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Tuesday, December 30, 2014

Big Ag rides the Monopolistic Coattails of SM

Big Ag. billionaires ride the monopolistic coattails of Supply Management ("SM").

The Big Ag. Billionaires love riding the coattails of Supply Management. Like most
"Deals with the Devil", both parties benefit from the relationship in the short term.
Long term, losing your freedom and your soul has significant consequences.

The Big Ag. Billionaires love riding the coattails of Supply Management. Like most
"Deals with the Devil", both parties benefit from the relationship in the short term.
Long term, losing your freedom and your soul has significant consequences.

Anonymous comments posted on Better Farming recently postulated that retailers enjoy, benefit, and welcome the price stability of SM commodities (dairy, chicken, eggs, & turkey), as it enables steady profits while minimizing consumer anger at high food prices.  Do big grocery chains ride SM's coattails too?

Big retail grocery chains tend to use 4 basic commodities (bread, milk, eggs, chicken) as "loss leaders" in their advertising and advertising flyers, where they focus their price competition efforts.  This theory assumes that if a grocer has excellent prices on these 4 basic foods, customers flock to your grocery store, then you can charge prices as you please on all the other items on your shelves.

That may be somewhat true, but there are limits to the retail price gouging that can occur under this method.

Groceries have always been a high volume, low margin business, and highly competitive.  More recently, grocers complain that it has become even more cut throat and competitive.  Walmart selling food in Canada has been a major disruptive force in the marketplace.  Some experts feel that Walmart will terminate its grocery sales experiment within the next five years.     

A Feb. 2014 Financial Post article said,
"Quarterly earnings margins before interest, taxes, depreciation, amortization and rent costs at Loblaw, Sobeys and Metro [the three largest grocery chains] have ranged from 6.5% to as high as 9% over the past two years."
I read with interest the recent article on Sobeys in Canadian Grocer.  Mr. Marc Poulin said healthier food products introduced into Sobeys over the past year are part of the reason for the recent profit jump at the stores.  I also note that the same article shared that "Analysts have said Sobeys faces fierce price competition in the grocery business."

On Empire Company Ltd.'s website (Empire is the parent company of Sobeys), it states, "Empire is committed to maximizing sustainable long-term shareholder value by supporting Sobeys’ purpose to help Canadians Eat Better, Feel Better and Do Better while also strengthening our related real estate investments."

Sobeys commitment sounds pretty good to me.  I hope that Sobeys follows through with their commitment.  I asked Empire's Board about that commitment on 2014/09/20 (ie. 100 days ago), and have not yet received a response from them.  They must still be thinking about it.

In 1996, researchers published their price modeling for the relationship  between farm and retail prices for 9 Canadian food staples. 
They found that
  • In 1986, Canada had 101 chicken processing plants.  The four largest processing firms, some of which operate multiple plants, account for at least fifty percent of total Canadian sales for meat (ie. low competition).  For chicken, the Canadian concentration ratio in 1982 was more than twice that in USA.
     
  • SM products sold at retail in Canada completely passed on all of the farm gate price increases to consumers (ie. a 1% increase in SM farm gate price increased retail store prices by 1%),
  • Non-SM foods usually passed on less than half of the farm gate price increase.
While Canada's chicken processor concentration in 1982 was double the US concentration, it has become even more concentrated by plant closures, mergers, and acquisitions.

That research confirms that it isn't just SM farmers who are solely responsible for the unfair gouging of consumers for SM commodities.  Those Big Ag. "friends" of SM who ride on the monopolistic coat tails of SM farmers also play a role in unfairly boosting prices of SM foods at retail stores.

It was reported to me earlier this year by the Meat Department Manager at a local grocery store that he was selling chicken at a price below their cost ($1.88 per lb., or $4.14/kg), which is roughly the same as US retail pricing.  I believe what he told me was true.  While it may not happen every day, it appears to happen at least sometimes that some food items are sold at retail prices that are at or below the retail store's cost.

Chicken Farmers of Ontario ("CFO") seems to have learned the "boiling frog" method of slow steady price inflation of 3.57%/yr as an insidious attack on consumers so as to maximize the profits of their multi-millionaire CFO members and their Big Ag friends. See Chicken Price Parity:  Will It Ever Come?

That "boiling frog" steady rate of price inflation for chicken may help retailers as well, just as the BF poster suggested.

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