The trouble with falling food prices

It is becoming cheaper to buy food in Canada. Canada experienced deflationary food prices in August for the first time in years.

Prices are actually dropping in every province, except for Alberta. While consumers may be delighted to see food prices decline, August numbers are pointing to a significant challenge for the food industry moving forward. Making money in the food business is not what it used to be.

Statistics Canada’s data for August may indicate the start of significant ongoing deflation in food aisles across the country. Most observers knew it was just a matter of time.

This could result in more profit-eroding promotions and a tempered outlook for the rest of 2016, and perhaps beyond the end of the year. If prolonged, this will likely put a significant strain on the entire industry, including producers. This phenomenon is the result of excess inventories for many products across the system and a more competitive food distribution landscape.

The drop in food prices is not just happening in Canada. The situation just south of us is even worse. The U.S. is on track to see the longest stretch of falling food prices in more than 50 years. In some parts of the U.S. beef prices have dropped by more than 40% since last year.

The decrease in eggs is down by an average of 40%. Dairy and bakery products have dropped by more than 15% in many regions as well. Coupled with high food inventories is a surprisingly sluggish demand from export markets like China. A relatively strong U.S. dollar is discouraging countries from buying overseas. Europe is also dealing with deflationary headwinds and many countries have seen food prices drop.

Unexpectedly, many believed Brexit in the U.K. would lift food prices higher and make the Pound weaker, but it didn’t.

The Canadian dollar, on the other hand, has held steady over the last few months, which is also keeping prices for fruits and vegetables lower in Canadian stores. Canadian shoppers who see a cauliflower priced at $8 right now should walk away and leave the premises immediately.

Commodity prices in most cases are half of what they were in 2012. Corn, soybeans, oats, beef, and pork are but a few examples of products that have decreased in price. As North American agriculture is performing well, high yields tend to keep prices lower. Farmers with less capacity will be affected by cheaper bushels. However, not all commodities are created equal. Cattle has been challenged of late by lower futures and unpredictable demand patterns. Western Feedlots, one of the largest operators in the country, announced recently that it was shutting down its operations in Alberta, which is a sign of things to come for the cattle industry.

Of course, processors are benefiting from lower input costs, but now hard hit by highly demanding grocers wanting to pay less for products and looking to remain competitive. Some processors can mitigate these undesirable requests coming from down the food chain, but the smaller outfits may not survive. For grocers, lower prices will likely keep the rumour mill at bay for potential mergers, acquisitions or new entrants. In the U.S., given how different the architecture of the industry is, it could lead to more consolidation.

So Canadians should continue to save for some time in grocery stores, but not with all products. At the meat counter, for example, poultry is at odds with other meat products. Chicken prices increased while beef and pork prices are dropping and that trend may very well continue. With prices regulated at farmgate and high tariffs on imports, the supply managed poultry sector is almost immune to what is happening right now. Poultry will obviously remain a popular source of animal protein for most meat-eating Canadians, but it will be interesting to see if some conversations will occur about the choice in meat products.

A backdrop story to deflationary prices is a changing consumer. Canadian consumers are slowly drifting and changing locations where they buy food. Food sales were up in convenience stores while sales for food specialty dropped by more than 1.5%. Economic headwinds are discouraging consumers from trading up.

Supermarket sales remain robust with an increase of 1.6% since last year. Yet gains by traditional grocers are likely due to creative and novel ways of adding value to food products. Offering more single servings, promoting more functional foods for health-conscious consumers or even sales of ethnic foods have picked up in recent months. Increased volume sales are not helping grocers grow their top-line, so they need to find other ways.

We now have a much more aggressive promotional environment, and consumers will likely take advantage of it. The good news is that it may last a while, except in restaurants. A more consolidated food service industry is still making our outings a little more expensive. What is unfortunate though is that it could bring our society back a few decades when food was inexpensive, undervalued, inconsequential and frankly, uninteresting.

The last few years have been interesting for foodies and for the entire Canadian food economy. Food providers have upped the ante and have made an effort to connect with consumers. We should hope that lower food prices will not compromise a vastly improved Canadian food marketplace. Indeed, we will have access to lower priced foods, but lets not marginalize the importance of our food in our daily lives.