Evidence of meeting #49 for Agriculture and Agri-Food in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was prices.
A recording is available from Parliament.
Liberal
The Chair Liberal Kody Blois
Mr. Brander, unfortunately, we are at five minutes. I will give you a few seconds to wrap up if you have any final remarks.
Professor, University of British Columbia, As an Individual
Okay.
I was going to say that I can't rule out structural problems of this type. However, I'm sure that, as far as the inflation premium went in 2022, if there was an effect it was a small one. I think the right tools for dealing with such issues are our competition policy tools. I would favour stronger policy in some areas.
I will stop there as I have already talked enough.
Thank you very much.
Liberal
The Chair Liberal Kody Blois
Thank you very much.
Certainly, our colleagues will have the opportunity to engage with you on questions.
We will turn it over to Mr. Stanford for up to five minutes, please.
Dr. Jim Stanford Economist and Director, Centre for Future Work
Thank you, sir.
Thank you, members of the committee, for the invitation to appear before you today.
I'm Jim Stanford, economist and director of the Centre for Future Work, which is a labour economics think tank with offices in Vancouver and in Australia.
I have prepared a written submission on profits and prices in the food retail sector. Hopefully, you have that in front of you. Let me briefly, in my time, summarize the key takeaways.
In that submission, I use industry-wide Statistics Canada data to evaluate corporate performance in the broader food retail sector. There are a number of reasons I use the aggregate Statistics Canada source rather than individual corporate financial statements, which you are also analyzing in your deliberations.
Number one is that the Statistics Canada survey has standardized definitions of concepts and terms, whereas individual corporate financial reports may have different terms about some of the specific ratios they report.
The second is that the Statistics Canada source aggregates across common calendar reporting periods—quarters and months. Again, this is unlike individual companies, which have different starting and ending points for fiscal years that, therefore, make comparisons more difficult.
Finally, the Statistics Canada data provides a very useful picture of overall trends across the whole industry and over time. The over time part I think is very important.
As for the main findings in my review, there's no doubt that aggregate profits have risen sharply in food retail in Canada since before the pandemic. In the last four quarters reported by Statistics Canada, net income was 120% higher than it was in 2019, the final year before the pandemic.
The profit margin on total sales has also increased notably. The net-income margin—net income as a share of total revenue in food retail—is up by about three-quarters in the last four-quarter period compared to 2019.
Finally, I also show that the actual quantity of groceries bought by Canadians is shrinking. It spiked during the lockdowns for reasons that we all know. It then returned to normal but now has kept shrinking. I would give this example as a worry. It's certainly a response to higher prices, but also a sign of stress and hunger in Canadian households. Canadians are buying less groceries in terms of quantity today than they were in 2019, even though our population is significantly higher.
The commonly heard claim that supermarkets have simply been collecting a constant margin on a growing business is demonstrably false in my analysis for two different reasons. Number one is that the margin was not constant; it clearly grew. Number two is that the business isn't growing. The business is shrinking in real terms. The actual quantity of groceries going through those stores is falling because Canadians can't afford it.
I think it is important to make a point about the entire supply chain in food and other products that we make and buy in our economy. It is certainly true that many of the inputs purchased by supermarkets have become more expensive, but those higher prices, in turn, also embody higher profit margins in many cases. We can be aware of those higher profits, not to exempt the supermarkets from critical attention but to recognize that the problem of excess profit-taking during the pandemic—and all of the stresses and strains after it—is broader than just the supermarkets. For example, there is a lot of discussion about the food processing sector.
I have also looked at Statistics Canada data on food manufacturing, which has also seen a marked increase in net profits since the pandemic, up 47% in the same before-and-after period. It's not as dramatic as food retail, which was up 120%, but it's up a lot, and food processing is a bigger sector in macroeconomic terms than food retail. The impact of those profits in the food processing stage of production on final food prices paid by Canadians is also significant. The same would be true for higher energy profits, which have been a dominant cause of inflation in Canada.
We have done other research—that I cite in my submission—on 15 strategic sectors in Canada's economy, which together recorded a $142-billion increase in their annual profitability in the last four quarters compared to prepandemic. In the other 37 sectors tracked by Statistics Canada, aggregate profits fell.
This is important. This is not an economy-wide phenomenon. This is not something that can be attributed to overall excess demand or to overheating of the labour market, like Mr. Macklem, the Governor of the Bank of Canada, has said over and over again. I don't think that argument would wash with consumers who left Loblaws having paid $200 for a cart of groceries—if someone came up to them and said, “The reason your food prices are so high is that too many of you are working and you have too much money to spend”.
I submit respectfully that a person who said that would get chased out of the Loblaws parking lot. It's clearly not due to Justin Trudeau either. As Professor Brander just pointed out, our inflation and our food inflation are both below the average of other industrial countries.
I wouldn't blame greed on its own. Greed is not new. Greed long predates the pandemic, but greed has had a good run in Canada since the pandemic. After-tax profits in Canada during the pandemic or since the pandemic have increased to their highest share of GDP in history. Amidst a social, economic and public health emergency, companies have done better than they ever have.
How do I understand this? This includes supermarkets but is not limited to supermarkets. You had unprecedented supply chain disruptions with the pandemic, the lockdowns and the breakdown of international transportation. You had consumer panic initially and then uncertainty and desperation afterwards—
February 13th, 2023 / 7:50 p.m.
Liberal
The Chair Liberal Kody Blois
Mr. Stanford, I apologize, but we're at time and then some. I think we'll maybe keep it at that.
We do have the brief, and I know that my colleagues will want to jump in on that.
Liberal
The Chair Liberal Kody Blois
We'll leave it at that.
We now go over to the Union des producteurs agricoles.
Mr. Caron or Mr. Tougas, you have the floor.
Martin Caron General President, Union des producteurs agricoles
Thank you, Mr. Chair.
I am Martin Caron and I am the General President of the Union des producteurs agricoles. I also have a field crop and dairy farm in Louiseville, in the region of Mauricie.
According to many economists, the inflationary period that we are going through right now is unique, due to the fact that the price increase of many products has been caused by supply issues, and not by increased demand. We must remember that the pandemic wreaked havoc in a number of supply chains, both locally and globally, including the food supply chain.
That's when Canadians realized how important it is to have local food production and processing capacity to ensure food security. Inflation created upheaval within our local or domestic food supply chain. During the pandemic, many processing plants had to reduce or halt their production because of COVID‑19 outbreaks. More recently, shortages and increased costs for labour have had an impact on businesses' profit margins within the farming sector. Businesses are having a hard time being competitive, because some of their rivals often have an almost unlimited access to very cheap labour.
The agricultural production sector is no different. The farm businesses that we represent in Quebec have had to deal with a sharp increase in the price of their inputs. In Canada, the price of inputs rose by nearly 30% between the first quarter of 2020 and the third quarter of 2022, according to Statistics Canada's farm price input index. Three of the main production inputs, which are animal feed, fertilizer and fuel, have seen price increases of 56%, 84%, and 82% respectively, which is much higher than the consumer price index. For horticultural producers, the price of flats has also skyrocketed during the same period.
On top of having to deal with rising input costs, farmers are now facing sharp increases in loan payments. We must remember that farmers have invested massively in their businesses over the past few years in order to meet environmental and animal welfare standards. The Canadian agriculture sector's debt has risen more than 30% over the past five years and was sitting at $129 billion in 2021. Over time, we believe that higher rates will generate $5.5 billion in interest payable.
When we know that net farm income is, on average, $6 billion, it is obvious that the increase in lending costs will greatly affect the profitability of many businesses over the next few months. Because of their high debt load, next-generation and new businesses will be particularly hard hit by increased interest rates.
Despite this difficult situation, we believe that the agri‑food sector hasn't done too badly, particularly for consumers. Even though the price increase of food is slightly higher to that of the consumer price index, i.e., 15.9% compared to 11.9% since the beginning of the pandemic, this increase is still much lower than the increase in farm input prices during the same period, which was 30%.
That said, we are not out of the woods yet. According to economic forecasts, interest rates will remain high over the next 24 months, which will maintain pressure on farm businesses' margins. What's more, labour issues, both in terms of supply and cost, will continue to dent the competitiveness of the farming and food processing sector.
To try and alleviate the situation, the government should provide the sector with the support it needs, such as temporary ad hoc assistance, as the United States has done. It has to keep the interest‑free advance at $250,000 for the advanced payments program. It should also reimburse producers who have had to pay the 35% surtax on Russian fertilizer. Moreover, the government should put measures in place that will allow farm businesses and food processors to enjoy competitive labour costs. Finally, the government should extend access to the Canada emergency business account for Canadian businesses, which will come to an end in 2023.
Finally, the government must support a code of best practices for distributors in order to ensure the fair distribution of revenue between the various stakeholders of the agri‑food sector. This will ensure that the consumer pays a fair price for his or her food. Ad hoc assistance and the measures we are requesting will help with the financial impact that is hitting farm businesses, which are having to deal with historic increases while ensuring a supply of food for our population.
Thank you.
Liberal
The Chair Liberal Kody Blois
Thank you very much, Mr. Caron.
We will now have a question period, starting with the Conservatives.
Ms. Rood, you have the floor for six minutes.
Conservative
Lianne Rood Conservative Lambton—Kent—Middlesex, ON
Thank you, Chair.
Thank you, witnesses, for being here this evening.
Last week I had a chance to question Metro about the allegations of unfair business practices, such as charging farmers a fee to even be able to sell their products to a grocer, or for having their products rejected, or for having to wait to have their trucks unloaded by the grocer. What I heard from farmers was corroborated by the Canadian Federation of Agriculture. That's also what they're hearing. This is something that doesn't happen in other countries and, frankly, it's embarrassing that it happens in Canada.
I'm going to direct my question to Dr. Stanford. Could you speak to how, perhaps, lower fees and more profits going directly into the pockets of family farmers could benefit domestic food production and pricing?
Economist and Director, Centre for Future Work
Thank you.
I have to start by saying I'm not an expert on agricultural practices and supply relationships with the grocers. I've read reports of these fees and other barriers for smaller producers to have their products made available in major supermarket outlets.
On the other hand, I'm also aware, as one of your previous witnesses indicated, of the strong corporate or oligopolistic power among many food processing companies—not the farmers, but the manufacturers who throw their own weight around, if you like, in trying to extract surplus profits at that stage.
In cases where the supermarkets buy directly from smaller producers, then clearly those fees and other barriers would be a significant barrier to their participation in the retail industry. It would undermine farm incomes, certainly, and likely lead to higher prices for consumers.
Simply doing away with those fees in and of themselves may not lead to lower prices for consumers, given the obvious pricing power of the supermarket chains themselves. This is where I think measures aimed at reducing fees and other barriers on the input side to the supermarket stage of the food retail chain would have to be complemented by measures to try to ensure that those savings were indeed passed on to consumers, rather than ending up in even wider profit margins than we've already seen for the supermarkets.
Conservative
Lianne Rood Conservative Lambton—Kent—Middlesex, ON
Thank you.
You touched on what my next question is. I've spoken to processors. I have a processor in my riding. I recall their telling me that for grocery stores they have to package private label products, which they must sell to the grocers at a lower price. Yet in the stores we see that the canned goods of the name-brand label in this case are not much different in price. You're maybe talking about a few cents less for the no-name brand versus the brand name, yet the processor is forced to sell at a discount to the grocer.
Looking from the outside in, it seems clear that these private labels would actually result in a higher profit margin for the grocers than the brand name.
I'm wondering if you could provide us some insight as to why Loblaws, for instance, may have only chosen to freeze the prices of their in-house brands. As we recall, before Christmas they froze prices of their in-house brands, and the other grocers followed suit.
Could they have chosen to freeze prices on all grocery products for a period of time? Would that have impacted their bottom line?
Economist and Director, Centre for Future Work
Certainly you're right that the supermarket chains have the opportunity to freeze prices on anything they sell. That's obviously within their purview. In this case Loblaws chose to freeze the prices for their own in-house brands, which of course are not made by Loblaws. They are made by other manufacturers and processors, and in some cases the same ones that produce the brand-name products.
I don't have any information from my vantage point on the returns that those processors get from the supermarkets on their brand name versus no-name products, and what the difference in cost of production and quality for the no-name versions of their output would be. But I think it is recognized that no-name brands do tend to have higher profit margins for the supermarkets than the overall portfolio of products.
There were also lots of questions asked, fairly in my judgment, about the significance or meaningfulness of that no-name price freeze anyway, which of course now has been done.
Conservative
Lianne Rood Conservative Lambton—Kent—Middlesex, ON
Thank you.
I'm going to continue.
During COVID, we also saw big grocers pay a wage premium to workers, so they could continue their work. Then, after COVID was gone, we noticed that all three of the major chain stores decided to pull the wage hike around the same time. We've seen a bread price-fixing scandal, and we've seen all the grocery stores put a freeze on their in-house products at the same time. We've seen a lot of things happen at the same time, among the three grocers.
My colleagues and I, along with industry, have been calling for a grocer code of conduct. I'm wondering whether you could comment on why you think they would all do this at the same time. The bottom line is, is this collusion?
Economist and Director, Centre for Future Work
Is that question for me, madam?
Economist and Director, Centre for Future Work
Okay, thank you.
Obviously, there's a specific legal context to the term “collusion”. I will not, as an economist, venture into whether this can be classified as collusion, for legal purposes. However, it clearly represents a concerted interest among, and a coordination of interventions by, these firms.
The issue you raised of wage cuts for grocery store workers, of $2 an hour—the removal of the so-called “hero pay” at virtually the same time across the chains—is obvious evidence of some type of informal coordination, at least among the major supermarkets. It shows that the market power these large companies can exert goes in many directions. It's obviously aimed against consumers. We've talked about how it can be aimed against certain producers, and it can be aimed against their own workers, as a form of monopsony power they have.
Liberal
The Chair Liberal Kody Blois
We're going to keep it right there.
Thank you, Ms. Rood. I gave you a little extra time.
Thank you, Dr. Stanford. I think we got the key element of what you were chasing.
Go ahead, Mr. Drouin, for up to six minutes.
Liberal
Francis Drouin Liberal Glengarry—Prescott—Russell, ON
Thank you, Mr. Chair.
I certainly appreciate the witnesses before us, tonight.
My first question is for Dr. Stanford.
You mentioned the food processing industry's sales have gone up by x percentage, and it's the same thing with food retailers. I'm wondering whether, within that analysis, you have done.... We know the five major food retailers own 80% of the market. Have you done the same analysis with the food processors? Is it a bit more split or diversified than it is on the food retailer side?
Economist and Director, Centre for Future Work
I have not studied what you refer to—concentration ratios, in essence, or what share of an industry's total revenue is captured by the largest suppliers in it. Professor Brander may have some insight on this.
In the food processing sector, I think there's greater diversity of firm size. Some of the food processors are very large—companies such as Cargill or PepsiCo. Some of them are much smaller. Some are producers of niche products. I doubt the concentration ratio is as high in food processing as it is in food retailing, but I haven't conducted research on that, myself.
Liberal
Francis Drouin Liberal Glengarry—Prescott—Russell, ON
Professor Brander, I hate to throw you under the bus, but I'm not the one who did that. You can thank Dr. Stanford for that.
Do you have any comments on that?
Professor, University of British Columbia, As an Individual
No, I haven't studied the food processing sector.
The only other thing I know—and it's not very helpful—is that the extent of concentration varies a lot, depending on the food item. In something like soft drinks, the concentration is very high. In other areas, it's pretty low. It would vary a lot by food item.
I don't know about the aggregate concentration level.
Liberal
Francis Drouin Liberal Glengarry—Prescott—Russell, ON
Thank you so much.
Mr. Caron, thank you for being here with us this evening. It is a pleasure to see you.
You no doubt know that the committee has too often been told that supply management contributes to price increases. Perhaps you have been able to talk with some of your egg producers in Quebec or from elsewhere in Canada, or compare the price of a dozen eggs here in Canada and the price that your friends from Quebec are paying in Florida currently, because some of them might be there right now. It would be interesting to hear you expand on the subject.
General President, Union des producteurs agricoles
We know that there's a price differential for eggs between the two countries: the price is lower here in Canada than in the United States. I think that shows that our supply management is an extremely useful tool. One of the first things to do is to make sure that we have farm businesses in every rural region in Canada. Producers are underpinning this social project in order to ensure a fair price and meet the expectations of our citizens.
I don't know if you have anything else to add, Mr. Tougas.
David Tougas Coordinator, Business Economics, Union des producteurs agricoles
Supply management also guarantees price stability. During inflationary times or a health crisis, supply management allows us to control or limit price variations of products that are supply-managed, which is in the interest of Canadian consumers.