Agriculture Committee on April 17th, 2023

[The Vice-Chair, Conservative, John Barlow]

Thank you, colleagues.

Thank you for being very patient, Mr. Riel. I appreciate that very much. Unfortunately, we don't control how the House runs itself. Even with the voting app, we can't always be perfect.

Colleagues, before we move on to the witnesses in front of us, we are going to do a little housekeeping. We have the subcommittee report that was sent out to everybody. I just want a motion to approve that subcommittee report, which just outlines our schedule, basically, from now until the end of this session.

Mr. MacGregor, could we have a motion for that? All in favour?

(Motion agreed to)

[The Vice-Chair, Conservative, John Barlow]

Thank you.

To our witnesses, for the benefit of time, what we're going to do, rather than split up the two panels, is have all of our witnesses in one panel, so you'll all be giving your opening statements together. Then we'll have two rounds of questions from the members of Parliament who are here.

That being said, I now call this meeting to order.

Welcome to meeting number 56 of the House of Commons Standing Committee on Agriculture and Agri-Food.

I will start with a few reminders.

Today's meeting is taking place in a hybrid format. The proceedings will be available via the House of Commons website. Just so you are aware, the webcast will always show the person speaking, not the entire committee. Taking screenshots or photos of your screen is not permitted.

Members and witnesses may speak in the official language of their choice. Translation is provided. If there is an interruption in the translation, I will stop you and we'll make sure it is corrected before you proceed.

Before speaking, please wait until I recognize you by name. If you are on video conference, please click on the microphone icon to unmute yourself. Of course, those in the room will be unmuted by the proceedings and verification officer.

To our witnesses, especially those on video, please speak slowly and distinctly for the benefit of our interpreters. All comments and questions from the members will be through the chair.

I would now like to welcome our witnesses here for this meeting on food price inflation, pursuant to Standing Order 108(2) and the motion adopted by this committee on October 5, 2022.

From Costco Wholesale Canada Limited, we have Pierre Riel, executive vice-president and chief operating officer of Costco Wholesale Canada and International. Thank you very much for being here. From 1km Foods Incorporated, we have Paul Sawtell.

[Ryan Turnbull, Liberal, Whitby, ON]

It's 100km Foods Incorporated.

[The Vice-Chair, Conservative, John Barlow]

I'm sorry. Thanks, Ryan. I'm trying to go as fast I can to get through this.

From the Canadian Centre for Policy Alternatives, we have David Macdonald, senior economist. Finally, from Farm Credit Canada, we have Justine Hendricks, president and chief executive officer, and Jean-Philippe Gervais, chief economist.

You will all have five minutes for your opening presentation.

Mr. Riel, I believe we'll give you a bit of an extension, to six minutes. I think we can stick to that. We'll start with you for your opening comments, please.

[Pierre Riel, Executive Vice President and Chief Operating Officer, Costco Wholesale International and Canada, Costco Wholesale Canada Ltd.]

Good evening, Mr. Chair and members of the committee.

My name is Pierre Riel. I am the Executive Vice President and COO for Costco Canada's operations and Costco International.

I appreciate the opportunity to speak with your committee today on food price inflation, a topic that is important to Canadians and to Costco.

I would like to share with you who we are, our mission, our unique business model and our code of ethics. We have a proud 38‑year Canadian history. We have 107 membership warehouses operating in nine provinces and we employ close to 50,000 Canadians. Our Canadian head office is located here in Ottawa.

I was born and raised in Maniwaki, and started working for Costco as a part-time stocker almost 37 years ago. My story is not uncommon, as 99% of management and executives at Costco are promoted from within, starting their careers as hourly employees in one of our warehouses.

Our mission is to offer our members the best quality goods and services at the best possible prices through our unique retail business model. Our presence provides Canadian consumers with a different option. Our business model not only allows us to offer a direct benefit to our members through our low prices but also benefits all Canadian consumers through our very competitive prices.

We operate membership warehouses, which people would usually refer to as stores, and an e‑commerce website. Our members pay an annual fee of $60 for Gold Star membership and $120 for Executive membership.

At Costco, we focus on sales and strive to keep our costs low.

Three core issues have been raised by the committee in its questions to retailers. I would like to comment briefly on each of them.

First, let's talk about food price inflation. Our warehouses offer food and non-food merchandise, as well as pharmacy, optical and hearing aid products, gas, and a food court with our famous $1.50 hot dog. The final price our members pay for food is dependent on many factors at each stage of the supply chain, which includes farmers, processors, distributors and retailers. That price is also affected by global commodity markets, foreign exchange, world events, labour shortages and government regulations. We work every day with our suppliers to reduce costs. It is our role to keep prices low. This is what our members expect from us.

Second, I would like to address the issue of our profit.

Costco's business model is a membership club—our members pay to shop with us and our role is to offer the best quality at the best price. On a worldwide basis, over the last three years 58.5% of our pre-tax profit came from membership fees. Over the last three years, if we exclude membership revenue, our pre-tax profit would be 1.43% of our merchandise sales. Let me be clear, Costco has not sought to increase its profits in light of the current challenges.

Over 15 million Canadians have Costco membership cards in their wallets. They recognize the value in shopping with us. In fact, more than half of Canadians over the age of 18 are Costco members. In Canada and the US, our executive members represent 57% of our membership base and they receive the added value of a 2% reward on all eligible purchases. Our annual membership renewal rate in Canada and the US is 93%, and went up by another percentage point this year. This means our members trust that we offer the right value proposition.

Third, I have a few comments about our focus on our employees.

As one of the most respected retailers in Canada and globally, we owe our success to our ability to attract and retain the best employees in the retail industry. We are committed to paying our employees competitive wages and providing broad health care benefits 100% paid for by Costco. Our starting hourly wage is $17.50. This is above minimum wage in the provinces where we operate, and it is regularly re‑evaluated. In 2019 our average hourly wage was $27.63; it is $29.76 today. We firmly believe these are among the highest retail wages in Canada.

To give you an idea what that means for annual wages, a cashier who has worked full time with Costco for seven years will earn over $70,000.

We know that paying employees good wages and providing benefits helps us minimize turnover and maximize employee engagement. Our employees deserve it.

We live by our code of ethics of obeying the law, taking care of our members and employees, respecting our suppliers, and rewarding our shareholders. By staying true to our unique business model and culture, Costco has continued to succeed, despite sometimes challenging business environments.

In conclusion, we believe that to meaningfully affect the price Canadians pay at the grocery store each participant at each stage in the supply chain has a role to play. I assure you that Costco takes the committee's work seriously, and is committed to ensuring that its Canadian members have quality foods at the lowest possible prices.

Thank you.

[The Vice-Chair, Conservative, John Barlow]

Thank you very much, Mr. Riel. We appreciate your comments.

Now we'll go to Mr. Sawtell from 100km Foods Incorporated. I'm sorry for shortchanging you in your introduction. You have five minutes. Please go ahead.

[Paul Sawtell, Owner, Founder and Chief Executive Officer, 100km Foods Inc.]

I appreciate that. I think 1km Foods would be far more difficult, so I'll stick with 100.

Thank you for your invitation to provide testimony during your investigation into food inflation in Canada.

My name is Paul Sawtell. In 2008, my wife and I founded 100km Foods, an award-winning local food distribution company. Our business was created to bridge the gap between small and medium-sized farms in southern Ontario and restaurants, small independent retailers, institutions and now home cooks as well. We connect a regional network of over 130 Ontario farms and producers with over 500 customers in southern Ontario, ranging from restaurants and cafés to the 2019 NBA champions, the Toronto Raptors. The Toronto Maple Leafs should take note.

Our supplier network is a mix of farms and producers that vary in size, in the products they produce and in the production methods they employ. No one in our network, ourselves included, has been insulated from the challenges that are driving food inflation in Canada. All of us have been exposed to significant increases in the price of fuel, packaging and other inputs over the past two years. Farmers are feeling squeezed, as you have heard in other witness testimony.

In looking at our own data, our average price of vegetables rose by 8% in 2022 versus 2021, which was below the national average of 11%. This may be attributable in part to a shorter supply chain, which keeps the amplification of inflation along the supply chain as low as possible.

While we may be seeing early signs that current food inflation levels are declining, climate change is inextricably linked to future food inflation and food insecurity. This will put at significant risk the Food Policy for Canada's vision of the future of food, which states, “All people in Canada are able to access...[enough] safe, nutritious, and culturally diverse food. Canada's food system is resilient and innovative, sustains our environment and supports our economy.”

It should be noted that BIPOC Canadians continue to be impacted disproportionately. The City of Toronto reports that Black Torontonians are three and a half times more likely to be food insecure than their white counterparts. Food system solutions must be developed through an equity lens.

Climate change and the associated rises in temperatures, droughts, floods, heat waves and changes in rainfall patterns threaten to impact agriculture more than any other industry, and threaten to only increase food inflation and food insecurity globally. It is widely accepted that one-third of all global greenhouse gas emissions are related to food and our food system. At the recent COP27 conference, world leaders acknowledged that the climate crisis cannot be solved without addressing the problems in our food system. However, while the production and distribution of food has contributed to climate change, we have an opportunity to implement food-based solutions that have far-reaching benefits to mitigate it, which will help Canada meet its Paris Agreement obligations and help stem future climate-related food inflation and food insecurity.

Regenerative agricultural practices have been shown to sequester atmospheric carbon in the soil, and the UN Food and Agriculture Organization cites other holistic models, such as agroecology, to be key to a global transition in agriculture. There is also a growing body of evidence that regional food systems can increase food system resilience and self-reliance and provide place-based solutions to climate change. We must act now.

We offer the following two recommendations for your consideration.

First, to mitigate a future food inflation crisis we must make a transition to agricultural practices and regional food systems that provide solutions for food security and climate change. Federal programs like the sustainable agriculture strategy and the on-farm climate action fund should be fully and permanently funded to help farmers make the transition to better production practices and invest in regional food systems.

Second, nutritious and sustainable food must be affordable and accessible to all Canadians, and our right to food should be codified. Increases in social safety nets, such as a universal basic income, can be useful tools for achieving this goal.

Thank you very much. I look forward to the discussion.

[The Vice-Chair, Conservative, John Barlow]

Thank you very much, Mr. Sawtell. I appreciate your comments.

We'll go now to Mr. Macdonald, from the Canadian Centre for Policy Alternatives, for five minutes, please.

[David Macdonald, Senior Economist, Canadian Centre for Policy Alternatives]

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.

[The Vice-Chair, Conservative, John Barlow]

Thank you very much, Mr. Macdonald, for your presentation.

Ms. Hendricks, welcome to the agriculture committee. I don't know if you've had a chance to be here since your appointment to Farm Credit Canada. Congratulations. We certainly look forward to working with you.

I will give the floor over to you. I don't know if it will be you or Mr. Gervais who will be speaking, but hopefully we have a chance to get together in the future.

[Justine Hendricks, President and Chief Executive Officer, Farm Credit Canada]

Mr. Gervais and I will split the time.

Thank you, Mr. Chair and members of the committee, for having us here tonight.

I would like to thank the committee for inviting us to present the findings of the FCC's 2023 Food and Beverage Report, which highlights the sector's financial performance.

Farm Credit Canada, or FCC, is Canada's largest lender to the agriculture and agri-food industry, with an investment-grade loan portfolio of more than $47 billion. We share our economic forecasts and knowledge to help the industry achieve its goals.

I will now turn the floor over to Mr. Gervais.

He will provide a review of our key findings related to overall food inflationary pressures.

Go ahead, Jean-Philippe.

[Jean-Philippe Gervais, Chief Economist, Farm Credit Canada]

Thank you, Ms. Hendricks.

Food and beverage manufacturing revenues grew over 10% in 2022. This growth was almost entirely due to price increases in the face of higher costs. Profit margins in the sector are thin and even thinner for small businesses. This makes it difficult to avoid trying to pass on cost increases.

There were multiple pressures on costs. The 2021 drought in North America reduced crop production and lifted the prices of key commodities. The war in Ukraine impacted grain movement in that region, causing global supply shortages and global commodity prices to rise. For example, the price of wheat and canola, two vital inputs in food, more than doubled in price from the beginning of 2020 to mid-2022.

Cost pressures have not only affected raw materials. The labour market tightened in 2021 and 2022, pushing the unemployment rate to unprecedented lows and driving up wages. The labour market tightening was even more pronounced in the food manufacturing sector. Wages rose faster in this sector than in the economy as a whole, even though employment growth there was lower than generally seen in the economy.

For that matter, the entire food supply chain is facing increased labour-related pressures. This affects input suppliers in primary production, primary producers themselves, manufacturers, food service, as well as related industries, such as trucking.

Despite every effort to contain costs and prices, pressure on profit margins has forced companies to raise prices. Historically, manufacturers have struggled to pass on cost increases to their customers, and 2022 has proven no different. The bottom line is that gross margins as a percentage of sales for the processing industry saw a significant decline in 2022. If manufacturers had passed on all the cost increases experienced in 2022 to their customers, food prices would likely be even higher today.

Consumers have cut back on discretionary spending as they face higher inflation, depleted savings and higher costs of servicing debt. Inflation led to changes in food consumption decisions, which resulted in fewer purchases and different sources for purchases. For example, Canadians are estimated to have increased their consumption of imported food in 2022. This is after spending a higher share of their food purchases on local foods during the pandemic in 2021.

While trends vary based on industry volatility, we are, in fact, optimistic that gross margin rates and cash flow will improve for struggling food manufacturers as cost pressures now begin to subside. We've already seen commodity prices come back from recent highs, but it is common for these lower prices to not immediately translate into lower food prices for consumers. It can take up to a year for industrial prices to reflect recent spot commodity prices and raw material cost declines. Energy, labour and packaging materials are all inputs that can account for a significant share of food manufacturers' costs. In the meantime, lower agricultural commodity prices may create profitability challenges for Canadian farmers.

Go ahead, Justine.

[Justine Hendricks]

As Jean-Philippe stated, we recognize that food inflation is adding pressure to Canadian families. FCC will remain committed to serving both our customers and the Canadian agriculture and agri-food industry. The agri-food industry has a long track record of excellence when it comes to offering safe, high-quality and affordable foods to Canadians and the world.

We believe there are significant opportunities for the agri-food industry in Canada to grow and to alleviate food security concerns for Canadians while being a major driver of economic growth for the entire Canadian economy. Innovation and higher productivity growth are critical for the industry to fully realize its potential, and we all have a role to play.

Thank you for the opportunity to speak with you today. We're happy to answer any questions you may have.

[The Vice-Chair, Conservative, John Barlow]

Thank you very much, Ms. Hendricks and Mr. Gervais. It's much appreciated.

We'll now move on to questions from members of Parliament. To keep our time as tight as we can, we'll just do two rounds from each party to try to get that done.

Mr. Sawtell, the interpreters are having a bit of an issue with your connection, so just to give you a bit of a heads-up, we'll do our best, but we may have to interrupt if someone asks you a question and the interpreters aren't getting it. That's just to give everyone a heads-up. We may have to pause and address this if it comes to that.

We'll start off with the Conservatives and Ms. Rood for six minutes, please.

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

Thank you, Mr. Chair.

Thank you, witnesses, for being with us this evening.

Canadian grocers and consumers are under pressure as food prices continue to skyrocket, despite overall inflation easing in recent months. In fact, the rising cost of groceries is being reported as nearly double the rate of inflation.

Throughout this study, I have frequently called out the poor business practices of large grocers for nickel-and-diming our farmers and producers. These practices keep costs high and are driving Canadian family farm businesses out of business.

An economics scholar, Ambarish Chandra of the University of Toronto, agrees, saying:

We’ve seen, frankly, bad behaviour from these grocers over the years, whether it’s price fixing or other sorts of scandalous issues, like co-ordinating on reducing pay for cashiers during the pandemic—all of these things stemmed from the fact that we just don’t have enough competition.

As Canadians know, Costco is not a Canadian company, but it is a far larger company than other Canadian grocers and can be a leader in proper competitive behaviour. I have asked other representatives of other grocery chains the same questions.

I'm looking at you, Mr. Riel. I just have very quick questions for you. Simple yes or no answers would be great.

Sir, do you charge listing fees?

[Pierre Riel]

No.

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

Do you charge rebates or have chargebacks?

[Pierre Riel]

No.

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

Do you charge unloading fees for your distribution centres?

[Pierre Riel]

No.

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

Do you charge penalties on packaging and minor shipment shortages or overages?

[Pierre Riel]

No.

What is very important to know is that it's part of our code of ethics to work with our vendors in a win-win situation. When there is a bad situation, we contact people and we deal with it. We want to do the right thing.

For us there's no unilateral decision made for charging back. There is a conversation and then a cure, and a decision is made. It's in partnership. That's the way we work with our vendors.

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

Thank you.

Do you charge late penalties if a truck arrives late for its appointment time to unload?

[Pierre Riel]

No.

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

We've heard from other grocers that their profit margins are around 4% on groceries. I'm just wondering if you can enlighten us perhaps on where your grocery margins sit at.