Meetings Feeling Katrina's Effect on Gas, Food, Lodging Costs - 2005-11-14

(Originally published September 26, 2005)

As the floodwaters slowly recede from the Gulf Coast, the ripple effect of Hurricane Katrina on pricing nationwide is just beginning to be charted.

In the wake of the hurricane, prices for commodities — including several that directly impact spending by meeting groups or attendees — increased across the board.

However, the good news for planners is that while these higher pricing levels currently are noticeable, some are only modestly higher, and some may not sustain themselves for long.

Katrina did serious damage to the ports of New Orleans and Gulfport, Miss., which are centers for oil refining. That resulted in a severe spike in gasoline prices, pushing up costs significantly for drive-in meetings. At press time gas prices remained well above where they were a few months ago but already had begun to come down.

However, said Tom Kloza, chief oil analyst for Oil Price Information Service (OPIS), based in Rockville, Md., "It's a bit premature to make a reasonable guesstimate on whether the market is correctly reading what will happen with demand.

"There are four refineries down there that haven't operated since Katrina, and we're losing 22.1 million gallons of refined gasoline a day. If consumers return to their pre-Katrina habits, I believe we'll spend most of the fourth quarter searching or a launching pad for a 2006 price spike."

According to OPIS, Gulf refineries that shut down in the wake of Katrina may not fully restore operations for up to six months. Of these, Chevron's plant in Pascagoula, Miss., may come online soonest, since infrastructure safeguards taken in the aftermath of 1998's Hurricane Georges minimized Katrina's damage.

Prices for some food-and-beverage items that are commonly served at meetings also were hit.

The Port of New Orleans is by far the largest U.S. coffee-handling port, with more than 5.5 million square feet of storage space devoted to coffee, and six roasting facilities are within a 20-mile radius.

"An estimated 27 percent of the U.S. stock of coffee was stored in New Orleans, and immediately following Katrina, the wholesale price of coffee increased by 10 percent before falling back a little bit," said Keith Collins, chief economist for the U.S. Department of Agriculture.

The hurricane-affected areas also account for 15 percent of U.S. chicken production. "Prior to Katrina's landfall, the wholesale price for boneless chicken breasts in the Northeast, for example, was $1.32 a pound, but the following week it averaged $1.41 per pound," said Collins. Moving forward, he believes the national average will continue to be higher than before the hurricane.

The industry perhaps most incapacitated by the disaster was the Gulf seafood business. Louisiana, Mississippi and Alabama account for 77 percent of the domestic shrimp supply and 67 percent of oysters. Planners can expect to pay plenty for these standard appetizers. Supply may not be a big issue, because much of the so-called "Gulf" shrimp actually comes from Vietnam; but it is more expensive to import.

Costs for many other food items are expected to rise as well, according to Collins. "The biggest effect on food prices this year is likely to be higher energy prices, aggravated by Katrina," he said. "These are increasing food processing, transportation and storage costs, which will get reflected over time in retail food prices." He maintained, though, that the effects will be modest.

It remains an open question how long any price increases will remain in effect. Observed Collins, "Markets overreact to these kind of losses. There's a saying: 'Buy the rumor and sell the fact.' "

In fact, prices for some food commodities are falling because of the halt of exports from New Orleans, which has created a glut of some items. "The initial effect of the hurricane has been to reduce grain and soybean prices," said Collins.

He added, "We've surveyed crop losses due to the floods in Alabama and Mississippi, but those have been offset by more crops elsewhere, where there has been better weather."

A different kind of commodity, convention space, could present pricing implications for groups that had been scheduled to meet in the damaged areas.

Many cities and facilities are endeavoring to give displaced groups a break on pricing. However, "Certain events that choose to relocate may have to pay a facility rental premium to reserve space on short notice at another venue that can meet their specific facility needs," noted Hans Detlefsen, Chicago-based senior manager of convention, sports and entertainment facilities consulting for HVS International.

According to Detlefsen, to the extent that does not happen, it will not be only because convention facilities are sympathetic to affected groups.

"The convention and meeting industry has large amounts of excess capacity in other markets compared to the demand from events planned in the Gulf Coast," he said. "Exhibit and meeting space capacity throughout the rest of the nation is still relatively high currently due to rapid increases in supply even as demand slowed during the past national economic recessionary period."

It was unclear at press time whether the rising cost of fuel, or any other effect from Katrina, could impact hotel rates.

"I do not think hotels will re-institute energy surcharges — that was not met favorably in the past," said Robert Mandelbaum, director of research information services for PKF Hospitality Research in Atlanta. "However, the impact shows up in surcharges on goods and services delivered to hotels. In particular, the gasoline surcharges that vendors are now charging hotels will put pressure on hotels to raise prices, or they'll experience lower profits."

But John Asselta, senior vice president at Partnership Travel Consulting in Ramsey, N.J., said, "The supply-and-demand ratio is making it a sellers' market. This, not energy costs, is enabling hotels to increase room rates. Energy costs are additional expenses that will play into the overall increase but are not specifically linked to it."