Great. Thank you so very much for the invitation to speak to you today.
Canadians want to blame grocery stores for jacking up food prices. There's some truth in this, but it isn’t the whole story. I’d like to take my time today to examine grocery store financial data as well as the broader inflation picture vis-à-vis corporate profits in Canada.
The annual inflation rate will be roughly 3% by June. Mechanically, the biggest month-over-month price increases occurred from February to May of last year, 2022. As we move through these months this year, these big increases will be kicked out of the annual series, thereby mechanically lowering the year-over-year CPI. The major exception to this will be food prices. Their biggest jump in month-to-month values came over the course of the fall, with the largest one actually happening in January 2023. It won’t be until sometime this fall that the rate declines, but prices will remain high for the foreseeable future.
According to Statistics Canada industry data, the past three years have been a great time for food and beverage stores and that industry. Net pre-tax profits in the industry sat just below $3 billion a year for several years prepandemic, but by 2022 they hit $6.5 billion, more than double where they stood in 2019. Net pre-tax profit margins tell a similar story. They stood at 2.1% in 2019, but by 2022 they had jumped to 3.6%. To put it another way, grocery stores used to keep one dollar out of every $50 that came in as profits. Now they keep one dollar out of every $28 as profits.
The input costs for the industry have increased by 21% since the end of 2019, an argument that the industry has made loudly. The trouble is that their revenues have increased 27% over the same period. It's worth saying that it's perfectly possible to pass on higher costs to consumers and then some, resulting in higher profits.
I think that looking exclusively at grocery stores when talking about food inflation is somewhat myopic, something that the upcoming Competition Bureau study falls victim to. It's worthwhile looking at the entire food chain, not just grocery stores. In a rudimentary food chain for food prices, you’d certainly want to include grocery stores, but also food manufacturers and farmers.
Margins for food manufacturers were higher in 2020 and 2021, but by 2022 those margins had levelled right back off to the levels where they stood prepandemic. The agriculture, forestry, fishing and hunting sectors, on the other hand, saw margins utterly crushed during the pandemic. They fell from 14% in 2017 to 3% last year. While grocery stores have managed to maintain higher margins, food manufacturers and particularly farmers are seeing no benefit from higher food prices.
The additional inflation dollars that consumers are paying are going somewhere, and it's worthwhile tracking this economy-wide, not exclusively in food prices or in the food supply chain. Four industries—oil and gas extraction, oil refining, real estate and banking—have booked half of all inflation dollars as profits. Compared to the big players, higher margins in grocery stores is like sitting at the kids' table. The broader retail industry is contributing little to overall inflation in Canada. You can think of the high price of diesel hitting all along the food supply chain, from fuelling tractors to long-haul trucks moving food to stores.
What’s to be done? Well, there's no relief in sight on food prices. Even if the food inflation rate declines by the end of this year, it’s unlikely to turn negative. Therefore, prices will remain high and Canadians will continue to struggle to put food on the table. The GST top-up, renamed the “grocery rebate” in budget 2023, is a good ad hoc approach. Better support for food banks is clearly needed. Although we’re a wealthy country, there is simply no need to force Canadians to go and get their food from food banks. Adequate income supports should be in place so that low-income Canadians can shop at grocery stores just like everybody else.
The federal government created a pandemic surtax on the banks in last year’s budget. This could easily expand to all companies to better capture the flood of inflation dollars flowing into corporate profits, the proceeds of which could help offset the impact of higher prices on Canadians through better income supports.
Thank you very much. I look forward to your questions.