Do Corporate Profits Lead to Food Inflation?

After more than two years of rising costs, Americans are finally feeling some relief in the grocery store as food inflation calmed down for the first time in March and again in April.

But these price drops will probably only go to the limit. The main reason is that over the past few years, the handful of food companies that dominate the sector have charged a premium for their products, citing supply chain disruptions. As a result, they are making record profits and nothing is stopping them from continuing.

Food companies are thriving: From 2021 to 2022, the food and beverage industry will record profits of over $155 billion.

It is well known that the triple threat of a pandemic, Russia’s war with Ukraine and the impact of climate change is having a huge impact on supply chains. Then came bird flu, and from 2022 he had more infections until early 2023.

This series of supply chain disruptions has pushed food prices to all-time highs, leaving many families unable to afford groceries. But that’s not all.

Food companies are thriving. According to Forbes, the food and beverage industry will record more than $155 billion in profits between 2021 and 2022. Nestlé, the world’s largest food company, increased its gross profit by nearly 3% last year to $46 billion. Cargill last year posted a 23% increase in sales to $165 billion, of which he made $6.68 billion in profit. Tyson Foods, America’s largest meat producer, nearly doubled its profits in the first quarter of 2022 as meat prices soared.

The profits go to food company executives and their shareholders. Last year, Tyson Foods CEO’s salary rose 33% to $12 million. Cargill gave his $1.21 billion to shareholders in his 2022 fiscal year, a record amount.

How is the corporate food industry thriving in the midst of the global food crisis? Can these two realities be reconciled? And what will that mean for future food prices? Is not it? We spoke to an expert to explain what was going on.

food pricing

The list of supply chain disruptions outlined above has caused shortages in some food groups and, unsurprisingly, led to higher prices for those items. In addition, costs such as transportation costs, fuel costs, labor costs, and raw materials for enterprises are also rising. Workers’ wages are also rising, but not enough to keep up with inflation. These costs are largely passed on to consumers, further driving up food prices.

“People are willing to pay a premium when food supplies are disrupted during a crisis,” said David Ortega, a food economist and associate professor at Michigan State University.

And not only is the supply scarce, but the demand has increased tremendously over the last few years. Data from the United States Department of Agriculture (USDA) shows that consumer spending on food is above pre-pandemic levels, even after accounting for inflation.

“The real cost of these products will be paid not only by our future generations, but also by the environment and communities of color, especially farm workers and low-income rural people living in highly polluted agricultural areas. increase.”

“Part of that is likely due to some of the excess savings that households have accumulated during the pandemic,” Ortega said. Demand from some consumers, usually younger consumers, willing to pay a premium for ethically and environmentally sustainably grown or raised food for their surplus savings is increasing.

“I think that’s what the grocery industry is really working on right now, because the grocery industry is a real cost-counter. Because we don’t live in the world,” he said. “they live [a world with] The real cost of these products will be paid not only by our future generations, but also by the environment and communities of color, especially farm workers and low-income rural people living in highly polluted agricultural areas. There are many externalities. ”

Food prices do not reflect these factors at all at this time. In fact, an analysis by the nonpartisan Economic Policy Institute found that corporate profits accounted for 54% of the increase in food prices from 2020 to 2021. Over the previous 40 years, only 11% came from corporate profits and the rest from higher food prices. Labor.

When avian flu recently wiped out more than 58 million birds in about a year and caused egg prices to soar dramatically, Carmain, the largest egg seller in the United States, increased its gross margin by fivefold. I was allowed to. This cast doubt on farmer-led advocacy group Farm Action, which wrote to the Federal Trade Commission (FTC) in January asking it to investigate price gouging and collusion in Cal Maine. .

“Contrary to industry claims, the egg price hike was not a ‘natural disaster’ but simply profiteering,” the letter said.

(Photo credit: Brandon Bell, Getty Images)

Farm Action pointed to USDA’s analysis of egg prices for 2022 as a whole, with researchers consistently noting that prices were “substantially higher than expected.” The fact that other egg producers didn’t intervene to sell their eggs cheaper “could be evidence of an implicit collusion in the marketplace,” said Farm Action co-founder and president. said Joe Maxwell of

And it’s not just the egg industry that has been accused of price gouging last year.

“Fundamentally, what companies have been able to do, and which they always brag about in their earnings calls, is to absorb these rising costs and reduce their costs,” said Chris Becker, senior economist at Groundwork Collaborative It’s all passed on to the consumer,” he said. A progressive economic think tank. “But they’ve been able to raise their prices significantly beyond that, and they’ve really seen their profit margins skyrocket. They’re doing it on every unit they sell compared to what they’re paying for labor input costs.” and generate higher profits.”

Researchers at Groundwork have been listening to company earnings calls to hear what executives at food companies say to shareholders about profits. “They don’t use the word ‘profiteering’, but they are talking about how they can get away with prices much higher than normal,” Becker said.

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