Food Prices in Canada: How the Supply Chain Works

TORONTO –

In the past year, the CEOs of Canada's largest grocery chains have become familiar faces to lawmakers scrutinizing food prices.

Executives faced questions from MPs and battled accusations of profiteering as their incomes grew.

But according to experts, the main factors behind the increase in food prices in the last two years are global.

“The supply chain that we've depended on for decades has been hit by major shocks over the past five years — COVID, conflict, climate change are the most prominent examples of major global macro stressors — and that's translated into massive inflation. all commodities in the global economy,” said Evan Fraser, director of the Arrell Food Institute at the University of Guelph.

Consumers are acutely aware of rising food costs because other costs, especially housing, are also rising sharply, Fraser said, so food prices have become a symbol of a broader problem.

Because consumers don't understand the intricacies of the supply chain, much of the blame often falls on the retailer, said Michael Graydon, CEO of the Canadian Food, Health and Consumer Products Association.

“People are under a lot of pressure in terms of cash flow. So… they look for blame,” he said. “And that's a bit of a challenge for the whole industry.”

Higher interest rates have moderated inflation since peaking in 2022, but food inflation continues to outpace headlines. The annual core inflation was 3.4 percent in December, while the price of food products increased by 4.7 percent.

Carl Littler, senior vice-president of public relations at the Retail Council of Canada, said factors including the war in Ukraine have pushed up prices and led to sharp increases in food inflation for staple goods, but are still above pre-pandemic levels. .

“There is no going back to status,” he said.

Supply chain

At its simplest, the food supply chain consists of three levels. Farmers or producers on one side and retailers on the other. In between, processing, shipping, and manufacturing companies create everything from packaging to ingredients to food products and buy and sell with each other en route to getting products to the grocery store.

Farmers are “price takers,” meaning the price they pay for what they produce is largely set by global commodity markets rather than negotiated with buyers, said J.P. Gervais, chief economist at Farm Credit Canada.

Companies in the middle of the supply chain, such as processors and manufacturers, also deal with costs such as packaging materials, wages and energy, he said.

“Those costs may not be increasing at the same rate as before, but they haven't decreased for the most part,” he said.

“There's a lot of pressure on margins in the overall supply chain.”

Processors may change their packaging, invest in automation or change recipes to reduce rising costs, Graydon said. But high interest rates make it difficult to invest in adaptation.

Once they've done everything they can to reduce rising costs, processors will turn to negotiations with grocers, Graydon said.

In the past two years, retailers have been “very responsive” to requests to raise prices, he said. This may be partly because retailers have their own brands and are aware of the forces driving costs up.

But Graydon says the concentrated nature of the grocery retail industry means retailers often have more power in negotiations, so the industry is working on a code of conduct designed to level the playing field.

Grocery store

Retailers have borne the brunt of food price controls – and their soaring profits have made them easy targets, although some industry watchers disagreed that the companies were profiting unduly from inflation.

Some of the global pressures affecting other parts of the supply chain also directly affect retailers, said the Retail Council's Littler, such as fuel prices, rising labor costs and interest rates. The rest indirectly affect retailers through negotiations with suppliers.

Price hike requests have increased in frequency and volume over the past two years, Littler said, and depend on determining “how legitimate and how opportunistic” the seller is.

“They can't expect people to operate at a loss or on unsustainable margins. So if they don't accept a reasonable price increase, then they won't get the product,” Littler said.

But by the same token, he says, grocers can't be expected to “operate with no margins or margins cut to the bone.”

Big multinational suppliers of major brands are the main concern about unreasonable demands, Littler noted.

Once a request for a price increase is accepted, the grocer must decide how much of it to pass on to the customer, he said.

Forecast

The good news is that things are starting to normalize along the supply chain, Gervais said, with commodity prices falling and production-level prices stabilizing.

But it may take some time to translate to retail levels, he said, because some costs, such as wages and transportation, remain high.

“We're one big shock away from seeing some market turmoil,” he said.

“But the bottom line is that we've seen commodity prices come down, we've seen the prices that food producers get for their products (decline), we've seen inflation come down.”

According to Littler, food inflation and core inflation will continue to converge as the factors driving food inflation diminish.

“I think we're looking forward to a steady period.”

This report by The Canadian Press was first published on February 9, 2024.