Werner's Blog — Opinion, Analysis, Commentary
Why have food prices risen so much?

Consumers are complaining about high food prices, and indeed food prices have risen sharply since the end of the pandemic. Politicians have taken up the complaints. The Liberals in parliament have singled out record profits of grocery chains and the lack of competition in Canadian food retailing, implicitly portraying these companies as greedy. Meanwhile, Conservatives are blaming Liberals and have singled out the federal carbon tax as a scapegoat. Both political parties are a fair bit off the mark.

Politicians cannot magically lower food prices, and the carbon tax has a negligible impact. Food retailing is not a high-margin business, and retailers have indeed been facing higher costs due to the effects of climate change on agricultural production; supply chain bottlenecks; the effect of the Russian invasion of Ukraine; higher energy prices; and also higher wages in response to higher inflation. The only market segment where food prices are regulated are where supply management for dairy and poultry products keeps prices artificially high, but politicians are loathe to reform supply management (see my recent discussion on dairy imports). There is in fact a link between food prices and a specific climate-related policy, which I return to below, but it isn't carbon pricing.

But how much have different food categories really risen in recent years? Looking at just the most recent annual inflation numbers distorts the picture because the baseline changes from one month to the next. It is more useful to look at a baseline a few years ago and examine the rise of food prices over a longer period.

Statistics Canada collects monthly food price information in order to compute the Consumer Price Index, and specifically table 18-10-0004. The CPI data are quite detailed if one is willing to look into it more closely. Below I have compiled a table with the most recent data from September 2023, and compared this against a reference period, the average of 2019. For each food category I show the percentage increase since 2019 ("Change since 2019") and the percentage deviation from the Main Food Index, the first row in the table. Differences are calculated as a percentage deviation, not simply the percentage-point difference.

Overall, food prices have risen 24.1% over the course of four years, an annualized inflation rate of 5.5%. In fact, all food items have risen in price; nothing has gotten cheaper. Overall, food prices have risen faster than overall inflation, and this is perhaps the most worrisome trend given that it hits less affluent households relatively more as they spend a larger share of their income on food items.

The table below shows which food items have risen more than the average food item, and which have risen less. A red background indicates deviations of more than 20%, an orange background indicates deviations of more than 10%, and a yellow background indicates deviations of more than 5%. Items with negative deviations of more than 10% and 5% are indicated by dark and light green backgrounds, respectively.

Product Category Change since 2019 Main Food Index Deviation
Food purchased from stores 24.1 %  0.0 % 
  Meat 26.7 %  2.1 % 
    Fresh or frozen meat 25.9 %  1.5 % 
      Fresh or frozen beef 32.0 %  6.4 % 
      Fresh or frozen pork 16.0 %  -6.5 % 
      Other fresh or frozen meat 12.6 %  -9.2 % 
    Fresh or frozen poultry 32.0 %  6.3 % 
      Fresh or frozen chicken 33.3 %  7.4 % 
      Other fresh or frozen poultry 25.3 %  1.0 % 
    Processed meat 23.8 %  -0.2 % 
      Ham and bacon 20.6 %  -2.8 % 
      Other processed meat 24.5 %  0.3 % 
  Fish, seafood and other marine products 16.0 %  -6.5 % 
    Fish 16.8 %  -5.8 % 
      Fresh or frozen fish 15.8 %  -6.7 % 
      Canned and other preserved fish 19.7 %  -3.6 % 
    Seafood and other marine products 13.7 %  -8.4 % 
  Dairy products and eggs 23.3 %  -0.6 % 
    Dairy products 22.1 %  -1.6 % 
      Fresh milk 20.0 %  -3.3 % 
      Butter 37.6 %  10.9 % 
      Cheese 21.5 %  -2.1 % 
      Ice cream and related products 22.2 %  -1.5 % 
      Other dairy products 21.1 %  -2.4 % 
    Eggs 34.8 %  8.6 % 
  Bakery and cereal products 26.8 %  2.2 % 
    Bakery products 26.6 %  2.0 % 
      Bread, rolls and buns 22.9 %  -0.9 % 
      Cookies and crackers 26.3 %  1.8 % 
      Other bakery products 31.2 %  5.7 % 
    Cereal products 26.9 %  2.3 % 
      Rice and rice-based mixes 23.3 %  -0.6 % 
      Breakfast cereal and other cereal products 24.3 %  0.2 % 
      Pasta products 37.3 %  10.6 % 
      Flour and flour-based mixes 29.3 %  4.2 % 
  Fruit, fruit preparations and nuts 20.9 %  -2.6 % 
    Fresh fruit 17.7 %  -5.2 % 
      Apples 25.9 %  1.5 % 
      Oranges 27.0 %  2.3 % 
      Bananas 4.5 %  -15.8 % 
      Other fresh fruit 23.8 %  -0.2 % 
    Preserved fruit and fruit preparations 31.7 %  6.1 % 
      Fruit juices 35.6 %  9.3 % 
      Other preserved fruit and fruit preparations 26.2 %  1.7 % 
    Nuts and seeds 16.0 %  -6.5 % 
  Vegetables and vegetable preparations 17.2 %  -5.5 % 
    Fresh vegetables 14.2 %  -8.0 % 
      Potatoes 16.5 %  -6.1 % 
      Tomatoes 2.0 %  -17.8 % 
      Lettuce 12.4 %  -9.4 % 
      Other fresh vegetables 26.9 %  2.3 % 
    Preserved vegetables and vegetable preparations 27.6 %  2.8 % 
      Frozen and dried vegetables 36.7 %  10.2 % 
      Canned vegetables and other vegetable preparations 23.7 %  -0.3 % 
  Other food products and non-alcoholic beverages 27.3 %  2.6 % 
    Sugar and confectionery 20.2 %  -3.1 % 
      Sugar and syrup 25.1 %  0.8 % 
      Confectionery 19.6 %  -3.7 % 
    Edible fats and oils 63.7 %  31.9 % 
      Margarine 66.9 %  34.5 % 
      Other edible fats and oils 61.8 %  30.4 % 
    Coffee and tea 19.5 %  -3.7 % 
      Coffee 19.5 %  -3.7 % 
      Tea 18.8 %  -4.3 % 
    Condiments, spices and vinegars 33.2 %  7.4 % 
    Other food preparations 24.7 %  0.5 % 
      Soup 21.1 %  -2.4 % 
      Baby foods 21.6 %  -2.0 % 
      Frozen food preparations 28.2 %  3.3 % 
      All other food preparations 23.6 %  -0.4 % 
    Non-alcoholic beverages 30.7 %  5.4 % 

Some items are vastly more expensive: edible fats and oils. Margarine is 67% more expensive than four years ago. this price increase seems to have spilled over into the price of butter, which has risen 38% over four years. Whether margarine and butter are good substitutes is an interesting economic debate, but when the price of margarine rises that high, it is likely that at least some of the rise in the price of butter is a "contagion effect" because the underlying ingredient price for milk is regulated.

Some food items have not risen quite as fast as others. Surprisingly, fresh vegetables including tomatoes, potatoes and lettuce seem to remain more affordable, as well as some fresh fruit such as bananas. Seafood and fish also seem to remain more affordable than other food items. Among the meats, beef and chicken is relatively more expensive than pork, ham, and bacon. And looking through the remainder of the list, pasta products have risen more than other food items, as well as frozen and dried vegetables, fruit juices, and eggs.

So which diet will remain affordable? Fish and vegetables seem to be a healthy combination of more affordable foods.

What stands out in the table above is the incredibly high price of oils and fats (including margarine). Agrifood experts point to a combination of of tightening supplies and growing global biofuel targets. Argentina's soybean crop for 2023 was dismal, and output in other Latin American countries is also lower than expected. Demand from China has also rebounded from pandemic conditions. And there are signs that the biofuel industry is approaching a feedstock crunch. The International Energy Agency reported last December:

Consumption of vegetable oil for biofuel production is expected to increase 46% to 54 million tonnes over 2022-2027, raising the share of vegetable oil production directed to meeting growing biofuel demand from 17% to 23%. In the United States, this increase in demand is already reducing soybean oil export estimates and supporting higher prices.

Rising biofuel demand putting pressure on food prices is not a novel phenomenon. Ethanol-blending mandates for gasoline, and airlines demanding more sustainable aviation fuel (SAF), are contributing factors. Chakravorty et al. (2017) reported that 40 percent of US corn is already used to produce biofuels. A recent report by the US Department of Agriculture also linked the growing demand for fats and oils on the global biodiesel expansion. Most of the feedstock comes from crude palm oil, soybean oil, and rapeseed oil. While global ethanol consumption has been relatively flat in recent years, global biodiesel consumption is rising.

There are other notable factors that contribute to high food prices. Russia's war on Ukraine has disrupted the supply of grains, in particular wheat. Blocked Ukrainian shipments of grains are worsening global starvation. Ukraine has also been a significant exporter of sunflower oil. World markets for fertilizers have been disrupted as well; Russia is a major exporter of urea. All of these factors have driven up production costs for Canadian farmers. Farm input prices have risen by 29.3% between 2019Q2 and 2023Q2; the cost of fertilizer alone is up 51% over the same period.

The blame for high food prices falls neither on greedy retail chain CEOs nor on Canada's carbon tax. Most of the contributing factors seem to be attributable to global sources. Russia's villainous war on Ukraine has driven up fertilizer and grain prices. High energy prices are also in part due to the disruption of global energy markets caused by Russia's war. But we also need to look at the unintended consequences of well-intentioned biofuel mandates. Simply diverting more and more agricultural production towards biofuels will ultimately have even higher impacts on food prices. The current rise in prices for fats and oils appears to be at least in part influenced by this trend.

Breaking the link between rising biofuel demand and food prices requires capturing biomass that is a co-product (or waste) of existing agricultural production, such as crop and wood residue, including corn stover and bagasse. Biofuels production needs to rely on feedstocks that do not reduce cropland. Public policies directed at biofuels need to distinguish between sources that affect food prices and sources that don't.

Posted on Saturday, October 21, 2023 at 09:00 — #Canada | #Economics
© 2024  Prof. Werner Antweiler, University of British Columbia.
[Sauder School of Business] [The University of British Columbia]