Food prices and political stupidity
False assumptions, stupid slogans, and political grandstanding can have bad effects.
The end of a year is a time for looking back – for review of events both significant and insignificant over the past 365 days (next year it will be 366).
My contribution to our calendar inspired look in the rear-view mirror is a deeper dive into some stupid political grandstanding that has intermittently annoyed me throughout the year. It’s been kind of like a fly buzzing around in my brain. I’ve kept promising myself that I’d swat it with a column, then the fly would land somewhere and stop buzzing for a moment. I’d promptly forget it was there. Then the damn thing would start buzzing again. But the year is ending, so I’ll swat the damn thing.
So what’s been my brain fly this year?
Jagmeet Singh and grocery prices.
I’ll let Singh and the NDP speak for itself. A December 7 NDP press release is typical of the genre. It’s got a long-winded titled: “As Canadians are expected to pay $700 extra on their groceries, Liberals continue to delay tackling corporate greed: Under the Liberals, CEOs are getting richer while everyone else has to pay more.” In it, Singh is quoted as saying:
“Canadian families are doing everything they possibly can to keep up with food prices, but still they’re going up. At the same time, Loblaw CEO Galen Weston thinks his close to 12 million-dollar compensation is reasonable, when his own employees are turning to food banks to eat. It’s not fair.
It’s clearer than ever that the Liberals tactic of asking CEOs nicely to lower food prices isn’t working, and that the Conservatives don’t want to touch these CEOs’ massive profits. Of course, the CEOs getting richer off food prices don’t want more power for the competition bureau or more regulations to make sure prices are fair for Canadians—It’s on the government to look out for the people they were elected to serve.”
The press release goes on to offer the NDP’s policy solutions:
“Outside of bringing the grocery CEOs to committee to answer to Canadians, the NDP fought to get measures into the fall economic statement that would lower food prices and give the Competition Bureau more room to put an end to this out-of-control corporate greed. These measures include more power for the Competition Bureau to crack down on price-gouging and price-fixing and gives further powers to the Canada's Competition Commissioner to keep markets competitive for small-businesses.”
There is a lot to unpack in all of this, but the basic logic track seems to be that:
There is such a thing as a “just price” or “fair price” for food,
The price of food exceeds the “just price” – that food is unfairly expensive,
That the price of food is too high because of greed and profiteering of grocery store chains and their greedy, overpaid CEOs,
That the reason grocery stores chains are able to engage in “price-gouging” is a lack of competition in the retail grocery market,
The government response should be to force large retailers to stop being so big, and
More, smaller retailers would keep food prices lower and return us to a just or fair price.
There are a lot of assumptions baked into this. To deal with them, I’ll have to go through them one-by-one. It’s going to take a little time, but there is really no other way to do this in a fact-based way.
Is there a “Just” or “Fair” price for food?
Singh and the NDP are getting positively medieval here. The concept of a just price by St. Thomas Aquinas in the thirteenth century. Aquinas argued that there was a natural price for every product. He was a little murky on how this price became established, but he was clear on one central fact. Once a just price was established, raising the price was immoral because the seller was taking advantage of the needs of the buyer. By definition, the buyer had more need for the product than the seller. If the seller raised the price of the product, he was taking advantage of the differential in need in a sinfully immoral way. For Aquinas, a just price was a stable price.
The equation of price stability with justice and morality had some validity in a society in which little changed, and sellers were almost always the direct producers. However, those days are long gone. Like it or not, we live in a market economy. If a producer’s costs go up, they must either raise their prices or stop producing. In the case of food retail, Loblaws and the other grocery retail companies are not the producers of the food they sell. Their sales prices must reflect their own cost of purchasing the food (along with their own operating costs). If prices do not cover costs, they quickly lose their ability to obtain food to sell. With that, grocery store shelves and freezers become empty. In a complicated supply chain with thousands of suppliers and fluctuating costs, a just price (defined by stability) will mean that we all end up hungry.
Are food prices too high?
Let’s begin by dropping the word “too” from the question. Any claim that prices are “too” directly leads to the knotty question of what the “right” price should be. With this, we are well on the way to the asserting that there is an arbitrary just price that can be established independently of the cost of production or distribution.
The better question is: are food prices high?
It depends on your temporal frame of reference.
There is no question but that food prices have increased in the past two years at a rate higher than most other commodities and average wages. The price of food such as dairy products, eggs and pasta is a bit of a jolt in the grocery store aisle. However, it should also be noted that prices have not gone up uniformly. The price of some food products has remained stable or, in the case of products such as pork, even dropped.
But two years is a short time horizon.
Let’s be clear about one thing. Overall, relative to our incomes, food in Canada is a lot cheaper than it used to be. According to Statistics Canada, forty years ago Canadians spent 13 percent of their income on food. This year, it is on track to come in at 7.5 percent. In real terms, food is fifty percent cheaper than it was forty years ago. If we go back a hundred years (again, according to Statistics Canada), the average Canadians spent 2.6 times as much on food as they did on rent. Get out your calculator and figure out what your grocery bill would be if food was as expensive today, in relative terms, as it was a century ago.
But there is more.
Not only is our food cheaper today, it is also better. We get strawberries in December and avocados in March. Our diet is safer, more nutritious and incomparably more varied than it used to be.
And not only is our food cheaper and better today. It is more convenient. We buy baked and sliced bread instead of flour. We don’t do our own canning (or growing) of vegetables. Much of the food we buy is pre-cooked. All we have to do is put it the micro-wave – or phone Skip-the-Dishes if pushing a button is too much work.
In actual fact, the food production and distribution system that Canadians enjoy is nothing short of miraculous. From time to time, we should give thanks to the famers around the world, agri-business, and grocery store chains for what they deliver to us at prices that are, in real terms, astonishingly low.
Are food prices high because of greedy corporate CEO’s?
Well, no.
Food prices are low.
But let’s dig just a bit deeper.
There is no question but that grocery store chain CEOs make a lot of money. There is room for serious discussions about whether they are worth it, the equity of income differentials, or how much our tax system should redistribute incomes. Those are all valid, serious, questions. However, the claim the salaries of grocery store CEOs are responsible for “high” food prices is numerically illiterate.
Let’s take one example.
According to media reports, Loblaws CEO Galen Weston earned $11.7 million last year. That’s a lot of money. I have no real problem with the argument that it is too much money for any individual to make. Let’s say we cut Weston’s salary and bonuses to $260,400. This is the salary Jagmeet Singh earns for being a Member of Parliament and Leader of the Third Party, so I am sure he would agree that this income is within the bounds of being fair and just compensation. This would cut Weston’s income by about $11,439,600. In 2022, Loblaws sold $39,398 million worth of food (pharmacy sales and financial services brought Loblaws’ total revenue to over $56 billion, but we’ll just include the food sales in our calculations). If all of the cut to Weston’s salary were applied to lowering food prices, it would result in a drop of 0.029 percent in food costs.
What would that mean for Canadians?
Extrapolating from Statistics Canada household expenditure data, if the households in the lowest income quintile did all their shopping at Loblaws, they would save about $1.43 per year. Households in the most affluent quintile would save about $3.48 per year.
As a strategy for lowering food prices, cutting Galen Weston’s salary is kind of stupid and futile.
Is there a lack of competition in Canada’s grocery retail sector?
As we saw in the NDP press release cited at the beginning of this article (I know, I know, it seems like a long time ago), the call to cut grocery store chain CEO salaries is but one part of Jagmeet Singh’s plan to lower food prices. The other major component is to use the Competition Bureau to make the retail grocery sector “more competitive”. This would mean a larger number of smaller companies in the retail food sector.
I’ll start my analysis of this part of the NDP plan with an observation about procurement. Years ago, when I had the responsibility for managing the expenditure of some small portion of the Saskatchewan taxpayer’s money, the rule was to get at three competitive quotes before buying something. Three was deemed to be a good number for procurement. It was enough to get the advantages of competition between suppliers but few enough that the cost of shopping around was reasonably low. The cost of sifting through a few hundred bids and quotes to compare prices was deemed to outweigh any potential savings. It’s useful to keep this logic in mind when we think about how much competition is ideal. In the case of grocery shopping, comparison shopping between too many stores imposes a cost in both time and money on consumers.
So…
Does the structure of Canada’s retail grocery sector allow a consumer to engage in competitive shopping to get the best deal?
I’ll start from my personal situation. Within 3 KM of our home in Regina there are the following major full-sized grocery stores that sell everything from apples to zucchini:
Safeway and Freshco (Empire)
Superstore (Loblaws)
Co-op
Save On Foods
Walmart
That’s six stores operated by five companies. In addition, there are two free-standing bakeries, M and M Meats, the food sections at London Drugs and Shoppers Drug Mart (Loblaws), a free-standing butcher, and several dozen restaurants. There’s also a really nice locally owned small grocery store called Lakeview Fine Foods, which has the best meat in Regina.
During the week, I’m in Lloydminster. This is a small city of about 40,000 people. It has:
Safeway and Sobeys (Empire)
Superstore (Loblaws)
Co-op
Walmart
Lloydminster also has at least two free-standing bakeries, two butcher shops, two Shoppers Drug Marts (Loblaws) and at least three dozen restaurants.
The fact is that there is significant competition in food in any (even small) city in Canada. In rural areas, there is less competition, but that is the result of a small population rather than corporate concentration. Nationally, Loblaws has about a 28 percent market share. Empire has about 20 percent. Walmart has about 10 percent. Costco is focused on larger cities but has about 8 percent of the grocery market. In addition to these chains with a national presence, every part of Canada as at least one other company with at least 15 percent of their regional market: in western Canada, there is Save On Foods and Federated Co-op, in Ontario/Quebec there is Metro, and in the maritime provinces there is Atlantic Co-op. There are also smaller companies that sell food ranging from London Drugs and Giant Tiger to specialty stores such as bakeries and butcher shops.
In short, the retail grocery sector in Canada is dominated by large companies, but there is quite a bit of competition. What’s more, this competition is open and vigorous. Prices are transparent and comparison shopping is easy.
Do large grocery chains engage in “price-gouging”?
The claim of “price gouging” is simply another variant of the medieval concept of a “just price”. There is significant competition in the retail grocery market. Price is a key component of this competition.
There is another hard truth about large grocery companies. We need them to get food at low prices.
There are two components to this.
The first is the creation of the supply chain. In my local grocery store, there are strawberries from Mexico, grapes from Chile, blueberries from Columbia, oranges from China, lettuce from California, beef from Alberta, cheese from Quebec, and rice from Vietnam. Getting all of this stuff to Regina requires that, at some point in the supply chain, there are large companies involved in collection, transportation, and distribution. This stuff cannot be done by small family-owned businesses – at least on an economical, reliable, and safe manner. If we broke up the large retail chains into a larger number of smaller companies, we would still have large corporations involved. They would just be invisible to the consumer because the concentration would occur at the wholesale rather than at the retail level.
There has to be big companies involved somewhere in the food supply chain unless we want to revert to the dreariness, uncertainty, and high prices of strictly local procurement. This brings us to the second way that large retail grocery companies help keep prices low.
It takes big to negotiate with big on equitable terms.
Loblaws, Sobeys, Walmart, and the other large grocery store companies are tough on suppliers. They are notorious for driving hard bargains. At the same time as the NDP is leading the political charge against rising food prices (with the Trudeau Liberals chiming in with some me-tooism), the federal government is pressuring the retailers to “treat suppliers better”. One way or another, this means paying suppliers more.
The ideal way to create the lowest food prices for consumers is to have grocery retail companies big enough to operate efficient supply chains and drive hard bargains with producers but have enough of big retailers to ensure they compete vigorously for sales.
You know, I think that’s kind of what we’ve got in Canada. I don’t know what the “ideal” balance, but we do have a balance. For example, Loblaws recently had a big fight with Frito-Lay over pricing. Frito-Lay raised its prices. Loblaws refused to buy its products at that price. Frito-Lay backed down. The result? Lower prices to consumers. It took a big retailer to bully a big supplier into submission. This sort of thing could not be done by Lakeview Fine Foods.
Are grocery store profits “too high”?
There are three ways we can think of profits: the absolute dollar value, return on shareholder’s equity, and the profit margin on total sales.
Let’s take a peek at the 2022 financial statements for the two biggest retail food companies: Loblaws and Empire.
In 2022, Loblaws had sales of $56,504 million, of which $39,398 million came from the sale of food. The rest came from the sale of non-food stuff and financial services which are more profitable for the company than food. Loblaws had a profit of $1,783 million. This gave it a rate on return on shareholder’s equity of 15.6 percent and a profit margin on sales of 3.16 percent.
In short, Loblaws is doing pretty well.
Here’s the thing though. Loblaws’ business model is based on high volume, low margin turnover. This means cutting profit margins on food would not result in significantly lower food prices. Let’s imagine that Loblaws cut food prices such that the return on shareholder’s equity was the Bank of Canada interest rate of 5 percent. This would save consumers a total of $1,189 million. Food prices would drop by about 3 percent. Loblaws would LOSE money on the sale of food, with non-food items and financial services accounting for all profits and subsidizing the grocery operations. The average household in the lowest income quintile that shopped only at Loblaws would save $147 dollars per year. It would be more significant than the hypothetical cut to Galen Weston’s salary discussed above, but that’s about the best you can say about it.
Now let’s look at Empire.
This company is more focused on groceries than is Loblaws. In 2022, Empire had sales of $30,162 million. This generated a profit of $745.8 million or a return on shareholder’s equity of 14.9 percent. Empire’s profit margin on sales was 2.46 percent. If Empire cut food prices to bring return on shareholder’s equity to the Bank of Canada interest rate, the average household in the lowest income quintile doing all their grocery shopping at one of Empire’s stores would save an average of $79.85 per year, or just under 22 cents per day.
Don’t spend your savings all at one place.
If we arbitrarily lowered grocery store profits, consumers would get some very modest short-term savings. In the long term, however, my guess is that grocery prices would rise because the retail chains would have no incentive to invest in new stores, warehouses, or equipment. Over time, the shelves and coolers would start to look pretty empty.
What can government do to lower food prices?
In the first half of 2023, the House of Commons Standing Committee on Agriculture and Agrifood took a deep dive into food prices. The Committee heard from 58 witnesses and received 5 written briefs. This resulted in a report titled Grocery Affordability: Examining Rising Food Costs in Canada presented to the full House of Commons on June 13. I’ve linked the report its title – or just click here to access it. The government formally responded to the report on October 13.
The report contained 13 recommendations.
Some of the recommendations would directly have the effect of INCREASING food prices. These include recommendations to increase the balance of power to suppliers in their negotiations with the grocery store companies and ensuring that food imported from other countries meet Canadian environmental and labor standards. These recommendations are not necessarily bad, but they illustrate both the complexity of the issue and the tradeoffs intrinsic to the setting of public policy. There are very good arguments in favor of ensuring agricultural workers in countries such as Mexico and El Salvador get higher wages and improved working conditions, but let’s not kid ourselves. These measures would inevitably lead to higher prices for food in Canada. Implementing these kinds of laudable policies and then condemning Galen Weston when prices rise is just stupid.
Let’s take one specific example of conflicting goals and tradeoffs inherent in one recommendation from the report.
As part of the sanctions package imposed on Russia after that country invaded Ukraine, the Canadian government imposed a 35 percent tariff on fertilizer imported from Russia. The Agri-Committee asserted (likely correctly) that this places some upward pressure on food prices by increasing input costs for farmers. As a result, the Committee’s report recommended removing this tariff. In its response, the Trudeau government rejected this recommendation. Personally, I am glad they did. Some things are worth more than a fraction of a cent increase in the cost of a loaf of bread.
One of the key recommendations from the report – and one that the government seems to be gearing up to act upon – is to “strengthen the Competition Bureau’s mandate and its ability to ensure competition in the Canadian grocery sector.”
If you’ve read this far, you can probably guess what I think of this recommendation, so I won’t belabor the point. What is interesting about it is what the report does not say about competition in other parts of Canada’s food supply system.
Specifically, the report is silent on the issue of the artificial, legislatively created, cartel that restricts competition and sets prices for eggs, poultry and dairy products in Canada. These “supply management” systems result in Canadians paying higher costs for these food products than consumers do in other comparable countries. What’s more, these products been amongst those for which prices have increased the most. In the last two years, the Canadian Dairy Commission ordered that the price of milk increase by 13.1 percent. Statistics Canada reports that the average price of eggs increased by 12.5 percent in 2022. Poultry prices increased by over 7 percent.
My point is not that all of these price increases are unjustified or unnecessary for producers. Instead, my point is that if the object is the lowest price possible for food, and a major means to achieve this is fostering more competition, we should look at more than just the grocery retail sector. In their recommendations on competition, the members of the Agriculture Committee were focused on the movement of the dog’s wagging tail rather than the travels of the dog itself.
Let’s look at just one small example of how government action has helped keep grocery prices just a little higher than they need to be.
New Zealand produces a lot of dairy products, and it does so at a lower cost than do Canadian producers. New Zealand would like to sell some of their milk to Canada. The supply management cartel operated by Canadian dairy farmers wanted to keep New Zealand milk out of Canada.
To make a long story short, Canada and New Zealand signed a Free Trade Agreement in 2018. As part of this agreement, Canada agreed to allow for the importation of a small, set quantity of New Zealand milk into Canada. It was just a little, but it would allow food processors to replace a little of the more expensive Canadian milk with cheaper milk from New Zealand. This prospect upset Canadian dairy farmers, so the Trudeau government (which had just negotiated and signed the Free Trade Agreement) promptly reneged by not processing import applications. No processed applications meant no import permits which meant no cheaper milk coming to Canada. The New Zealanders did not take this lying down. They filed a complaint in accordance with the dispute resolution mechanism contained in the agreement. In September of 2023, the resulting panel ruled that Canada had violated both the spirit and letter of the Free Trade Agreement.
The response of the Trudeau government? A press release promising to continue the fight to keep cheaper New Zealand milk from Canadian consumers.
After all, it is easier to grandstand about Galen Weston’s salary and the alleged greed of the companies that are the public facing part of a long and complicated food supply chain.
So why do I care about this?
I realize, to my chagrin, that I’ve written over four thousand words on this post.
Yikes.
Why did I bother?
It’s not because I’m feeling any sorrow for Loblaws, Empire, or the other big food companies. They are doing okay.
My concern is for us normal folk.
The simple reality is that we are blessed with a food production and distribution system that gives us more abundant, better, and cheaper food than has existed at any other time in the history of humanity.
That’s a fact.
I don’t want simplistic sloganeering and demonization of those running the system to ruin it. That road leads to less supply, higher prices, and sometimes even mass starvation.
It’s happened before.
Here is one example. In the 1780s, the French food production and distribution system was a mess. Inheritance laws had created a large number of very small farms that were incapable of much more than subsistence production. Greedy aristocrats-imposed duties on peasants – such as insisting that the peasants in their locale use the aristocrats’ mills to grind their grain. Restrictions on movement of product made it difficult to get food from one place to another. As a result, local weather patterns could create famine in one area while there were surpluses fifty miles away. It was a mess. Over 85 percent of the population were farmers, and they barely produced enough food to keep people from starving – and they often failed at meeting this low bar.
Then bad got worse. There were two bad growing seasons. Intermittent and localized famines become more generalized. The responses quickly made things a lot worse. People demanded food for a “just price”. If a baker or shop keeper asked for more in order to cover costs, they were often killed, and their business looted or burned. That did not help supply. Anyone attempting to transport food to where it was most needed was at similar risk – having a wagonload of grain was proof that you were an evil hoarder who needed to be punished. Peasants rebelled against the owners of the mills by burning the mills. That made it hard to turn grain into flour. Everyone was busy blaming and punishing those who operated the food supply system – which made it impossible for the system to work. Crop failures in some parts of France was transformed into a great famine, followed by bloody revolution and twenty years of war.
Canada in the 2020s is a long way from France in the 1780s. We are blessed with a food supply system that yields abundance rather than misery. But I worry that simplistic blaming of those running this system for minor hiccups caused by a complex world will lead to policy decisions that will truly screw things up. As I’ve watched Jagmeet Singh’s NDP and, to a degree, Justin Trudeau’s Liberals, posturing about food prices, I hear echoes of past fiascos.
Karl Marx once observed that history repeats itself – the first time it comes as tragedy, the second as farce. Right now, much of our political debate on food prices is still in the realm of farce. Let’s not let it turn into tragedy.
Thanks Mark. I needed that. Clarity on a cliche and emotionally charged issue.