Are Carbon Taxes Driving Food Prices Up?
In recent years, Canadian consumers have faced a noticeable rise in grocery prices, with increases largely surpassing those in neighboring countries. A key driver behind this surge has been identified as the carbon tax policy, which has affected the food supply chain from farm to store. The effects have reverberated through wholesale and retail prices, creating a challenging landscape for both consumers and the food industry.
The introduction of the federal carbon tax in Canada in 2019 marked a turning point in the nation’s food pricing trends. Data from wholesale and retail food price indices reveal that since this policy’s implementation, there has been a consistent climb in costs across the supply chain.
One of the most striking pieces of evidence comes from a comparative analysis of the Retail Sales Price Index (RSPI) and Wholesale Sales Price Index (WSPI) from 2015 to 2024. The graph shows retail prices rising sharply, particularly after the tax increases, with wholesale prices following a similar trajectory. These patterns are marked by significant upticks immediately following the red lines on the chart, which indicate periods when the carbon tax was increased.
A detailed analysis reveals that both retail and wholesale food prices are escalating, but the wholesale price increase is particularly concerning as it directly influences consumer costs. As Dr. Sylvain Charlebois, known as “The Food Professor” on social media, observed, “Wholesale food prices further up the supply chain, driven higher by policies like the carbon tax, are putting increasing pressure on retail food prices.”
The discrepancy in wholesale food price trends between Canada and the United States is even more alarming. A comparison chart shows the US Producer Price Index (PPI) for Food alongside the Canadian Wholesale Sales Price Index (WSPI) for food over a 14-year span (2010-2024).
A significant divergence is visible after 2019, the year the Canadian federal carbon tax took effect, indicated by a red dashed line. Since then, the Canadian WSPI has risen by 42.62%, while the US PPI has increased by only 30.87%, resulting in a 36.8% difference in price growth between the two countries. This gap suggests that Canada’s food industry is becoming less competitive, as it faces additional costs not borne by American producers.
This growing disparity is a point of concern for those monitoring the competitiveness of Canada’s food industry. Dr. Charlebois remarked, “This is how the carbon tax could be affecting the competitiveness of our food industry, from farm to store.”
Margin expansions amidst rising prices
Compounding the issue of rising food prices is the trend of margin expansion by large food companies. Margin expansion refers to the increase in the difference between the cost of producing goods and the price at which they are sold, essentially boosting profit margins. For large companies in the Fast-Moving Consumer Goods (FMCG) sector, this increase often translates into higher prices for consumers.
For instance, Unilever, a major multinational in the FMCG industry, has expanded its margins by 250 basis points. This rise in margins is evident in Unilever’s financial performance, as seen in their first half of 2024 report, which indicates a 19.6% operating margin, up by 250 basis points from the previous year. The underlying operating profit stood at €6.1 billion, with a reported growth of 17.1% compared to the prior year.
Similarly, Nestlé, another FMCG giant, reported a margin increase of 160 basis points. Their financial data for 2023 underscores organic growth of 7.2%, with a 7.5% pricing increase compensating for a -0.3% real internal growth. Such increases are attributed to various factors, including the need to offset higher costs, potentially influenced by policies like the carbon tax.
Even Danone, a company operating in what is typically considered a ‘low margin’ business, experienced an upward shift. With only a 40 basis points gain, it has achieved impressive margins by leveraging its operational strategies. As Daniel Mullen, an industry analyst, noted, “Danone, with a gain of only 40 basis points, makes fantastic margins for being in a ‘low margin’ business.”
Consumers in the crossfire
The combination of rising wholesale costs due to carbon tax policies and the increasing margins of large food companies leaves consumers bearing the brunt. As wholesale prices rise, retailers are forced to adjust their prices to maintain profitability, ultimately pushing the increased costs down to shoppers. This results in higher grocery bills at a time when many are already facing economic pressures from inflation and other factors.
As the Canadian food industry faces these challenges, calls for a thorough review of the carbon tax’s impact on food prices are growing louder. The combination of tax policies and profit margin strategies is making basic goods less affordable for many Canadians, sparking discussions on potential reforms or supportive measures to alleviate the burden on consumers.
Information for this briefing was found via the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
