadership but had funds to contribute, and CGA was eager to add more independent operators to its membership. Thanks to the work of Darling and a handful of others, the two organizations officially merged in mid-2014. The move strengthened the grocery industry in California, boosting advocacy efforts and creating a more diverse member pool. Since then, CGA has been a strong voice for independent grocers in addition to larger chains and companies. “In the eight years since that merger, funds from CIGA have been used for education in helping independent grocers with training and compliance,” Darling said.

CGA also established the Independent Operators Committee, which Darling said has been integral to ensuring small independents are well-represented within CGA. The committee meets twice a year and supports independent grocers with issues like compliance, hazardous waste disposal, workers’ compensation, and labor and employment issues. “It’s been a great merger. I think it’s been really good for both entities and frankly I don’t even really think about it much anymore, we’re just one family,” Darling said. “Ron is excellent to represent everybody. Not just the small chains, but the independents.” As the grocery industry faces ongoing challenges from inflation to labor and supply chain, Darling expects 2023 to be a busy year. “If we had even one of those at a time it would be very challenging, but to try and deal with them all at the same time has really made the business much more difficult,” he said.

During his time as board chair, Darling also wants to focus more on advocacy at the local level for both chains and independent stores—in addition to CGA’s already active efforts at the state and national levels.

“The independents are really well-positioned to advocate on behalf of the industry at the local level,” he said. “They know who their local elected officials are, they know the sheriffs, they know who the local regulatory people are, and so I think they'll be a big help in that.”

With the support of CGA, Darling is confident all CGA member companies are in good hands. Darling notes the outstanding CGA staff and their efforts in government relations and communicating with members, as well as a successful lineup of trainings and events that are always “first-class.” While there’s a full calendar ahead of Darling as CGA Chair next year, there will also be some fun. Darling notes that CGA’s Independent Operators Symposium will take place in Hawaii in January, an event carried over from CIGA that CGA happily embraced. “Again, I’m just really proud to be part of that and be able to give back to the industry that’s been so good to us,” he said. ■

“The industry has been really good for me and my family, and this is an opportunity for me to

give back,” Darling told CGA. “And

you know what, I just love the idea of being able to communicate with all these different grocers and vendors, too. There are so many outstanding people who are involved in CGA and I’m just really proud to be a part of that group.”

By Jessica Mause

iStock

MIDTERM BY THE NUMBERS

As usual, it’s good to be a Democrat in California. This cycle, however, features a few caveats after November’s midterm elections. While Democrats nationally fared better than pre-election political prognostications and economic headwinds, Democrats’ overall performance in California provided something of a mixed bag.

With a non-competitive race at the gubernatorial level and no compelling statewide candidate matchups, voter turnout in the state underperformed expectations. Those who did vote showed themselves to be concerned about the trajectory of California, distrustful of special interests’ influence in the political process, and upset about the lack of progress on the seemingly intractable problems facing the state. As such, the Democratic Party faced more headwinds than usual.

STATE LEGISLATURE

At the legislative level, the impact of term limits kicked in this cycle with numerous senators and assemblymembers opting to retire early or seek other elected offices. This was also the first cycle in over a decade featuring significant turnover: 24 new members in the Assembly (30%) and 10 new members in the Senate (25%). It wasn’t so long ago that a Democratic supermajority in either chamber was considered a major milestone. Now both chambers contain Democratic supermajorities. The Assembly flirted with a lasting supermajority from 2012 to 2016 before cementing it after 2016. Senate Democrats secured their supermajority for the first time in 2016, lost it from a recall, and then won it back in 2018. In the years since, the only questions surrounding Democratic dominance of both chambers is how large will those majorities be. In the 2022 midterms, Democrats gained two seats in the Assembly, giving them a 62 to 18 advantage. In the Senate, Democrats improved their lead by a single seat, expanding their caucus to 42 members compared with eight Republican seats.

FEDERAL

As mentioned above, Democrats outperformed both historical precedents for an incumbent party in an off-year election and poor economic indicators. However, deep blue California did feature some highly-competitive races in congressional seats. In the end, all incumbents—both Democrat and Republican—won contested races stretching from San Diego (Dem. Rep. Mike Levin) in the south through Orange County (Dem. Rep. Katie Porter and GOP Reps. Young Kim and Michelle Steel), Los Angeles (GOP Rep. Mike Garcia) and the Central Valley (GOP Rep. David Valadao). However, Democrats did take some hits. Sky-high costs of living, record gas prices, surging crime, and the ever-growing homeless population have driven many Californians out of the state and capped overall growth. As a result, the most recent census numbers caused California to lose one of its congressional seats during redistricting. In addition, the party lost a previously Democratic seat in the Central Valley. Thus, while Republicans ended up taking the House of Representatives by a historically slim margin (222-213), California was responsible for two of those gains.

LOOKING AHEAD

The new Republican majority in the House naturally means leadership changes from the Speaker of the House to committee chairs. The narrow GOP majority has created some uncertainty for California Congressman Kevin McCarthy’s path in the race to succeed Nancy Pelosi as House Speaker. That said, the odds still favor that the gavel will remain in the state moving south from San Francisco to Bakersfield. As such, California will continue to play an outsized role in national politics and policy. Pelosi stepping down as Democratic Leader signals a likelihood that she leaves sometime during her upcoming term, triggering not only a special election for her seat but also the likely retirement of some long-serving members of the congressional delegation. Some of Pelosi’s peers appear likely to join her in leaving. These retirements will generate a new round of musical chairs as local and state elected officials seek congressional office. On the Senate side, Dianne Feinstein appears poised to move on in 2024 as well—assuming she makes it through her entire term. Jockeying has already begun behind the scenes for her seat. Any Senate primary is certain to be a competitive and expensive proposition with the potential (again) of two Democrats facing off in the general election. Current congressional members like Adam Schiff (D-Burbank), Katie Porter (D-Irvine), Ro Khanna (D-Fremont) and Barbara Lee (D-Oakland) all are rumored to be looking closely at a race as are several state and local officials.

Adding to the overall sense of drama, should Feinstein vacate her post mid-term, the appointment of her replacement falls to Gov. Gavin Newsom. Newsom previously has pledged to appoint an African American woman to the seat, immediately putting folks such as Rep. Barbara Lee and San Francisco Mayor London Breed on any shortlist.

STATEWIDE

Democratic dominance at the statewide level continued unabated in 2022 with the party sweeping all nine constitutional offices. With no competitive race at the top of the ticket after Governor Newsom blew out the 2021 recall attempt, all eyes turned to the statewide ballot measure contests.

Voters weighed seven statewide measures this year, and they gave corporate special interests big (and expensive) losses in November. The DraftKings and FanDuel sports betting initiative, Lyft’s wealth tax to fund electric vehicles and the tobacco industry’s referendum on the state’s flavored-tobacco ban spend over $200m combined and all were blown out on Election Day. On the contrary, voters showed their progressive bona fides by approving with huge margins a constitutional amendment codifying abortion rights in the state constitution and a passing a huge, dedicated stream of funding for arts education.

LESSONS LEARNED

Continued Democratic growth coupled with the Republican Party’s retreat in the state show no signs of reversing any time soon. However, outside of the partisan outcomes, what did we learn about this year’s electorate and what might we surmise about what the future holds?

Well despite voters’ consistent and vocal concerns about the direction of state and local government, they did little to fundamentally alter the political orientation or policies currently in place. Indeed, in many local races, the electorate remained with the status quo or moved left.

No better city exemplifies this trend than Los Angeles. By all metrics, Los Angeles has gone backwards: its homeless population continues to explode; crime is up; numerous scandals over the past few years have engulfed city officials; cost of living has priced out long-time residents; and repeated audits of recent tax increases show that those revenues rarely go towards their intended purpose. Yet Los Angeles voted in the ultimate insider in former California Speaker and Member of Congress Karen Bass—an elected official deeply embedded in the political machinery of the city. No matter your position on the Caruso versus Bass matchup, her victory hardly represents serious change in city government. On top of that, the council continued its march leftward despite a deteriorating quality of life emanating from those very policies. Second, even with significant losses for corporate special interests (think Lyft, tobacco and the online gaming industry), expect the business community to continue heading to the ballot for relief. With the current makeup of state and local governments, corporate entities have little choice but to take their issues directly to the electorate, which is generally more amenable to corporate issues especially when they involve anti-tax initiatives. Third, expect the cost of elections to continue its upward ascent. Universal Vote-By-Mail in the state has now elongated “Election Day” and the spending that accompanies it to five-plus weeks. Want to know why you’re getting more mail pieces and seeing unrelenting YouTube ads in August? Well, that’s because any voter can now vote in the first week of October, and campaigns need to leave no stone (or vote) unturned in their quest for victory. What was interesting was when Californians voted this cycle. Historically, Republicans used to vote early. Under the Trump administration that dynamic began to flip as Democrats, champions of greater access to the polls and tactics to facilitate that (vote by mail, early voting locations, etc.) cast their ballots early. Late votes left campaigns desperate for money in the final weeks of the cycle. Campaigns spent too much money communicating with voters too early. What does this mean for campaigns in the real world? One thing we can be sure of is that campaign expenditures will continue to rise because of the length of the voting window. As a result, campaigns, especially candidate-funded ones, will need to look to outside sources of spending and independent expenditures to allow them to communicate with voters over the prolonged campaign period. Candidates need to raise more money or rely on more special interest funding to bridge the gap.

FORECAST

California will see continued labor dominance at the state legislative level. The trend in California, and nationally, is toward more aggressive labor positioning both in the workforce and aiming to dictate how corporations run their business models. AB 5 (employee classification), AB 257 (fast food wage and labor council) and hazard pay are all examples of a more aggressive labor movement trying to force companies to implement policies, whether or not the macroeconomic indicators justify them. This dynamic is unlikely to cease, and in fact is likely to accelerate. As such, business interests in the state need to be aggressive in defining bad policies early and going to the ballot when they can to make their cases directly to voters. Unless the business community becomes more aggressive, these bills and political dynamics will proliferate because legislators are not paying a political price for pushing these policies. California politics never fail to produce fireworks. Expect more of the same in 2023. n