Why do food prices keep rising?

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Jordan Heath-Rawlings One of the biggest stories of last year was the continued rise in food prices. So much so that we now know food bank use exploded last year. The heads of major grocery chains have been called to testify before House of Commons committees. Consumers are struggling to afford the basics and the government has begun work on a so-called Grocery Code of Conduct and is exploring changes to the competition act. And so here in the first week of 2024, the result of all of that a

CLIP: Trip to the grocery store in 2024 will likely still cost more as much as $700 for a family of four.

Jordan: So here we are again, and believe it or not, the authors of the Canada Food Price report that gave us that number say that it’s actually something of a good news story because food prices will only rise a few percentage points this year. And while that happens, the government continues to put pressure on grocers to lower prices and develop a code of conduct. But Canadians are learning just how much profit those grocers are making. So why are food prices really going up? Is it greed? Is it the carbon tax? Is it legitimate expenses for major chains? And if that’s true, then why are profits so high? What might the government do to cool off food prices? And at the bottom of it all, what can we all do to make sure more Canadians can afford to eat this year? I am Jordan Heath-Rawlings. This is The Big Story. Jim Stanford is an economist as well as the director of the Center for Future Work end in December. He testified to the House of Commons Agriculture and AgriFood Committee. Hello, Jim.

Jim Stanford: Hello, Jordan.

Jordan: Why’d you testify to a House of Commons Committee? What are they trying to figure out in Ottawa? Why’d they invite you?

Jim Stanford: Well, this is a standing committee of the House of Commons on food related issues. They’ve had a number of hearings over the last year or so about the problem with high food prices and the challenges that many Canadians are having affording food. This was actually my second appearance. This was like the sequel Jordan. I appeared earlier in 2023 and then they had me back in December for a follow-up conversation about the most recent developments in food prices, the role of the supermarkets in raising prices and how they’re basically making record profits as a result.

Jordan: Can you explain the research you’ve been doing at the Center for Future work into both grocery and grocery profits?

Jim Stanford: Sure. There’s different ways to get the data for individual companies. Of course, you can go and look at how much money they’ve made that’s publicly available in the financial statements that they have to post for any companies that are publicly traded on a stock exchange. So companies like Loblaws, Metro Sobeys, et cetera, you can see their financial reports. They don’t necessarily give you as much data and breakdown as you would like in terms of where the money is being made, et cetera. But they all certainly confirm that the profits of the supermarkets have been rising in the post covid period when we’ve been grappling with inflation. The source that I prefer to use though Jordan, is actually from official government sources. That’s the statistics Canada. They gather data on revenue and costs and profits for companies in all parts of Canada’s economy, including helpfully, the food retail sector. They break it out as a separate industry and that way you get comparable data across all of the companies operating in an industry on a sort of standard timeframe. And I find that a more helpful way to get the big picture of what’s happening in the food retail sector.

Jordan: When you put all that data together, what stands out to you as your top line takeaway? What was your very clear message to the committee? And we’ll get into the reasons for it in a minute, but I’d like to know the highlight.

Jim Stanford: Well, the top line finding was really the bottom line of the company’s business reports. Namely, they are making more money than they ever have and their aggregate profits I project for 2023 will likely exceed $6 billion across the food retail sector. Now, food retail includes those big supermarket chains that I mentioned. It also includes smaller grocers, it includes specialty stores, butchers, bakers, et cetera. But by and large, most of the trend is driven by the big chains. They control around two thirds of the total market, the three big chains. And we have seen a sustained and dramatic increase in profits since the Covid pandemic Before the pandemic. Typically food retailers would make aggregate profits of maybe around two to $3 billion a year, and now they’re going to earn six. So their profits have more than doubled since the pandemic. And this has gone hand in hand with the takeoff of inflation in the whole economy. But inflation’s been particularly bad in food and food related products. So clearly something is translating into profits in the sector. The other thing I found is that food retail has sustained those high profits, unlike many other parts of the economy, this problem of what I call profit led inflation, where companies were able to take advantage of the disruptions and shortages that were associated with the pandemic, push up prices and boost their own profits. That occurred in many industries in Canada in the first year or two after the lockdowns ended, we actually saw corporate profits as a whole surge to their highest in Canadian history as a share of our GDP. But that started to moderate as those shortages disappeared and supply chains were fixed and consumer spending normalized in most of Canada profits have come back down towards those pre covid norms in food retail. However, they’re continuing to grow. And I was surprised to see that 2023 will be the best year ever for supermarket profits.

Jordan: What do the corporations and their leaders have to say about this? They’ve seen the same data that you have. They obviously know that their profits are at a record level. The committee has seen that data. How did they explain themselves? Because they’ve been in front of that committee too.

Jim Stanford: Oh, they have. In fact, just before my appearance in December, the CEO of Metro was up there trying to say the same thing. What they say, Jordan kind of depends on who they’re talking to. And you hear two different messages depending on the audience. If they’re talking to the business community and their own shareholders, for example, in the management discussion and analysis section of their financial reports or on conference calls with financial analysts, when they release their quarterly results, they in a way boast about how profitable they are because they’re trying to sell themselves as a good investment opportunity and they have been a good investment opportunity. They’ve made record profits, they’ve paid out record dividends, they’re taking billions of dollars and buying back their own shares. Now, this has been something that’s popular with the supermarkets is share buybacks as another way of driving the share price up even further. So that’s where they will talk about high margin products and their marketing successes and the bottom line results being higher profits. However, they know that that is not a popular message with the consuming public that’s struggling to get food on the table. And so they change their tune when they go to say, the commons committee, or remember in late 2023, the industry minister gathered the CEOs in Ottawa for a private meeting to talk about food prices and how to bring them down, et cetera, et cetera. In those venues, they try to portray themselves as innocent intermediaries. All they’re doing, they say is passing on the higher costs that they have to pay for their own inputs. That would include the processed foods that they put on the shelves, and it would also include transportation, energy, labor costs, et cetera. Everything else you have to buy when you run a supermarket. And they’ll say, the only reason food prices are going up is because those costs are going up. Don’t blame us in essence. And they have, I would say, a lot of very vague and misleading claims about how their profit margins are low. They don’t actually make that much money. Do

Jordan: We know their profit margins?

Jim Stanford: Oh, sure, yeah. Profit margin is a ratio where you can divide the bottom line income of a company after all their costs, after taxes, et cetera, divided by the total revenue that comes in the food retail sector as a whole. You can see that in the Statistics Canada data that I cited. That’s about 3.5% in 2023. So what that means is for every a hundred dollars that’s spent at the cashier, 3.5, $3 and 50 cents goes to the bottom line profit of the supermarket. Now, the CEOs will claim that’s low. They’ll say it’s a very razor thin margin is a term that they’ve used, which is nonsense. The companies of course don’t make any of that stuff right. They buy it from others, put it on the shelf and sell it. Retailing is always and has always been a low margin business in that regard compared to industries that actually have to design and develop and manufacture and everything else. And the margin itself has increased, has doubled since before covid. So what actually matters for investors is how much profit you’re making relative to the capital that you put into the business. That’s called the rate of profit. And that’s actually more relevant than the so-called profit margin. And in the supermarkets that rate of profit has been very high. In Western, for example, the company that owns Loblaws, their actual rate of profit on invested capital, the return on equity was 26% in the first three quarters of 2023. So that’s a lot more than you or I are making on our savings account. Jordan, I can tell you that much.

Jordan: We have done reporting on all the issues the pandemic has caused to supply chains to the cost of labor to all of that stuff. So I think people would understand that costs have gone up, but we’re not talking about cost versus revenue here, we’re talking about pure profit, right? And that is going up.

Jim Stanford: You only need to have finished high school math. I think Jordan, to understand if all that happened was your cost went up and you passed on those costs in higher prices, then your profits shouldn’t change if that’s all you were doing. And there’s different ways you could measure that, but the reality is the profits have more than doubled and the profit margin has widened. So there is more going on than simply passing on higher costs. And I think there’s been a lot of massaging of the message that the CEOs and those who support the grocery industry have undertaken. There is no doubt that the aggregate profits of these companies have grown dramatically since the pandemic. They’re doing more than just passing on higher costs and they’re doing so in the middle of what for many Canadians is a crisis. There are millions of Canadians who literally sweat to worry about how they can put food on the table, and there’s all kinds of worrying signs. One of the bits of information I presented to the committee was the decline in the quantity of food that Canadians are buying. This is one way that they’re responding to high prices, is they’re actually cutting back on the quantity of groceries they buy. Once you’ve adjusted for the prices, we’re spending more. There’s no doubt about it, but we’re buying less actual groceries. And that worries me because what does that result in? It results in people skipping meals or kids going to school without a good breakfast or families turning to food banks. We’ve seen record numbers of food bank usage. There’s I think lots of consequences for this. We could shrug and say, well, what else do you expect a corporation to do? They’re going to charge whatever the market will bear. They’re in business to make money and as much of it as possible. But I do think that both morally and economically, there should be limits on that. And food is an essential commodity, and I think that Canadians have not been well-served by these companies.

Jordan: Why do you think, and I’m going to use the term greed, deflation now, although you haven’t used it yet. I will point that out, but why do you think that narrative has been so challenged if to your point, anybody with a high school degree can kind of look at the numbers and see what it looks like is going on here?

Jim Stanford: Yeah, it’s an interesting word. Greed. Deflation. I don’t use it myself, Jordan, why not? Well, it’s a bit of a pejorative term, first of all, and in my economics, I do try to, I’ve got views obviously, but I do try to make them as sort of evidence-based and scientific as possible. And the other problem with the term greed, deflation is it assumes that the greed just somehow appeared. And the reality is that that profit motive that drives how corporations act has been there for decades and decades. So it doesn’t really explain what changed after the pandemic. If it was driven by greed and greed alone, why weren’t the supermarkets, which had a very strong market position before the pandemic, why weren’t they jacking up prices before the pandemic? And it’s the unique combination of the disruptions and the supply chain problems and the shortages that allowed the supermarkets to, in a way unleash greed. Greed was always there, but it went to town after the pandemic because of the shortages, because consumers came out of lockdown with empty shelves and had to restock because of the disruptions, because of the confusion. One theory that many economists have put forward is that when overall prices are rising, companies can take advantage of that to sort of disguise their prices. And in another time, someone would look at a price for $7 per head of lettuce and say, what the heck? I’m not paying that. I’ll go somewhere else, but in conditions of broader inflation, then they say, well, I guess everything’s going up, and they sort of swallow it. So lots of reasons how it happened, but it isn’t just greed, it’s greed. Combined with the very strong concentration in this industry, the top three firms controlling about two thirds of it. So that limits competition combined again with all of the unique disruptions after the pandemic. Now obviously, if you believe that corporations are noble and disciplined by the market and just following the laws of supply and demand, you aren’t going to like a narrative that puts some critical attention on the role of corporations in the challenging situations that Canadians have faced since the pandemic. So there has been pushback on that. On the other hand, I would say that in Canada and internationally you’ve seen I think a growing recognition that unusually high corporate profits have played a very central role in the surge of inflation since the pandemic, even our Bank of Canada governor, Mr. Mackle and his team have acknowledged in their most recent statements that corporate pricing behavior is in fact relevant and the old focus that the problem of inflation usually in their view arises from average people having too much money and demanding too high wages. Those are the traditional storylines they now recognize that’s not enough to explain what’s been happening since the pandemic, and they’re starting to pay more attention to the role of corporate prices. So I think it is controversial, no doubt for obvious reasons, but I do think the evidence ultimately speaks for itself and you are seeing more openness to considering the role of corporate pricing strategies, unusually high corporate profits, and what can we do about them in terms of understanding and responding to this inflation?

Jordan: Well, let’s talk about what’s going to happen this year then. And I guess the first thing I’ll start with is the food price report that’s done every December. It comes out of the agriculture division of Dalhousie University. I’ll ask you, first of all, have you read it? What did you think about it and what do you expect for food prices this coming year?

Jim Stanford: Yeah, I did see that report, Jordan. They estimated food inflation would slow down a bit to something. I think if I recall between 2.5 and 4.5% for the year. I think that’s a reasonable forecast. We’ve already seen food price inflation come down quite a bit at peak in late 22 and early 23, it was running at 10 to 11%. By the end of 2023, it had fallen to about 5%, and it will fall a bit further in 2024 in this year. I think many obvious reasons for that. Some of those supply chain problems and shortages that I talked about are being resolved. We’ve seen world agricultural prices come down a lot for commodities, for bulk commodities. We’ve seen world energy prices come down a lot after the price shock after the Ukraine war, and all of that eventually I think will trickle through into more moderate food price inflation. On the other hand, even that number is still going to be higher than the overall inflation rate. So by the end of 2023, overall inflation was down to about 3% in Canada, and it’ll probably fall further this year. So it’s better that food prices are growing more slowly, but they’re still growing faster than everything else. So I do think, again, the slowness with which food prices have responded to the normalization of supply chains and falling world commodity prices, again is cause for concern, and that has contributed to, again, these record profits at the retail stage. They’re paying less for their inputs now, but those are not being fully passed on to consumers. That’s clear.

Jordan: What is the government doing about this? What’s the purpose of these committee hearings and what action might it take? I think probably a lot of our listeners have heard about a potential grocery code of conduct. What would that be and what would it take to get there?

Jim Stanford: Well, the governments and the politicians I think sense the public’s anger about food prices and the fear that comes with worrying whether you’ll be able to put food on the table for your family. So they have been relatively active. These inquiries, you mentioned the competition bureau, the Federal Government’s Competition Bureau has launched an inquiry into the food retail sector that came out with some findings and recommendations. The government has taken some measures. For example, they are moving forward with changes to the competition law that would, I think, in some ways help. One of the things they’re looking at is right now there are these very cozy practices where the supermarkets basically carve up the real estate that is used for major grocery stores, and you can do things like sign a deal with a mall that no other grocer will go into that mall other than you even if you leave the mall. This is the amazing bit or other ways that the access to real estate and retail space is controlled in this kind of cozy oligopoly that they have. So the government’s moving to stop that practice as recommended by the Competition bureau. That’s positive. This code of conduct is a voluntary thing. The government is facilitating it, but the government isn’t ordering it. What it would involve is the major retailers and the food supply sector negotiating kind of a set of fair practices so that there’s more transparency in those supply agreements that result in food processors providing food at a certain price for certain stores. Some of the problems that you have right now is big supermarkets, because they’re so dominant in the market, will actually charge extra costs from the food suppliers for the right to sell their food on that store’s shelves and have other kind of practices that sort lock up supplies rather than a more transparent and more competitive relationship between them. So the code of conduct will not directly involve consumers and it won’t be required. It will be a voluntary code, and it’s not clear yet that the big supermarkets are going to sign on. When I appeared at the comments committee in December, the person before me was the CEO of the metro chain, and he said, for it to work, we need everyone to sign on. And he said that Metro would sign on, but at this point it wasn’t clear whether Loblaws and Sobeys would sign on, in which case the code would lose much of its power. I think there’s some benefit from the code. There are other countries that haven’t, but I wouldn’t expect miracles from it. It doesn’t directly involve the consumers, and it I think is of major benefit to smaller grocery chains and smaller food suppliers. These are the ones who can’t afford those cozy deals that I was talking about, and they would have, I think, a chance to run a fairer business under the code of conduct and that could eventually result in better prices for consumers.

Jordan: So last question then. I mean, what could we do this year to get more affordable food into the stomachs of Canadians? You mentioned people are potentially skipping meals, buying less food. We know food bank uses at an all time high. What’s something practical that we could do early this year?

Jim Stanford: Yeah, I think there’s a number of levers that have to be pulled. Jordan. I think we should have stronger competition laws that can give the bureau more power to, first of all, collect detailed information from the grocery stores, which they don’t have at this point, and publicize it, and then also monitor and when needed step in to improve competitive conditions either by blocking mergers. I mean, these three chains got so big by taking over smaller chains. So a stronger competition authority could have more power to stop those mergers or even to order divestitures a breakup of big companies where it looked like that would help consumers. Another thing that could be done would be to consider excess profit to taxes on some of the companies, including the big supermarket chains that have profited so much from this inflation. We have an excess profits tax already in Canada on the banks and the insurance companies, and I think there’s other industries that have contributed disproportionately to inflation, including food retail that could be targets for that. Then you take the revenue from those graduated taxes on profits and you give it back to particularly low income Canadians who can’t afford groceries. So we did that a bit with that expanded GST credit that the federal government put in place. I think that should be continued and expanded. Another part, of course, of the cost of living crisis. It’s not just what you pay for stuff, it’s how much income you have. And that’s where I think part of the solution in the end is going to be to make sure Canadians have more money. Now, the conventional wisdom would say, well, that’s just going to cause more inflation if you give people the money so they can afford groceries at Loblaws and they’ll just keep shopping there. But the reality is those prices are going up whether our wages are going up or not. So at least we’ve got to make sure that people’s wages, including the wages, by the way, for grocery workers, amazing stories that some of them go to food banks because even some full-time grocery store workers can’t afford to buy at the stores that they work at. So part of the solution is supporting Canadians incomes as well, so that we can keep up with those prices.

Jordan: Jim, thank you for all this. Always a pleasure and I always learn a lot. Here’s to a better year, I hope this year.

Jim Stanford: Thank you very much, Jordan. Thank you.

Jordan: That was Jim Stanford, economist and director of the Center for Future Work, and that was The Big Story. It feels great to be back. We’ve had a wonderful holidays. We’ve taken some downtime. I hope you have too, and we have all sorts of different ideas for you this year. We’re also looking for your different ideas. If you have something that needs to be on our radar this year, please reach out. You can find us on Twitter at The Big Story fpn. You can shoot us an email to hello at The Big Story podcast.ca. Or you can call us six nine three five five nine three five and leave a voicemail. The Big Story is available in absolutely every podcast player and on every smart speaker if you ask it to play The Big Story podcast. Thanks for listening. I’m Jordan Heath-Rawlings. We’ll talk tomorrow.