As the economic tsunami of 2020 recedes and businesses navigate the choppy waters of supply chain bottlenecks and labor challenges, the forecast for the Canadian beef industry is for a smoother navigation. However, several factors ranging from widespread drought to capital flight in food processing are driving up food prices in the retail sector.
Food inflation supports retail sales
Sales at supermarkets and other grocery stores have remained above 2019 levels for the past 18 months. Grocers were still achieving year-over-year sales increases in January and February 2021. More recently, that pace has slowed. In the second quarter of 2021, supermarket and grocery store sales fell by an average of 1.6% compared to 2020, but still increased by an average of 12.2% compared to 2019 levels.
Food inflation is supporting retail sales. The Canadian retail food forecast predicts a 3-5% increase in overall food prices for 2021. Inflation will be felt differently across the country. Alberta, Manitoba, Ontario and Saskatchewan could experience below-average food price increases. However, British Columbia and the Maritimes could experience higher than average food price increases. The largest increases were forecast for meat from 4.5 to 6.5%, bakery from 3.5 to 5.5% and vegetables from 4.5 to 6.5%. These goods are susceptible to the impacts of the La Niña drought experienced this year and the growing national reliance on imported goods which are at the mercy of rising fuel and transport costs.
Capital flight from Canada’s food manufacturing sector is also a factor in rising food prices. Both family businesses and large multinationals have difficulty justifying their businesses here, even when using Canadian inputs in their products. Lack of investment in Canada’s food processing sector means retailers are increasingly reliant on imports, contributing to higher grocery prices. Transportation costs, climate change mitigation costs and packaging taxes make goods more expensive. Large companies can pass these costs on to suppliers, and they pass through the supply chain to producers. Small businesses need to pass on increased business costs to the consumer.
Year-over-year monthly food price comparisons are misleading this year given the volatility of the current economic environment. In August 2021, the food price index (FPI) increased by 2.7% compared to August 2020. From January to August 2021, the CPI only increased by 1.4% compared to the same period in 2020. It is essential here to note that the CPI has consistently exceeded the Canadian Price Index (CPI) over the past 20 years. This means that food prices at the grocery store are not a reliable indicator of the magnitude of overall national inflation. The sky is not falling yet, simply reflecting the transitory effects of Canada’s choppy economic waters.
Meat prices rise
The retail price of beef began its seasonal decline, down 1% from July 2021 to settle at C$21.85/kg in August 2021. The retail price of prime rib roast, which fell 5% seasonally from July to August 2021, was the main driver. of this decline. However, retail beef is still more expensive than usual, with prices up 8% from August 2020 and 14% from August 2019. The price hike is fueled by increased demand in the retail, especially for higher priced medium meats.
In August 2021, all major cuts were priced higher than in August 2020, with the exception of ground beef. The largest increase was for sirloin steak (13%), followed by boneless blade roast (11%), prime rib roast (9%), stewing beef (5%) and round (5%). Blade roasts and round roasts found counter-seasonal support throughout the summer. Ground beef, although up 2% from July to August 2021, was down 1% in August 2021 compared to August 2020.
Year-over-year, prices for meat products in the CPI increased at the fastest pace in August (+6.9%) since June 2020 (+8.1%). Notably, this was driven by the price of poultry and pork. Producers are facing higher input costs, supply chain issues and growing demand from restaurants for shareable products such as wings that struggled to be in demand last summer.
Rising retail prices for chicken and pork are becoming more beef-friendly, although beef has yet to reach the price level it was before the pandemic. In August 2021, the retail price of chicken increased by 7% compared to August 2020. From January to August 2021, the relative price ratio of beef to chicken averaged 2.72, compared to 2.82 during the same period in 2020. In 2019, this average was closer to 2.56.
From January to August 2021, the relative price ratio of beef to pork averaged 1.53, compared to 1.56 during the same period in 2020. In 2019, this average was closer to 1.45. The retail price for pork rose 9% in August 2021 from a year earlier, reaching the second highest price on record since 1979. It wasn’t until November 2015 that pork prices rose over the past 42 years.