Canadians to see lower food inflation in 2016




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Canadians to see lower food inflation in 2016

Kevin Grier

  • 3 May 2016
Owen Roberts - The Urban Cowboy

Kevin Grier is a respected and connected agriculture and food market analyst with a solid understanding of industry issues from farm to retail. His research and analysis helps companies, producer groups, financial service organizations and governments make informed decisions that impact their bottom line.


Last year ended and this year started off with an exceptionally large amount of media coverage on rising food prices. Speculation was rampant regarding how high inflation would charge in 2016. One of the main catalysts of the concern was the rapidly depreciating Canadian dollar. The highlight (or nadir, depending on your view) of the coverage was the famed $8 cauliflower.

Needless to say, another critical driver of inflation concern was meat prices. Record low supplies of cattle have driven beef prices sky-high. The 2014 PEDv outbreak forced pork prices to record highs and pricing did not move much lower in 2015.

The depreciation of the C$ during December and January caused meat, produce and other food costs to be much higher than they would have been without the depreciation. With that noted, it appears that the depreciation has ended and there is a noticeable strengthening in the C$. That is a force for less inflationary pressure.

The question about how high prices will go in food stores is dependent on the C$, but it is also dependent on overall commodity pricing. The raw costs of hogs, coffee, sugar, wheat, etc., play a big role in retail food prices. I have calculated strong statistical correlations between raw product pricing and retail food prices. In that regard, the Bank of Canada’s index of commodity pricing shows that all commodities, including food-based, have been on a long-term decline.

In addition to the C$ and commodity pricing, retail prices are also largely dependent upon the degree of competition at retail. The more intensely that the retailers compete with each other, the lower the inflationary pressures and vice versa.

Of course the logical question is how to measure competition. Some even assert that since there are only three main grocers, Loblaw, Sobeys and Metro, there really is not much competition anyway. Looking at the last question first, the starting point is that there are far more entities than the three main grocers selling food. Walmart and Costco are major food industry players and they gain market share every quarter. The bottom line is that Loblaw is the biggest with about 30% or less share, followed by Sobeys at over 20%, Metro at around 10%, and many others making up the remaining 40%. I argue that the food market is a competitive market.

One way to measure competitive intensity is by grocery sales square footage growth. The analysts at CIBC Institutional Equity Research estimated that there was significantly above average square footage growth from 2010 through 2014 and below average growth in 2015. Above average growth in square footage means more stores competing for a set of consumers. That tends to mean more intense competition and lower pricing increases.

That is exactly what happened in those years. In fact not only was food inflation low in those years but packaged foods often saw price deflation. In 2015 the competition eased with below average square footage growth. Food inflation increased in 2015. In 2016, CIBC sees a bigger increase in square footage. To my way of thinking that suggests less food inflation.

In fact that suggestion might actually be coming to fruition. The Financial Post has noted recently that “Tough times in the oilpatch are leading to deep frugality in the grocery aisles, delivering a harsh blow to the owner of Sobeys and Safeway.” The Financial Post also noted that “Sobeys’ decision to slash prices on 8,500 grocery items this week in Quebec stands to trigger a price war with other grocery retailers.”

The question for the industry is whether the difficulties in those two very different and geographically distant markets can up the competitive ante in the entire country. My view is that those two markets, plus the ongoing bleeding away of share to Walmart and Costco, are going to result in more pricing competition through the supermarkets.

In summary, when you combine the slow appreciation of the C$ with low commodity prices and heightened grocery competition, the stage is set for lower food inflation in 2016 compared to 2015. Perhaps much lower food inflation.

So what does this have to do with pork? Pork is uniquely positioned as a competitive weapon for grocers. Pork costs are very low in comparison to beef and it is probably the most profitable fresh meat item in the meat case. Pork can be used as a customer draw in the front of flyers and when it is not on the front of the flyer, it is generating margins with regular sales.

In addition, as I have noted here before, pork demand in Canada is improving significantly. Consumers are looking favorably at the red meats again and pork is the most price competitive. In an increasingly competitive Canadian grocery market, those are very positive attributes.

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