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Corporate profits are driving food price inflation

Remarks to the Agriculture and Agri-Food Committee of the House of Commons

April 20, 2023

3-minute read

The following is a slightly modified version of remarks that David Macdonald, Senior Economist at the Canadian Centre for Policy Alternatives, made to the House of Commons Agriculture and Agri-Food Committee on April 17. A more detailed analysis from October 2022 can be found here.

Canadians want to blame grocery stores for jacking up food prices, and there is some truth in this—but it isn’t the whole story. In order to understand why grocery prices have gone up so much, we have to examine both grocery store financial data but also the ways that corporate profits, more broadly, fit within the inflation picture.

The annual inflation rate will be roughly three per cent by June—that’s because the big month-over-month price increases occurred from February to May 2022. So, as we move through those months this year, we kick those big increases out of the 12-month series—thus lowering the year-over-year CPI.

The major exception is food prices. Their biggest month-to-month jumps were in the fall, and the biggest one of all happened in January 2023. This means that it won’t be until this fall that the rate of increase declines. Prices, however, will remain higher for the foreseeable future.

According to industry data from Statistics Canada, the past three years have been great for the food and beverage store industry. Net pre-tax profit in the industry sat just above $3 billion a year for several years pre-pandemic—but by 2022 they were $6.5 billion, more than double where they stood in 2019.

Net pre-tax profit margins tell a similar story, they stood at 2.1 per cent in 2019 but by 2022 they stood at 3.6 per cent. Put another way, grocery stores used to keep $1 out of every $50 that came in the till, now they keep $1 out of every $28 as profits.

The input costs for the industry have increased by 21 per cent since the end of 2019, an argument the industry loves to repeat loudly. The trouble with this argument is that their revenues have increased 27 per cent over the same period. It's perfectly possible to pass on higher costs to consumers, and then some, resulting in higher profits.

Having said all that, looking exclusively at grocery stores when talking about food inflation is somewhat myopic, and something the upcoming Competition Bureau study falls victim to. It's worthwhile to look at the entire food supply chain.

In a rudimentary supply chain for food prices, you’d want to include grocery stores, food manufacturers and farmers. Margins for food manufacturers were higher in 2020 and 2021, but by 2022 their profit margins went right back down. The agriculture, forestry, fishing and hunting sector on the other hand saw margins utterly crushed during the pandemic. They fell from 14 per cent in 2017 to 3 per cent last year. While grocery stores have managed to maintain higher margins, food manufacturers—and particularly farmers—are seeing no benefit from higher food prices.

Consumers are paying additional inflation dollars, and those dollars are going somewhere—so it's worth tracking where, across the whole economy. Four industries have booked fully half of all inflation dollars as profits—oil & gas extraction, oil refining, real estate and banking. Compared to those big players, the grocery stores’ increased margins are sitting at the kids’ table. The retail industry, more broadly, is contributing little to overall inflation in Canada—but the high price of diesel is hitting the whole food supply chain from fueling tractors to long haul trucks moving food to stores.

So what is to be done? There is no relief in sight on food prices, even if the food inflation rate declines by 2024, it’s unlikely to turn negative—that means prices will remain high and Canadians will continue to struggle to put food on the table.

The GST top up, renamed the “Grocery rebate” in Budget 2023 is a good ad hoc approach. Food banks clearly need better support, but Canada is a wealthy country—there is simply no need to force people to go to food banks to eat. The government should put adequate income supports in place so that low-income Canadians can shop at grocery stores, like everyone else.

The federal government created a pandemic surtax on the banks in last year’s budget. This could easily expand to all companies, to better capture the flood of inflation dollars flowing into corporate profits. The proceeds could help offset the impact of higher prices on Canadians through better income supports—something that Canadians clearly need.

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