Report forecasts food costs will rise no more than four per cent
March 31, 2020, Halifax, N.S. – Dalhousie University and the University of Guelph have issued an updated Canada Food Price Report for 2020.
The new report replaces an earlier forecast released in December 2019 that indicated food prices would increase by anywhere between two to four per cent, with meat being the one category which would increase by four to six per cent.
Following is the update:
Considering the current COVID-19 crisis, and based on our latest analysis, we do not believe the overall forecast for food prices in 2020 will change. We expect food prices to increase by no more than four per cent, as forecasted in December 2019, despite the COVID-19 epidemic. But the food retail and processing sectors are under extreme pressure to change food safety practices, to make customers feel safer. These new protocols will require more work and more staff. Due to the oil price war between Saudi Arabia and Russia, the Canadian dollar will be one factor to watch closely, as it is already affecting food prices in some categories. Also, online purchases and delivery will likely increase the cost of food over time.
We are expecting some categories to be affected by new market conditions and COVID-19. The forecasts for Bakery and Vegetables are being revised upward. We are expecting menu prices at restaurants to drop significantly, due to the substantial disruption the sector is experiencing. There is also the possibility of Fruit prices slightly decreasing as the Canadian harvest begins in summer.
Canadian dollar and commodities
Most analysts agree that the oil price war is only beginning. With cheap oil abounding, this will impact the entire agri-food market, from farmgate to plate. Due to lower gas prices, the cost of transportation will drop as new contract terms are being negotiated. However, the Loonie is getting hit hard, given its resilient link with oil which will impact food prices more quickly. It’s currently at its lowest level in many years, affecting our importers’ buying power. A weakened Canadian dollar versus the Greenback led to the cauliflower situation we experienced a few years ago. If the dollar drops further, many items we import will cost more, from produce to canned goods, to many other processed foods we purchase regularly.
The current COVID-19 pandemic and the oil price war is causing a massive sell-off in equity and crude oil markets, and to a much lesser extent, in agricultural commodities. These are just the latest occurrences that are keeping a lid on potential price rallies for agriculture. Farmers hoping to increase returns saw their expectations vanish. Around the world, harvests are strong, and nothing is moving up, as many commodities are going sideways or down, due to weak demand. The same can be said in the livestock industry, as hog and cattle prices are also dropping, due to weak global demand. In other words, most farmers are looking at an average year, at best. This means we no longer expect farmgate prices to become a higher pressure point on food retail prices as we expected in December.
Meat prices are expected to go up by no more than six per cent, as predicted in December 2019. We have received reports of meat prices going up dramatically in some parts of the country. Some reports suggest prices went up by 10 to 15 per cent. We believe, however, that certain cuts which would normally be sold in food service are being sold, at a premium, at retail. Consumers should not expect dramatic increases at retail at this time.
Store experience changing
The costs of complying with customers’ new expectations are increasing. A number of Canadians are unable to leave their homes, and many others now actually fear going to the grocery store. In fact, 76 per cent of Canadians now consider a visit to the grocery store as an inherent risk to their health. Food safety and public health protocols are changing as grocers are attempting to change store experiences by setting up barriers between employees and customers and asking customers to adhere to strict physical distancing while visiting the facility. Customers are asked not to touch products unless they intend to purchase them. Security to control traffic in stores, and store cleaning protocols have been enhanced across the country, which has also increased the cost of operating a store.
To prevent unnecessary stockpiling, grocers are now posting signs limiting the number of items customers can purchase per visit. Rationing is appropriate, given these unprecedented circumstances and consumers should expect the practice to continue throughout the crisis.
Online ordering surge
According to a recent survey, nine percent of Canadians who have never ordered food online are now doing so. This was a shock for most grocers, who were not ready to absorb that level of online traffic. Customers are expected to wait anywhere between three to seven days for their order. Since Amazon acquired Whole Foods in 2017, most grocers were deploying a more aggressive online strategy, but COVID-19 happened too quickly, which is why many are challenged by the sudden surge of online ordering. We do expect grocery stores to realign resources in order to address the backlog, but delivery costs will be mostly downloaded to consumers.
The food service industry is being decimated as a result of COVID-19. Restaurants in Canada normally generate more than $90 billion in sales a year. Almost overnight, the sector’s ability to generate revenues beyond delivery or pick-up was halted. Extracting service margins and the impact of pre-immunized products found in the service sector, we estimate that $40 to $50 billion worth of food is now purchased through food retail. That is a massive amount of food that grocers must sell, in addition to their regular business and new online challenges. We are expecting to continue to receive reports of empty shelves, but the situation will likely improve.
Wages across the sector have increased in recent weeks. Most grocers have made similar announcements to this effect. Employees are being retrained and are requested to conduct new tasks related to sanitation. Salaries have increased by anywhere between five to 15 per cent. We estimate that more than 250,000 employees working in more than 5,000 stores have received a pay increase since the start of the outbreak. Most employers have committed to increasing salaries until early May, but that could be extended depending on how recruitment becomes a challenge amid the outbreak and beyond. This will certainly increase operational costs.
There have been reports of unjustified price increases across the country. In times of extreme anxiety, consumers are quick to take to social media with examples of exaggerated pricing for specific food products. While the possibility for a grocer to increase prices for no apparent reason exists, “price-gouging,” as labelled by many, is highly unlikely. Consumers may see the price of a product increase dramatically, but the same product, or an alternative, in most cases, can often be found in the same store or at another location.
Weekly flyers appear to have shrunk across the country; fewer promotions are available to Canadians. This is likely due to the fact that grocers are devoting most of their energy to stocking shelves, making sure stores are full. We do expect the number of food products sold at a discount to be reduced over the next few months, until the COVID-19 crisis subsides.
Our forecasting methods were updated to incorporate new economic data as soon as it becomes available. Fluctuations in oil prices, currency exchange rates, and other market indicators since the onset of the COVID-19 pandemic are reflected in our revised forecasts.
For more information, please visit the Agri-Food Analytics Lab at Dalhousie University’s website or the Arrell Food Institute’s website.
Click here for the updated 2020 report.