Agriculture Committee on Dec. 11th, 2023

[Eric La Flèche]

Yes. As I mentioned, all taxes that increase costs, whether on carbon, plastic or anything else, will ultimately increase retail prices. It may take a while, but it certainly has an inflationary impact.

As for the dollar impact of the carbon tax on Metro, we'll try to give you a satisfactory answer, but I don't have that information at hand.

[The Chair, Liberal, Kody Blois]

Thank you very much, Mr. La Flèche and Mr. Lehoux.

Mr. Drouin, you have the floor for five minutes.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

Thank you very much, Mr. Chair.

Mr. La Flèche, I'd like to thank you for having agreed to testify before the committee once again. I hope that we'll be able to leave you alone afterwards, at least until the end of this session. For the next Parliament, though, we might decide otherwise.

One of the reasons we are looking into this issue, and previously heard from Metro and its four major competitors, is that they represent an oligopoly. In principle, these five major food retailers share 80% of the market.

I'd like you to explain whether it's a common practice for the industry to announce a price freeze in November. According to Mr. Sylvain Charlebois, the five major players in the industry always announce a price freeze in November.

Has Metro's behaviour changed? At a previous meeting, one of your competitors told us that it would normally announce a price freeze for certain products, but that this time, the price freeze applied to additional products.

I'm trying to understand why the five major retailers announce a price freeze in November.

[Eric La Flèche]

I can't speak for the others, but at Metro, we require our suppliers not to introduce any price increases during a specified period. We will not accept any price increases from our suppliers between November 1 and February 1, more or less. It's a long-standing practice at Metro. I can't speak for the others, but I know that other companies do this as well. However, I don't know which of them do, or the periods for which they do so.

It's because we are busy with things other than negotiating with our suppliers during this period. We want to provide good service to our customers, at the lowest possible prices, and to ensure that our stores are ready for the holiday season, which is a busy time. As I said, it's a long-standing practice at Metro.

Because we won't accept price increases from our suppliers during this period, prices remain stable in our stores, not for products usually found around the store perimeter, like fruit, vegetables and meat, which change every week, but for dry goods. That's good news for our customers, because it keeps the cost of the food basket more stable.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

We spoke at length about the grocery store code of conduct, and I know that Metro is in favour of it. Does the fact that two of the other major grocery players say they disagree with this code worry you?

Are you also concerned that one or more provinces might unanimously decide to introduce their own code? I know that there are soon going to be some meetings on this. If they were to do so, the regulatory framework for your activities would vary from province to province. Is that a concern?

[Eric La Flèche]

It would, of course, be problematic if each of the provinces in which we do business required us to follow different rules. We would prefer an industry-led code subscribed to by all the industry players.

As I said earlier, I hope we'll be able to address the issues raised by those who have reservations about the code. There have been meetings, but no agreement yet. I think we need to continue to discuss it. The lawyers should be able to find legal terminology that would keep everyone happy and make it possible for everyone to subscribe to the code.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

I know some lawyers, and am accordingly aware that things can take a long time. Let's hope that the debate won't take too long and that we can get some answers fairly quickly. After all, it's been two years since we announced that there was going to be a working group and that the industry said that it would be able to come up with an agreement.

I know that there will be discussions between provincial and federal government departments. If over the next few months, the government feels that discussions have dragged on for two years and decides to require you to comply with a code, would you or would you not be in favour of that?

Are you still confident that the industry will come to an agreement?

[Eric La Flèche]

I hope so. I think we're nearly there. People are going to have to redouble their efforts to get it done. I believe it would be a good thing for the industry, and that it would enable us to move on to other things.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

I know that you're under a lot of pressure from the media, but I can assure you that we are just as concerned about monopolies and oligopolies elsewhere in the food sector supply chain. I don't think that governments will end up having to get involved, because I believe in the free market, but they will unfortunately have to do something if a few players were to capture an overly large share of the market. That's one of the reasons we are here today.

I would have liked to have heard that the industry wants a code of conduct, but sometimes all that's needed is a little shove. Thank you for being one of the three major industry players to have agreed to the code. I hope that the other two competitors will come to the negotiation table as soon as possible.

[Eric La Flèche]

Thank you. Yes, we're all in favour of a code.

However, as I've already said, I definitely deny any contention that our industry isn't competitive. On the contrary, our industry is extremely competitive.

[The Chair, Liberal, Kody Blois]

Thank you very much, Mr. Drouin and Mr. La Flèche.

Colleagues, the first part of the meeting has come to an end.

Thank you very much, Mr. La Flèche. I wish you a Merry Christmas and thank you once again for being with us in person.

I will now suspend for a few minutes before we welcome the second witness panel.

[The Chair, Liberal, Kody Blois]

We will resume.

Once again, I would like to welcome the members of the committee.

In the second witness panel this afternoon, we have two representatives of the Association des producteurs maraîchers du Québec: Patrice Léger Bourgoin, its General Manager; and Catherine Lessard, its Deputy Director General. It appears that Ms. Lessard is having some technical difficulty. I hope it can be resolved.

We also have Ron Lemaire, who is President of the Canadian Produce Marketing Association. Mr. Lemaire is also having some technical difficulty, which I hope the technicians can resolve.

Next, we have from the Centre for Future Work, Jim Stanford, economist and director.

We'll have five minutes for each of the opening remarks.

It's going to have to be Mr. Patrice Léger Bourgoin.

Before that, I would like to take a brief moment to note that Mr. Lehoux' grandson is with us today. His name is Édouard, and I believe he is a high school student.

Good afternoon, Édouard. It's a pleasure to have you with us.

I now turn the floor over to Patrice Léger Bourgoin for five minutes.

[Patrice Léger Bourgoin, General Manager, Association des producteurs maraîchers du Québec]

Ladies and gentlemen, thank you for having us here today.

Any attempt to improve food price predictability is considered a risky business at the best of times. However, the extraordinary geopolitical, economic and climatic circumstances we're experiencing these days—including the wars in Ukraine and Israel, sustained interest rate increases and climate events that undermine farm production—significantly undermine reasonable predictability in a context of global supply-demand equilibrium.

However, we believe that there are initiatives that can be introduced to support price stabilization efforts, and I will now describe them.

Consolidation has sharply restricted wholesale channels in the past 30 years or so. Since the number of independent grocery stores, affiliated owners, regional brands and co‑operatives has fallen precipitously, this consolidation has forced the industry to reinvent itself by establishing supplier relations strategies based on billing miscellaneous costs and imposing fines and penalties. This approach has inflated the revenues of retail chains in the food industry. It has also substantially increased suppliers' overheads, obviously at consumers' expense. It would have been very difficult to do that if the food trade industry hadn't become a monopoly over the years.

Now that the damage has been done, it's time to apply some remedies to mitigate the effects of that consolidation.

However, let's make one thing clear: consolidation doesn't necessarily mean competitiveness. Even if the sector is extremely competitive, consolidation has an impact on the sector as a whole. It's very important to point that out.

The code of conduct is a good first step toward resolving the power balance between big, publicly traded companies and SMEs, most of which are family operations. We must not allow the two retail chains whose representatives appeared last Thursday to scuttle this promising initiative. What those representatives said was appalling. We can't support those kinds of assumptions.

Access to a stable local market for fresh fruit and vegetable production is essential to ensuring food price stabilization, since it reduces the number of stakeholders and supply chain costs.

The ability of Quebec's fruit and vegetable producers to compete has been undermined to a troubling degree. While the business environment in Canada and Quebec should be comparable to that of our competitors in order to ensure that local businesses are competitive, that's unfortunately not the case. A study that we commissioned last year, and that was funded by Quebec's Ministère de l'Agriculture, des Pêcheries et de l'Alimentation, yielded a shocking finding: the regulatory environment is undermining the ability of Quebec fruit and vegetable producers to compete against their competitors, particularly those in the United States and Mexico.

A favourable regulatory environment for our sector is a decisive factor in businesses' ability to compete. Local products compete directly with imported fruits and vegetables, as Mr. La Flèche said a few moments ago.

The federal and provincial governments must get involved in the reassessment of risk management approaches for fruit and vegetable producers in a climate change context. All stakeholders clearly need to understand their risk management responsibilities. Wholesalers and retailers also face an increasing amount of risk. Governments need to create an environment conducive to investments that increase risk resilience and the ability to adapt and transform in response to climate shocks.

In conclusion, prices in the fruit and vegetable sector can be stabilized through fairer relationships among producers: family SMEs, the major retail chains and the wholesale industry giants. Greater fairness among producer countries engaged in international marketing, in accordance with their respective regulatory burdens, is becoming essential to ensuring our country's food security. It is unacceptable that fruit and vegetable producers are required to manage a disproportionate amount of risk in the current climate change context.

We would now like to offer a few observations.

First, if the five major food chains fail to comply with the code of conduct, we suggest that an initiative be introduced in the next few weeks leading to legislation that would provide a better framework for commercial relations. Lawyers have been in talks on the code of conduct from the get‑go. Once again, we can address the issues together with the legal experts, but we want to emphasize that they've been involved since the discussions began.

Second, we suggest that the government implement the recommendation your committee made in its grocery affordability report, that the reciprocity of standards be respected for imported products. On that point, Mr. La Flèche said that he looks for the best possible price, wherever in the world it may be. We contend that the Canadian government also has a responsibility to ensure food security for consumers by ensuring that Canadian standards are met for both local and imported products.

We would also like to see the government launch an incentive and support program for technological innovation and automation, as stated in one of the recommendations in that report.

Lastly, we recommend that the government review agricultural risk management programs in partnership with the industry and the Government of Quebec.

[The Chair, Liberal, Kody Blois]

Thank you very much, Mr. Léger Bourgoin.

Mr. Lemaire, we are now going to give you a shot. Hopefully this got figured out.

Why don't you say a few words and we'll see if it works.

[Ron Lemaire, President, Canadian Produce Marketing Association]

Hello everyone.

Thank you for including me. I hope my volume is working for the interpreters.

Is that strong enough for interpretation services?

[The Chair, Liberal, Kody Blois]

We're going to give it a shot.

You have five minutes, Mr. Lemaire.

Go ahead, please.

[Ron Lemaire]

Good evening, Mr. Chair, and committee members.

On behalf of the Canadian Produce Marketing Association, I want to thank the committee for the opportunity to talk about food prices in Canada.

CPMA represents over 830 companies that are growing, packing, shipping and selling fresh fruit and vegetables in Canada, which drives $15 billion within the industry and across the country.

We are a unique entity that addresses the entire food system and the complexity of how fresh produce moves—

[The Chair, Liberal, Kody Blois]

I'm sorry. I'll have to stop you there, Mr. Lemaire.

I think we're having issues with translation. There is no translation....

Now, it's okay, so we're going to keep going.

Go ahead, Mr. Lemaire.

[Ron Lemaire]

Should I start from the top or from where I left off?

[The Chair, Liberal, Kody Blois]

I know my colleagues know your subject matter pretty well, so we'll let you keep going from where you were.

[Ron Lemaire]

Wonderful.

As noted by previous witnesses, there have been excessive cost pressures on both the supply chain and the consumer. While the produce industry is seeing market improvements, we are still seeing parts of our system influenced by global markets and high-cost centres. As we saw last week, the 14th edition of Canada’s food cost report by leading Canadian universities shows projected increases to vegetables and other foods for 2024.

It is critical to understand that the food system is complicated. There are no singular solutions to drive down food prices. Labour costs across the supply chain continue to rise, production inputs remain high, and ongoing high interest rates, a high cost of borrowing and the regulatory burden all play a factor in business. The changing climate is also an ongoing issue. The cost of adjusting our supply chains to meet this challenge is extremely important to recognize.

As some on the committee are aware, I chair a global coalition of fresh fruits and vegetables that is focused on addressing supply chain issues. Earlier this year, we surveyed industry members on the global impact of costs to their business. The numbers are dramatic. While these numbers are improving, they tell a complex story of why Canadians are paying more for their fruits and vegetables. This is what we reported in Canada—packaging up 13%, labour costs up 18%, plant material costs up 16%, cost of crop production inputs up 21%, energy costs on average up 24%, and machinery and equipment up 20%. While retail wasn't included in this survey, I have had conversations with retailers in Canada. Costs in their operations are up as well.

While we are seeing food inflation slowly decline, these impacts continue on both consumers and our sector. Our concern now is declining fruit and vegetable consumption. In Q4 of 2023, we are seeing Canadians' daily consumption drop by a serving. If this continues, our data shows an increased cost of approximately $1 billion annually to our health care system.

According to our numbers, we know that fresh produce typically moves in the opposite direction of the consumer price index, or CPI, and not inflation specifically. When the CPI dropped in October, I would have expected consumption to increase, but it was not the case. Consumers are still reducing consumption, and this is a concern. I think Mr. MacGregor talked earlier at committee about the projected cost of food in 2024 increasing. We are very, very concerned about where this is going.

The Government of Canada needs to look at food as essential and frame policy to support this. The regulatory burden with proposed policy measures on packaging and heating costs are examples of driving up costs through poorly developed policy measures that do not look at the unintended consequences.

Before closing, I would like to note the grocery code of conduct. We have heard a diversity of testimony. As a steering committee member and now interim board member of the code, I can attest to the fact that everyone is working hard to reduce and stabilize food prices. The process of developing a code has made all key industry players talk to each other in a way that has not happened in the past but is positive in terms of moving forward. We may not have a perfect solution yet, but we are years ahead from where we were in 2020. Trade associations continue to work on solutions for all. While there is concern, I know, that not all major retailers are around the table, we are still negotiating. I will tell everyone that it is a negotiation, and we continue to do so.

In closing, we need to take a full food systems approach to finding a solution to food inflation. There is no silver bullet. We have a large geography to navigate. We have diverse urban, rural and remote communities to serve. The path forward needs to recognize all of these elements and consider all of the unintended consequences that could develop through poor policy frameworks.

Thank you for the opportunity. I look forward to questions.

[The Chair, Liberal, Kody Blois]

Thank you very much, Mr. Lemaire.

We'll turn it over to Mr. Stanford for up to five minutes. Then we'll get to questions.

[Dr. Jim Stanford, Economist and Director, Centre for Future Work]

Thank you very much, Mr. Chair, and members of the committee.

Food price inflation has slowed down in recent months, and this is a very positive development, but it remains higher than overall inflation. Food prices increased by 5.6% in the 12 months ending in October, compared to general inflation of 3.1%.

In my judgment, an increase in profits collected at the retail stage of the food supply chain has made a measurable and sustained contribution to those continued high food prices. Supermarkets did not cause the outbreak of inflation that followed the COVID pandemic, but they did make it worse.

I have prepared a submission, which I believe has been distributed to the committee, with updated data regarding prices and profits in the food retail sector in Canada. Let me briefly summarize the main findings.

Based on profits realized in the first nine months of this year, net income in the food retail sector will likely exceed $6 billion for 2023. That's up 8% from 2022 and sets a new all-time record.

Food retailers are now earning more than twice as much profit as they did before the COVID pandemic.

Basic mathematics refutes the claim that you have heard from supermarket CEOs that they have merely been passing on higher input costs to consumers. An industry cannot double its profits if it's merely passing on higher expenses.

Measured as a share of total revenue, the net income margin of food retailers also remains elevated. The sector-wide profit margin was 3.3% of total revenue in the first nine months of 2023, again more than twice as wide as it was in 2019. This profit margin is widely misunderstood in popular discussions about food retailing.

Supermarket CEOs often describe food retail as a low-margin business because final profits are a small percentage of total revenue. This does not mean that food retail is not a very profitable industry, however. The margin merely reflects the fundamental input/output structure of any business.

Food retailers generally do not process or manufacture the products they sell. They simply buy them from suppliers, add a mark-up and sell them to consumers. Their business expenses are limited to functions directly related to the stores they operate. It is thus natural that profit margins relative to total costs, including the costs of those already-made products, seem low.

In contrast, profit margins for other industries that undertake more complex and vertically integrated functions like product development and manufacturing tend to be higher as a proportion of sales.

Businesses, when they are investing capital, evaluate investment opportunities not according to which industry offers the widest sales margin but rather the greatest return on invested capital, and since grocery stores are not a capital or technology-intensive undertaking, profits relative to the scale of capital invested in those stores can be quite significant.

For example, in its latest financial report covering the first three-quarters of 2023, George Weston Limited reported a net income of about $2.7 billion over nine months, up 12% from the similar period a year ago. That may seem small relative to overall revenues, but it's large compared with the invested equity base in the company, which was $13.7 billion at the close of that period. That implies an annualized return on equity over the first nine months of 2023 of 26.4%, so that is a very strong rate of profit by any definition. The idea that grocery stores are a low-margin business is quite misleading.

The sustained record profits in food retail contrast with profit trends elsewhere in the economy. We have seen a decline in overall profits in 2023, which rose substantially right after the pandemic but have moderated since. The same goes, interestingly, for the food processing sector, which also enjoyed strong profits initially after the pandemic that have moderated since.

Finally, I would like to address the suggestions made by some observers that high food prices are caused by Canada's federal-provincial carbon pricing system.

There is no correlation in either historic data or international comparisons between carbon pricing and food inflation. In Canada, food price inflation was higher in years when increases in the national carbon price, which was phased in beginning in 2018, were smaller, so statistically there's actually a negative correlation between changes in the carbon price and food inflation. U.S. food prices grew faster than in Canada on a cumulative basis since the pandemic, even though the U.S. has no carbon pricing system.

I'll leave it at that. Thank you, again, and I look forward to the questions.

[The Chair, Liberal, Kody Blois]

Thank you very much, Mr. Stanford.

We now have Ms. Rood for six minutes.

Colleagues, we're only going to be able to have two rounds of questions, so we'll have the six minutes and then the one afterwards.

Go ahead, Ms. Rood, for six minutes.

[Lianne Rood, Conservative, Lambton—Kent—Middlesex, ON]

Thank you, Chair, and thank you to our witnesses for being with us today.

Mr. Lemaire, it's my understanding that Sobeys and Metro directly participated in drafting the grocery code of conduct, and helped to shape it. I'm wondering if Loblaws, Walmart and Costco were offered the same ability. If not, why would they choose the Retail Council of Canada to represent them instead?