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 A closer look at the market fundamentals behind rising food prices Food prices are increasing in 2021 and with them, a proliferation of news items that point to meat as the primary driver. While the news narrative may suggest an exodus of consumers as retail beef prices rise, it is worth a reminder of the deeper market fundamentals at play. The following context is provided by Canfax Research Services. Agriculture markets are global: Canada’s Food Price Report projected overall food price increases for 2021 between 3% and 5%. These figures were forecast on known, repeatable, global phenomena: (1) the La Nina drought in North America, (2) increasing Canadian dependence on foreign food processing, and (3) the rising cost of fuel to transport those imports. From January through August this year, food price inflation is below those projections, up 2% from 2020 and up 4% from 2019. Food prices are seasonal: Accordingly, year-to-date comparisons are critical for context. Beef prices tend to rise in the first half of the year, decline into the fall, and find support during the holidays. From January through August 2021, the retail beef price was 2% higher than same period in 2020, which was 6.7% higher than 2019 due to strong consumer demand as sales shifted from foodservice to retail. Over the last 10 years, retail beef prices have increased about 5% on average, year-over-year, with the largest spike in 2015 (+17.6%) and the lowest (negative) growth in 2017, down 3.8%. The relative price of beef compared to chicken or pork has declined for the last three months, as the price of beef edges seasonally downward and the price of chicken and pork have edged up. Commodities are currently volatile: As economies re-open, supply chains have been plagued with volatile starts and stops causing large swells in month-to-month pricing. So as Statistics Canada’s August Consumer Price Index report shows that prices for retail meats increased 6.9% year-over-year – the fastest pace since June 2020 (+8.1%) – it is important not to take one month of data to the bank. The increase was led by fresh and frozen pork (+9.3% Aug ‘21/Aug’20) and chicken (+8.4% Aug ‘21/Aug’20), which both struggled in pricing last summer, compared to beef. Retail beef was up +5.3% (Aug ‘21/Aug’20) during a period of seasonally high wholesale demand for high-value grilling meats just as food service came back to the table to compete for these same products when restrictions eased. The beef prices are likely to decline into the fall as demand seasonally shifts to end meats. Foods have different income elasticities: Foods like meat with higher income elasticities of demand are more susceptible to the rise and fall of real disposable income than items like bread, or cereal. Income elasticity of demand explains how more money in a consumer’s pocket translates to more money spent on goods. For a product like beef, the income elasticity of demand is 0.54; meaning for every 1% increase in disposable income there is a 0.54% increase in demand for beef. In the second quarter of 2021, the average Canadian had 12.8% more disposable income than they did before the pandemic (the fourth quarter of 2019). As demand rises and supply stays steady, the market begins to allocate goods to the highest bidders. Going forward, a good rule of thumb to keep in mind is that: More Money + More People = Higher Prices. Back to main page |
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