Cheap food challenges food industry

Making money in the food business isn’t nearly as simple as it once was.

It’s becoming cheaper to buy food in Canada — prices fell in August for the first time in years in every province except Alberta. And the Statistics Canada data may indicate the start of significant ongoing food deflation.

But while consumers may be delighted to see prices decline, it creates a significant challenge for the food industry.

The tempered outlook for the rest of 2016 and beyond puts a significant strain on the industry, right down to producers.

The declining prices are the result of two factors: excess inventories for many products and a more competitive food distribution landscape.

And as bad as the drop in food prices is in Canada, it’s even worse in the United States.

The U.S. faces the longest stretch of declining food prices in more than 50 years.

In some parts of the U.S., beef prices have dropped by more than 40 percent since last year. Egg prices are down an average of 40 percent. Dairy and bakery products have dropped by more than 15 percent in many regions.

High U.S. food inventories are exacerbated by surprisingly sluggish demand from export markets like China. A relatively strong U.S. dollar discourages trade.

Many European countries are also dealing with declines in food prices. And that’s unexpected, since many believed the United Kingdom’s decision to leave the European Union would push food prices higher as the pound weakened.

The Canadian dollar, on the other hand, has held steady over the last few months. That has kept fruit and vegetable prices lower in our stores.

At the farmgate, prices for commodities like corn, soybeans, oats, beef and pork have been cut by as much as half of what they were in 2012.

High yields for North American agriculture have tended to keep prices lower, and farmers with low capacity will suffer most.

Cattle prices have slipped as the result of unpredictable demand. Western Feedlots Ltd., one of the largest operators in the country, has announced it will close its operations in Alberta. It’s a sign of things to come for the cattle industry.

Of course, processors benefit from lower input costs but now face a backlash as grocers demand lower prices from suppliers to remain competitive. Large processors can mitigate these costs but smaller outfits may not survive.

For Canadian grocers, lower prices likely quell rumours of potential mergers, acquisitions or new entrants.

In the U.S., however, it could lead to more consolidation.

Canadians should expect to enjoy grocery savings for a while, if not with all products.

At the meat counter, for example, chicken prices increased while beef and pork dropped and the trend may continue.

With prices regulated at farmgate and high tariffs on imports, the supply-managed poultry sector is almost immune to price fluctuations. Poultry will remain popular for most meat-eating Canadians, but it will be interesting to see if different meat choices are made due to price discrepancies.

Canadian consumers, in general, are slowly changing their food-buying patterns. Food sales are up in convenience stores but down in specialty outlets by more than 1.5 percent. Supermarket sales remain robust, up 1.6 percent since last year.

Gains by traditional grocers are likely due to creative ways of adding value to products. Offering more single servings, promoting more functional foods for health-conscious consumers and sales of ethnic foods have picked up.

It’s a much more aggressive promotional environment and consumers should take advantage of it. And it may last a while, except in restaurants, where a more consolidated industry still makes our outings more expensive.

In recent years, food providers have made an effort to connect with consumers. We should hope that lower food prices won’t compromise a vastly improved Canadian food marketplace.

Lower-priced foods shouldn’t marginalize the importance of food in our lives.

Sylvain Charlebois is dean of the Faculty of Management and professor in the Faculty of Agriculture at Dalhousie University. This column is distributed by Troy Media.

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