Do companies take an oversized bite of food profits?

Food processors and retailers have pushed food prices upward even as prices paid to farmers have been largely stagnant, the National Farmers Union said in a statement late last year, which attributed rising food costs to rising corporate power.

“Consumers need to know that less and less of the money they spend on food actually makes it back to the farmer,” said Stewart Wells, NFU vice-president of operations.

“Big processors, packers, and retailers are charging consumers more, paying farmers as little as possible, suppressing workers’ wages, and taking more for themselves,” Wells said. “That’s why retail food prices continue to increase, not because of rising grain or livestock prices, COVID-19, or supply issues.”

The statement came as a response to the 2022 Canada’s Food Price Report — written by academics from Dalhousie University, the University of Guelph, and others — and to subsequent media analysis.

The report predicted overall food prices would rise five to seven per cent in 2022, the highest predicted rise in the 12-year history of the report.

It focused on disruptions to the food supply chain, which included the ongoing pandemic, adverse weather events, labour challenges, high inflation, and transportation issues.

The NFU graphed the divergence of retail prices and farm gate prices between 1981 and 2021 for products like bacon, ground beef, bread and corn flakes.

For instance, according to StatCan data, in that period the price of bacon rose to over $8 per pound from $2 per pound, while the price for dressed hogs rose from under $1/lb. to just over $1/lb. (Ontario prices, not adjusted for inflation, the NFU said).

Based on StatCan and Agriculture and Agri-Food Canada data, ground beef rose to between $5 and $6 per pound in 2021 from just under $2 per pound in 1981 while the price of cattle (cull cows, liveweight, in Alberta) rose to about $1/lb. from $0.50/lb. in the same time frame.

“Processors and retailers are overcharging because they can,” said NFU president Katie Ward.

Smaller-scale, local and regional processing along with a likely breakup of the largest packers, processors and retailers are needed to reverse these negative effects, Ward added.

Small component

However, two analysts say the NFU is basing its statement on misinterpretation of how food distribution works.

Farmers are exposed to price-taking economics, said Sylvain Charlebois, senior director of Agri-Food Analytics Lab and professor of food distribution policy at Dalhousie University. In processing and distribution, the dynamics, responsibilities and risks are totally different.

It’s hard to compare them and say farmers’ wheat price should rise in conjunction to what consumers pay at the grocery store. The bushel of wheat is only a tiny component of the bread, Charlebois said.

“To me that argument has never made sense, ever,” Charlebois said.

He added that a small shift, e.g. an increase in farm gate wheat prices, is like a pebble thrown into a pond. By the time the ripples reach retail, they’ve grown much larger.

Grocers can’t afford to play too much with prices, Charlebois said. They have to maintain their margins while dealing with inelastic demand (e.g. the demand for bread remains roughly the same despite price).

If grocers price themselves out of the market, they won’t be able to defend their margins. Dropping prices is relatively easy, Charlebois said. It’s much harder to bring them up.

Hikes in beef and pork prices can be traced to extraordinary demand and consumer willingness to pay, said market analyst Kevin Grier.

Beef prices are high at the packer level because of great demand, Grier said. Beef production in 2021 was very high, so it can’t be blamed on supply.

“The only explanation for that is because we’re willing to pay for it,” Grier said. “It’s not because we have few packers showing power and all that… we’ve had few packers for a long time.”

The situation is similar for pork, he added.

Grier said the cattle supply was backlogged coming into 2021 — in 2020 some packers were forced to shut down or slow due to COVID-19 outbreaks.

Packers could control prices because they had more cattle available than they could kill, and also great demand for what they processed.

Hog producers probably wouldn’t complain about 2021, he added.

A pipe dream

When asked what data it had to demonstrate that more local and regional options would improve farmer and consumer outlook, the NFU didn’t produce much evidence.

“It’s a little bit hard to provide data to the contrary when there’s not much out there,” Ward told the Manitoba Co-operator.

The desire for more processor options is understandable but not realistic, Grier said.

“Who wouldn’t want more people to sell to?” he said. “I understand, but look at the reality. Once you get through your dreams, then look at the reality. Where’s the returns on these plants?”

However, the NFU isn’t the only organization to call for this kind of change.

A Jan. 3 executive order from U.S. President Joe Biden pledged US$1 billion to expand and diversify independent processing capacity.

According to a fact sheet from the White House, “the meat- and poultry-processing sector is a textbook example (of) lack of competition hurting consumers, producers and our economy.”

It cited four large packers controlling 85 per cent of the beef market, 54 per cent of poultry, and 70 per cent of pork.

“When dominant middlemen control so much of the supply chain, they can increase their own profits at the expense of both farmers — who make less — and consumers — who pay more,” the fact sheet says.

Hogwash, said Grier.

“There’ll be absolutely nothing positive that comes out of that,” Grier said. “(New packers will) get up and running just in time for the herd to be down, and then there’ll be plants closing.”

The cattle herd has been in decline for years and will continue to do so, he said.

There’s also plenty of competition, Grier said. The top four packers go after each other “tooth and nail” in both buying and selling, he said. Then there’s also smaller federal and regional packers to compete with.

“It’s really not that concentrated,” Grier said.

In Canada, the West doesn’t produce enough hogs to meet its current killing capacity, said Grier.

“Put another plant or two, another company out there. What’s that going to do? Somebody will go out of business,” he said.

Grier allowed there may be room for a regional beef packer. Canada still produces more beef than it processes. However, he cautioned that the beef herd is shrinking. Any startup risks lack of supply by the time it was running.

“Maybe the NFU would invest in a plant,” Grier said. “Good luck. Like really, good luck with that.”

Too much power?

That’s not to say processors and retailers don’t abuse power.

While analyzing the NFU graph of bread prices over grain prices, Charlebois pointed out that a steep rise in bread prices in the 2000s corresponded with a 14-year price-fixing scheme, which grocery giant Loblaw admitted to in late 2017.

In that time, bread maker George Weston Ltd., and grocery giant Loblaw, which are both owned by the same company, arranged prices between themselves. Other major grocers were also linked to the scandal.

The price of bread more than doubled between 2001 and 2015 Macleans noted in a January 2018 report.

In data (compiled by Grier), Macleans noted that if the cost of bread had risen at the rate of regular food inflation, it would have been at least $1 cheaper per loaf.

Over the same time, the price of bread by far outpaced the price of hard spring wheat flour. Also, according to Grier and Macleans, American bread prices rose about $0.50 per loaf in the period of admitted price-fixing while Canadian prices rose by about $1.50.

Charlebois said there’s also abuse of power between retailers and processors, which is why he’s in favour of developing a grocery code of conduct.

Processors and producers have accused retailers of unfairly dictating terms with their suppliers. For instance, the Dairy Processors Association of Canada (DPAC), in an article on its website, accused large retailers of not always adhering to the terms of contracts with suppliers and “can arbitrarily charge fees and take deductions off payments.”

DPAC alleged this affected consumer prices and producer compensation. It said the grocery retail market was highly concentrated and lacked competition.

In July, a federal-provincial-territorial government working group released a report looking into the matter and found that concentration in the retail sector did enable retailers to use their bargaining power to levy fees on suppliers, that these fees sometimes lacked transparency and predictability, and that the resulting strained relationship had made Canada less attractive to food-manufacturing investment.

Canada’s agriculture ministers called on the industry to lead a code development process.

Negotiations over the code began in summer with hopes of proposing a solution by end of year. When agriculture ministers met in November, they extended that deadline to March, according to a Financial Post report.