The Grocery Price Riddle

As the budget is tabled in Canada this week, those feeling the pinch from rising food prices aren’t seeing much in store for relief.

Due to the massive consolidation of the global food trade in recent decades, there is no longer any economic linkage between retail food prices and commodity farm revenues. Less than a sliver of farmland is currently used to grow food to feed communities, and it still faces major processing and distribution roadblocks that prevent it from scaling up.

The Food System Stack

The food supply chain is comprised of several layers: grocery stores, distributors, manufacturers, processors and primary ingredient handlers. Most farmland in North America isn’t typically used to produce food.

With some exceptions like legumes, wheat flour, high-fructose corn syrup and canola frying oil, crops are mainly exported in bulk and/or sold for domestic livestock feed, ethanol and biodiesel production. Livestock production and processing is siloed in industrial production facilities designed to handle only one phase of the animals’ growth and the meat packing process.

Food Input Costs

Grocery store giants claim that their costs are going up (although earnings are as well). The variable supply chain costs facing grocery stores are labor, transport, fuel, and ingredient costs.

With the exception of beef cattle, back down through the supply chain to farmers, ingredient prices have been falling. Food processing and manufacturing costs, due primarily to all the new tariffs, are said to have been rising.

Evidence of this is seen in the poor earnings performance of publicly-traded food processors and consumer packaged goods (CPG) corporates lately. Previously-merged companies are breaking apart and laying off thousands of employees in a struggle to restore profitability.

Fuel and transportation costs are stagnant, but labor costs are changing in a hurry. With so much of primary production relying on temporary foreign workers, the government crackdown and deportations are taking away a critical piece of core production infrastructure in North America, leading to upward pressure on wages.

Policy Tools

The struggle for governments to ‘fix’ high food prices is partly due to a lack of useful policy tools for enforcing changes to the current system, which was built in this vulnerable way precisely because it is efficient and cheap. Price controls just lead to empty shelves.

In Canada at least, it certainly appears as though there is some opportunistic price-gouging happening at the major chains, which are private corporations not charities after all. The code of conduct introduced by the previous federal government has been, unsurprisingly, totally ineffective in halting food price inflation.

The lack of government control over food prices also stems from the fact it’s an international trade. Grocery food production costs are rising globally and inflation is happening everywhere, raising the cost of food imports.

Canada is far from self-sufficient in fruit and vegetable production, but technology and climate change are starting to shift the price economics in favor of domestic production (although at the same time, climate change represents a costly new risk). Tariffs, and the consumer sentiment that’s fast-increasing demand for everything local, at least enables those who can afford it to buy more of their food from smaller brands and direct from farms.

Conclusion

There’s long been this conundrum in the local food movement that the best, most nutritious and delicious foods should not only be available to the wealthiest consumers. Rather, it’s hospital patients, school children, and individuals struggling to afford meals who stand to benefit the most from better food.

Economic theory doesn’t always work like the textbooks suggest in industries with extreme levels of consolidation and opaque pricing, even in open markets. The most effective tool that governments have to get food prices down is to subsidize small local producers to scale up, and to invest in new processing capacity right-sized to increase regional food supplies, offering more consumers the opportunity to support local at a more competitive price.