The Decibel - Why it’s so hard to bring food prices down

Episode Date: September 27, 2023

The federal government has been facing intense pressure to reduce the cost of food, as food inflation remains much higher than overall inflation. Some measures have been brought in, but many experts question whether they’ll actually be effective.Michael Von Massow, a food economist and professor at the University of Guelph, joins us to talk about why food prices are still so high, what role the government has, and why this is such a difficult problem to solve.Questions? Comments? Ideas? Email us at [e-mail]

The cost of food has been a big focus recently in Parliament. Our government is going to do everything in our power to make sure prices stabilize. First of all, we shouldn't be stabilizing. We should be lowering prices. Life is miserable, especially for the poorest among us. And his solution is to make it everything cost even more. The leader of the opposition is saying he wouldn't have been there to help 11 million Canadians with the grocery rebate. He wouldn't have been there. Prices are high and Canadians across the country are feeling it.

There's a lot of pressure on the federal government to bring food prices down. But what can the government actually do here? Today, I'm joined by Michael Von Masso. He's a food economist and professor at the University of Guelph. He'll tell us why food prices remain high, the role of grocers and of the government, and why this is a more difficult problem to solve than it might seem. I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail.

Mike, thanks so much for joining me today. Well, thanks for having me. Looking forward to our discussion. Me too. And I'd like to just really start by getting kind of a lay of the land from you. What is food inflation at right now? Food inflation, if you look at the annual number, that's the one that's regularly reported. It was for the month of August, about 6.8% or 6.9% when we look specifically at grocery stores. That reflects price increases over the

past year. What it doesn't say is what's happening more recently. And so if we look at the more recent months, if you look at just the month of August, prices actually went down in the month of August and prices have actually gone down in two of the last three months. So while prices are still up in the past year, and the reality is Canadians are feeling that, the truth is it feels a little bit like prices are moving in the right direction and at least maybe even coming down a little bit, but at least not going up further on a day-to-day basis. So in the store, you won't be seeing those price increases anymore. Okay. Okay. And so you said 6.9%. What is that in relation to general inflation? Well, that's still higher than general inflation, which if I recall,

was around 3.5% or 4% year over year in August. But what's also worth noting is that in the last three months, food price inflation has been below the rate of general inflation. So that food prices, like I said, have decreased two of the last three months, and the average is below what's happening to other prices. So the reason that the food price inflation annual rate is still higher than general inflation is that we had bigger increases over the past year that are still reflected in that annual number. So what's happening in the short run then to make food inflation go down over the past few months? Well, there are a variety of things that are happening. We expect prices to be

a little lower this year, particularly for fresh fruits and vegetables as the Canadian production comes online. We're not paying for it in American dollars, so we're not as susceptible to the exchange rate. We're not trucking it as far. So this time of year, we expect those things to be a little bit cheaper anyway. I also think that we're seeing some relief from the extreme weather events that we saw last winter, flooding in the Salinas Valley, drought and cold weather in Northern Africa and Southern Europe that affected Europe and some spillover effects to here. Maybe we're going to start seeing a little bit of adjustment to the problems that we're having to the war in Ukraine. So a lot

of those factors that have increased food prices have been mitigated to a degree. And the war in Ukraine, that was really affecting wheat prices, right? Because there's so much wheat produced in that part of the world to get it out there, there was all kinds of issues with the supply chain. Yes. So wheat and also vegetable oil. So the Ukraine is a significant export of sunflower oil. So vegetable oils are substitutes. So we saw all vegetable oils, sort of plant-based fats, prices go up. Okay. Okay. So we have this number for food inflation overall, 6.9%. But Mike, do we know specific numbers for specific items? Which food items are actually seeing the biggest changes? Well, we can look and I'll just look here

to see. So pork in the past year has actually come down by 1%. We saw dairy products come down in August. We saw bakery products come down. That's sort of, again, we're getting a little bit of relief from as we adjust to the war in Ukraine. Now, that said, there are still some things that are going up. Edible fats and oils are up 13.1% year over year. Pasta is up 12.8% year over year. So it's more expensive now than it was a year ago. It's more expensive, 12 or 13 now than it was a year ago. It's more expensive, 12 or 13% than it was a year ago. So if you look at the direction, that means pasta was really expensive over the winter. It's come down 3% in August and is still up almost 13% year over year.

So rice is another one, was up a lot year over year, but was down almost 1% in August. So some of these staple carbohydrates are moving in the right direction. So let's talk about what we're doing in response to these prices, Mike. We've seen the Bank of Canada raise interest rates to clamp down on inflation broadly, right? So are interest rate hikes having an impact on food inflation specifically? Well, interest rate hikes aren't really having an effect on food prices to a significant degree. If you look at why we do interest rate hikes, we do interest rate hikes to make it more expensive to get money, to make it more attractive to save money. And so what the

intention is, is to reduce demand for products. So if you're buying a car or a computer or a new phone, all of those sorts of things, we would expect demand to come down because if we're borrowing money to do it, it becomes more difficult to borrow and the option of saving becomes more attractive. So we defer some of those purchases. With food, it's much more difficult for us to defer purchases. We can't say, well, I'm going to put off new food till next month. So while we may adjust what we're eating, we can't reduce food demand. So interest rates by themselves don't do a whole lot for food demand and therefore don't do a whole lot for food prices. So does that make food inflation harder to control than other things? Like if the Bank

of Canada can't use interest rates to cool those prices? Well, exactly. Food inflation is harder to control because, especially as we're seeing now, these are some fundamental factors which are affecting food prices. There's not a lot we can do on a day-to-day basis to stop the war in Ukraine, unfortunately. There's not a lot we can do on a day-to-day basis to stop these extreme weather events that have caused disruptions. And so in the short term, it's much more difficult to control some of these factors that are affecting food prices. Okay, so there's been a lot of criticism against grocers, right, that they're actually responsible for driving up food prices. What have we learned about that recently?

We're hearing a lot of noise around, oh, the grocers are misbehaving and driving food price inflation, which I would argue that they're not to a significant degree. And so the Competition Bureau came out and did a report. In that report, they did not find any definitive evidence that the grocers were contributing to food price inflation, although they made some recommendations. They said, well, we could use more competition, but they didn't say yes, that there's an issue with the grocers. The Bank of Canada also came out and said that grocer margins aren't contributing to food price inflation. So there is some evidence that grocers aren't to blame here.

Okay. Well, let's keep talking about competition, though, because we have a pretty consolidated market when it comes to groceries, right? There are five companies in Canada that control around 80% of the grocery market. There's Loblaws, Metro, Empire, which owns like Sobeys and Safeway. And then we've got Walmart and Costco. What influence does this consolidation of grocery companies actually have on food prices in Canada? Do we know? Well, the answer is, as you said, we don't know. There are people who say, well, that lack of competition is clearly driving food price inflation. And there are others who say, well, that's not the case. I think those big five are

probably closer to 70% of the Canadian market, maybe a little bit more. It's always hard to tell exactly because those share numbers aren't out. If you look in the US, the top five are probably closer to 60% of the market. So we are a little bit more concentrated. Now, you might argue that there's some structural differences. And so the question is, does that concentration lead to efficiencies, which is one of the arguments that the industry will make? We can have distribution efficiencies. We can have purchase efficiencies. We can have administrative or operational efficiencies because we don't need as much

of that head office or we spread that head office over more. They can also buy better, frankly, because they represent a bigger share. They can put pressure on their suppliers to sell them cheaper or to give them other breaks. So some people will say size allows us to achieve those efficiencies. Others will say size makes it easier for them to control a bigger part of the market and therefore make more money. Again, the answer is we don't know definitively. If you look over the past couple of years, the rate of food price inflation in Canada has actually been lower than most of the developed world. And do we have less competition than other countries? Well, we have greater concentration than many other countries. Yeah.

I guess I'm struggling to get my head around this a little bit because it seems kind of like an obvious correlation here that we know that more competition usually leads to better prices for consumers. And Canada's Competition Bureau, right on their website, they say this, right? That, quote, competition drives lower prices and innovation while fueling economic growth, unquote. So I guess, how would more competition not impact prices? Well, for a couple of things. If you look at the Canadian market, yes, there are five players who represent 70 or a little bit more of the market, but they compete significantly for our food dollar. If you look at price matching guarantees, look at the flyers, look at the specials,

look at the structure of the industry, they are competing tooth and nail for our business. The fact that there are fewer players competition for our food dollars between these different players. And we see them responding to that competition. We're seeing a move to more discount. We're seeing some stores changed from mid-level stores to more discount stores because that's where the market's going. So I think we are seeing the industry response. It's worth noting that in the Competition Bureau's report, they said they spoke to one international retailer and said, why haven't you come to Canada? And they said, we don't think we could compete on price in Canada. Yeah. Well, you mentioned that Competition Bureau report, Mike. So I want to ask you about that too, because that report this summer, it did say that there wasn't great competition in our grocery sector.

So I guess doesn't that go against the idea that these five major chains are actually – that they actually do have good competition to compete for our dollar? Well, the Competition Bureau report did say we should have more competition in this country. It didn't say we have found that the have more competition in this country. It didn't say we have found that the lack of competition has raised prices. I think that overall, and I hate to be sort of equivocal here, is the answer is we don't know. Yeah. And we should say here that the federal government has brought in some changes that would allow the Competition Bureau to get more information from grocers. But really, Mike, I mean, it comes back to this point that we don't really know, right? So more information is needed to figure this out. Yes. And so we shouldn't probably be making policy recommendations without a foundation

of some sort of certainty as to what's going on. We'll be right back. What are the issues, Mike, with having just a handful of companies control the majority of grocery stores? Like, it sounds like they could hold a lot of power with that structure. Yep. There's no doubt they do hold a lot of power. And I would argue that they wield that power up the supply chain rather than on consumers. They wield that power to compete with each other. So the big players make it more difficult. And this was highlighted in the competition play. Make it more difficult for smaller chains, make it more difficult for

independents, because they can go to those big processors, those big distributors and say, if you want to have access to 25 or 27% of the market, which is what Loblaws can say, you need to meet these demands. You need to give us this price. You need to give us these terms. You need to pay for shelf space. And so they do have power. And if they take advantage of that power, it gives them a competitive advantage on the other side, gives them an ability to price in a way that draws people into their store. So I would argue that it allows them to be profitable without putting undue pressure on consumers. Okay. Mike, I also want to ask you about Parliament's role here, because we've heard a lot of talk from MPs about wanting to reduce food prices. So what is Parliament's role in increasing the competition here, like in limiting the power of these few grocers that wield this power?

I think the first thing Parliament should do is figure out what's happening. And I hate to keep beating on this theme is make sure we understand, right? You know, Parliament, the federal government recently called in the grocery CEOs, rather than saying, let's talk to the food industry broadly and say, are there things we can do to improve the resilience of the food system, to address some of these long-term issues that we've seen. And so the first thing I would say is let's be straight with Canadians and say, here are the reasons food prices are going up. Here are the things we can control. And here are the things we can't control. And so I would argue that in the big picture, most of this food price inflation was out of the control of either federal or provincial governments. So are there any examples, though, Mike, like from other countries? Like, can we can we look to anywhere else in the world where governments have actually been able to bring in policies that help reduce the cost of food and food inflation? Well, if you look at some countries, India, as an example, large, large population,

so large domestic demand has limited exports of some products in order to keep prices down. Essentially, if you say we're either going to increase the cost of exporting or we're going to limit how much you can export, that increases the domestic supply, reduces domestic prices, it protects domestic consumers. And so it can be an effective tool. The knock on effects are it hurts farmers, right? Because farmers lose a market, their returns go down. And in some cases, they will change their production away from some of those low-priced commodities. So you can have those sorts of things. Because they can make more money doing something else. Doing something else. So we saw that in India. We've seen Argentina do it. We saw

it with Malaysia, with palm oil. Is that something Canada could do? Perhaps. but we are a small country who exports large volumes of wheat. And so we would probably do more harm to our economy than benefit our consumers by doing that limit. We've seen countries try to control or regulate prices. The degree to which that's successful has been mixed and is somewhat problematic. So if you say you can't charge more than this for this product, does that product disappear from shelves because it's not worth carrying anymore? Okay. So honestly, Mike, I mean, it sounds like you're saying there's not a lot that the government can really do here to bring down food prices. You've gone through a whole bunch of things and you don't seem to really think that any of them would work that well. Well, there is no magic bullet that we can do quickly now.

I hate to be the bearer of bad news, but that's the truth. I think there's very little we us having a conversation, not just with the grocer CEOs, but across the industry to say, are there things that we can do to improve the resiliency of our food system? So rather than having all our eggs in one basket, pardon the pun, we would diversify our supply so that if one supply was compromised, either to do a disruption or to an extreme weather event, we would have other alternatives. Finding ways to increase the resilience might not help us between now and Christmas or now and Thanksgiving, but might provide less volatility in the future.

Yeah. So just lastly, Mike, I mean, it seems like food inflation is going down in recent months. Do you think that this will continue? When can people start to see some relief here? Well, we are starting to see some relief, as we said at the outset, right? Prices were down almost half a percent in August alone. Unless things really take a turn for the worst, I would expect similar things in September. And so I think we are going in the right direction here. We can't predict when we'll get another extreme weather event. We can't predict what the weather will be like in California and Northern Mexico this winter in terms of supply. But some of the fundamentals that we can look at and say tangibly now says the news is likely better in the next few months.

We'll be watching for it. Mike, thank you so much for taking the time to speak with me. Thank you for having me. That's it for today. I'm Mainika Raman-Wells. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show.

Adrian Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.