Canada's food price inflation explained

And, no it is not corporate greed or oligopoly pricing

I watched an episode of The Agenda with Steve Paikin this morning with an outstanding panel discussing what underlies the 10.9% rise in food prices year over year in Canada which is part of the rampant inflation Canadians are suffering under the Trudeau government. Paikin put up a chart of measured food inflation based on October 2022 Statistics Canada data, replicated below

Source: The Agenda on YouTube linked above

The panel included Ian Lee (a professor at Carleton University), Sheila Block (an economist), Sylvain Charlebois (a professor at Dalhousie University), and DT Cochrane, (an economist with a non-profit group lobbying for “tax fairness”).

The four panelists offered differing reasons for Canada’s food price inflation. Sheila Block blamed climate change. Mr. Cochrane blamed corporate profits. Mr. Charlebois more or less supported Mr. Cochrane’s view as did Ms. Block, but Mr. Cochrane also blamed the Liberal government supply management of the dairy industry. Professor Lee pointed to the hard data from Statistics Canada to draw the unpopular conclusion that food inflation arose from a plethora of convergent factors including the war in Ukraine, taxation policy, and rising energy costs but disagreed you could find any material amount of inflation arising from corporate profit margins in the grocery industry despite Ms. Block and Mr. Cochrane stridently arguing corporate profits were a significant cause and Mr. Charlebois more or less agreeing with them.

Surprisingly, I found myself agreement with Sheila Block (but not for the reasons you might think) and Ian Lee, and found the other panelists views seemed to reflect ideology rather than analysis of the facts. That left a lot to unpack.

Let me start with Sheila Block’s climate change reason, which was devoid of any detail except the words “climate change”. Climate change policy, not actual changes in world climate, is perhaps the greatest contributor to food inflation not only in Canada but also worldwide. Institutional stupidity blaming harmless CO2 for “global warming” has resulted in a global shortage of fossil fuels which has in turn driven up costs of oil and natural gas and those costs (as professor Lee pointed out in the episode) find their way into food prices through every stage in the supply chain which, for transportation, relies on diesel fuel and gasoline in particular and energy prices at all stages of farming, processing and distribution including the costs of operating grocery stores. Even a cursory look at European natural gas and oil prices gives you a glimpse of the carnage caused by the fossil fuel shortage - well depicted in this chart from Bison Investments.

The nosebleed prices for fossil fuels (and natural gas in particular given its role in electricity generation) have seen electricity costs in Europe soar, shown in this second chart from Bison Investments. A tenfold increase in electricity costs affects inflation throughout the economy.

I was for many years the controlling shareholder of Dominion Citrus Limited, one of Ontario’s largest importers of fresh fruit and vegetables, and served as both Chairman of the Board and for a time as Chief Executive Officer of that food distributor. It should come as no surprise to anyone that produce spoils and needs to be kept refrigerated for many items, and is shipped in trucks that run on diesel fuel. The costs of refrigeration and trucking are significant costs for fresh produce. A truck containing ~$20,000 worth of produce now costs $9,500 to travel from California or Arizona to Canada, up from $7,500 in pre-pandemic days. That factor alone explains most of the inflation in fresh fruit and vegetables, the bulk of which Canada imports. Throw in the escalation in the cost refrigerated storage, the shipping cost from the Ontario Food Terminal to the grocery store and the costs of storage and handling in the produce section of the grocery store and it is pretty clear that fundamentally stupid climate policies underly much of the food price inflation Canada is experiencing.

Professor Charlebois hit the nail on the head when he commented on the supply management issue administered by the Trudeau government, pointing out that managed dairy prices have been increased twice in the past year with the farm gate price up over 10%. Milk, cheese, ice cream and the whole spectrum of dairy products suffer from inflation caused by government policy, not by some other factor like grocery store profits.

Sheila Block and Mr. Cochrane blame grocery chain profits for food inflation. Let’s unpack that a bit, which is made easy by the fact that Loblaws, Sobeys and Metro are all public companies that publish audited statements. Grocery chains are “pass through” entities operating at low margins with high turnover, and their profits as a percentage of sales revenue is the only possible contributor to grocery prices since all the other costs are what they pay suppliers and their own operating expenses and they work to keep those lower, not raise them. Profit margin reflects their success or failure to control input costs and after tax profits comprise the effect of their price “gouging” (to quote their critics) and corporate taxes, when all things are considered.

Corporate taxes are an interesting issue since, as Professor Lee pointed out, Canada has signed a global corporate minimum tax agreement. If anyone is confused, corporations don’t pay taxes, they collect them and pass them on in price. Any increase in corporate taxes is paid by grocery store customers, increasing inflation disproportionally on lower income Canadians who (like everyone) have to eat and pay a higher proportion of their incomes on essentials like food.

At the end of the day, any complaint about grocery store “gouging” must manifest itself in higher after tax profit margins. Here is a chart of the after tax profit margins of the major Canadian grocery firms since 2019 showing that net income after tax as a percentage of sales has risen to 3.0% in 2022 from 2.4% in 2019. Grocery store profits contribution to food inflation comprises 0.6 percentage points presuming that 2019 profit ratios were “normal”. In fact, returns on capital employed in 2019 were low by any measure but it is inarguable that higher NI ratios made a nominal contribution to the rate of inflation.

It should be obvious, but for clarity and simplicity I will parse out the major causes of the inflation Paikin introduced to start the discussion with the four “experts”. Recognize that high diesel fuel costs flow through all transportation and add to the inflation in the costs of milk, butter, eggs, bakery and cereal products and edible fats and oils all of which suffer trucking costs. Trucking costs contribute to the inflation rates for these products which I estimate at 15% of product cost for dairy, 30% for edible fats and oils and 50% for bakery products, in addition to 90% of the inflation in fresh fruit and vegetables as described above.

Reality is that it is government policies that created inflation - overspending increasing money supply that triggered the inflationary environment, climate policies that drove up the prices of oil & gas which manifested itself in high fuel costs for transportation and higher electricity generation costs flowing through to refrigeration costs, and government supply management policies driving dairy prices north. Profit margins, the favorite whipping boy of left wing politicians, have an nominal impact on inflation comrising 0.6 percentage points of the reported rate as I have shown which translates into between 2.6 and 5.5 percent of the inflation in the individual categories.

By my estimates, government policies are responsible for between 30% and 94% of Canada’s inflation for the foodstuffs shown, and I have ignored inflationary tax policies like the useless carbon tax or corporate taxes both which increase retail prices for everything and impose those costs on the most vulnerable in Canadian society.

Three of the four panelists attacked corporations recommending more regulation and an excess profits tax (in Sheila Block’s case) and only one, professor Ian Lee, pointing out the obvious reality that such approaches will make little difference to inflation and risk driving more capital out of Canada. Canada’s inflation rate is homegrown with the Trudeau Liberals its architects and I see no sign the policies that fuel our inflation will ameliorate as long as Trudeau holds office.