By Sylvain Charlebois
Editor’s note: Dr. Sylvain Charlebois is a professor in food distribution and policy at Dalhousie University. He has authored five books on global food systems and has published more than 500 peer-reviewed academic journal articles.
Unlike what many analysts have said in the past, the food sector has never been recession-proof. COVID-19, however, may show us that it is in fact immune to deflationary pressures. And meat counter economics will matter more than ever.
Despite a negative inflation rate, recent StatsCan numbers are telling us that we are in for a wild ride at the grocery store. The numbers are also telling. While the general inflation rate sits below zero per cent, the food inflation rate is close to four per cent. In December 2019, Canada’s Food Price Report forecasted a food inflation rate of about four per cent for 2020, and this is very much where this year is heading toward. But COVID-19’s economic shock will likely be long-lasting and will affect grocery shoppers’ pocketbooks for quite some time.
In Canada, inflation has not been an issue for the past decade. It came close to four per cent in 2011, and that is about it. Not much excitement there. We have seen some decoupling between the general rate and food inflation before, but nothing like this. Over the course of this past summer, food prices increased almost four times more rapidly than the price of any other durable goods in the economy. Now, the Consumer Price Index is not reflecting the actual costs households are facing due to lockdowns. We are all consuming differently. Still, the difference between the two is huge.
COVID creates initial meat shortages
In March 2020, the initial COVID-19 shockwave was real rather than financial, and it impacted industry and the rest of the economy directly. Food service, a sector which generates more than $90 billion of revenues a year in Canada, essentially disappeared almost overnight. Lockdowns forced the entire food industry to adjust quickly to a change in our economy. That shock was swiftly transmitted to the demand side, as households were hit by layoffs and lower incomes.
Financial markets were then hit hard by the uncertainty, not knowing when the pandemic and lockdowns would end – unlike other recessions where a slowdown is triggered by a shift in demand, which leads to subsequent market pressures to cut supply. That is what our textbooks tell us. COVID-19 is essentially a one-two punch to the system, whereas both sides of the economy, supply and demand, were hit hard. There is no textbook for that. The recovery’s sequence is hard to predict, with more than eight million Canadians who have applied for the Canadian Emergency Response Benefit (CERB).
Once confinement measures loosened up and Canadians could go out, shop, visit restaurants and do other normal activities to support the economy, the question was whether Canadians would show up. If lingering fears of contagion and of a possible second wave and uncertainty about household incomes prevail, the likely outcome is deflation or at least a price drop for most things. ‘Deflation’ is likely the scariest word for any economist. It is like cancer to an economy. Hard to end deflation and grow an economy when consumers know that what they want to buy today will be cheaper tomorrow. That could impact clothing, cars, houses – you name it. Taxes will go up, putting more pressure on consumer demand.
Food differs from other products
Food will likely buck the deflationary trend for an extended period. Unlike what many analysts have often said, the food sector is not recession-proof, as consumers will either trade down or will not go out as much. But with COVID-19, nobody has been going out to restaurants, and consumers have not really celebrated their lockdowns over caviar either. Most of us went back to basics: cooking, baking and making bread. Consumer demand now has a COVID-19 benchmark. Deflation or not, we need to eat.
Yet, on the supply side, COVID-19 is making everything more expensive to produce, process, distribute and retail. New cleaning protocols, higher salaries and building infrastructure for e-commerce will all cost more. Plant shutdowns and food safety issues are the last things the food industry needs. With online shopping becoming more popular, delivery costs will also need to be covered by consumers, whether we like it or not. Food has always been a high-volume, low-margin business, and that is not going to change. For industry, covering the cost to produce and distribute food, and asking consumers to pay more, will not change either. COVID-19 is impacting the entire planet, so we cannot import our way out of this scenario either.
As a result, we could see the average Canadian family devote a much greater percentage of their budget to food. Pre-COVID, roughly nine per cent of our budget was devoted to food. It is one of the lowest percentages in the world. That could rise to 11 or 12 per cent by 2022. In fact, given lockdowns, that percentage is likely much higher right now. In comparison, Americans are at six or seven per cent, whereas Europeans will spend about 15 per cent. Their percentage will likely change as well. In 1970, Canadian households were spending 21 per cent of their budgets on food. So, in a sense, we are going back in time.
COVID helps dictate buying trends
As for meat counter economics, things may get interesting. Early signs suggest consumers are not giving up on meat. In fact, 91 per cent of Canadians still eat meat regularly, based on recent polling data released by the Agri-Food Analytics Lab at Dalhousie University. With the regular trifecta of meat products, which includes pork, chicken and beef, consumers will continue to visit the meat counter, but with much tighter purse strings. With beef prices going up since January, we are expecting Canadians to consider chicken and pork as budget-friendly options. Chicken has been a stable option for years, but pork could also become the product of choice for the next little while. Beef will likely remain popular, but price will be an issue for families financially challenged by the economic downturn.
Simply put, current food economics are overwhelmingly forcing us to revisit the social contract we have with food, perhaps for the betterment of society. Valuing food, especially meat products, has only positive socio-economic implications.
Current food economics are making us more attuned to what is happening around us food-wise. It is also making us more food-literate. Such a shift in food prices is relative to what else is going on in the economy and will leave many behind as food insecurity levels in many parts of our country will soar.
Single parents, children and underprivileged demographic groups will require more attention as we embark into a new food era. Animal proteins, one of the most significant misunderstandings in modern agriculture, could get a boost by renewing its relationship with consumers. Our rural/urban divide has generated significant disconnects around major issues like GMOs, processed foods and, yes, animal production. The market could open up to a more traditional case, which suggest that animal production is very much part of sustainable agricultural systems.
However, there is a silver lining: since the beginning of COVID, even if food prices have been rising, most households are spending less on food. Each household in Canada is saving approximately $5 a day by just cooking at home and avoiding restaurants. That is roughly more than $600 since the beginning of the pandemic, which far exceeds price hikes shoppers needed to absorb during the same period.
Any way we look at it, COVID-19 will have a long-lasting impact on our relationship with food, and no-one is immune to that.