It’s easy to see that store food prices are inflated. It is very difficult to determine who caused this and what caused it.
Democratic presidential candidate Vice President Kamala Harris wants to ban “price gouging” in the food industry to combat food inflation, which has been the bane of the economy for the past three years. Grocery prices have increased 21% since Joe Biden entered the White House in 2021. Wages have only increased by 17%. Shoppers are losing their grocery budgets.
When Donald Trump was president, food prices rose only 6.5%, while wages rose 15%. That’s one big reason why some voters think Trump has an advantage on handling the economy. Inflation in food and rent prices pushed Biden’s approval rating below 40% and was one of the reasons he withdrew from the presidential race in July.
Harris clearly wants to reverse that negative atmosphere. But identifying the villains responsible for soaring food prices is not the way to do that.
To explore price gouging in the food industry, Yahoo Finance examined profit and cost data from eight different sectors representing the entire food industry, including agriculture, food production, distribution, and retail. This includes the big companies you’ve all heard of, such as Walmart (WMT), McDonald’s (MCD), Coca-Cola (KO), and Procter & Gamble (PG), as well as many of their competitors. Included.
We collected data on eight sectors of the food industry using standard industry classification codes, and the Dow Jones ticker symbol and S&P Capital IQ for each sector. Each ticker symbol represents a subset of publicly traded companies in the S&P 500 (^GSPC) index. Therefore, the profit and cost data analyzed represents the aggregation of data for all companies represented by each ticker symbol.
We compared average costs and benefits from 2016 to 2019 to the same data from 2022 to 2024. The first period represents the pre-COVID-19 economy, where inflation was low, and the second period represents the post-COVID-19 economy, where inflation was high.
If profits have significantly exceeded costs in the past few years, price gouging will be obvious. It will then become clear that companies are raising prices more than necessary to cover their higher costs, thereby making more profits.
But I found very little of that. Of the eight categories we examined, benefits exceeded costs in only three. This suggests that companies in these categories were passing on a little more to their consumers on top of their own higher costs. But in five other industries, companies appear to be eating up costs rather than passing them on.
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The greatest benefits relative to costs occur deep in the food supply chain, and most consumers will not notice them. In the produce and services sector, post-COVID-19 profits increased by 129%, but costs increased by just 75%. That means the industry is more profitable than it was in the four years before COVID-19.
The largest company in this field is ADM, formerly known as Archer Daniels Midland, which processes agricultural products such as corn, stores and transports grain, and produces various food additives in addition to ethanol. There is. ADM has increased its profitability in recent years. From 2016 to 2019, the return averaged 2.4%. It rose to 4.3% in 2022, when food inflation reached 12%. At an earnings conference, executives explained how their newfound “pricing power” is helping boost profits.
Does that constitute “price gouging”? Hmm. Companies, especially publicly traded companies, have a legal obligation to maximize profits for their shareholders. Companies raise prices as much as possible. It is the government’s job to figure out whether companies are abusing monopoly power or other unfair advantages. Also, ADM’s 4.3% profit margin doesn’t seem excessive when compared to a company like Apple (AAPL), which has a 26% profit margin.
In any case, ADM’s margins are currently on the decline, and executives discussed the challenge of lowering prices, rather than raising them, in the latest earnings call. ADM did not respond to requests for comment.
The only other sector that has seen significant increases in profitability in recent years are consumer staples retailers, including Walmart, Costco (COST), Target (TGT), and other chain stores. Since COVID-19, the sector’s profits have increased by 67%, but costs have increased by 51%. This does not appear to be a large enough gap to constitute price gouging. Such improved performance could come from increased efficiency as companies struggle to streamline operations in the face of rising wholesale costs.
Democratic presidential candidate Vice President Kamala Harris and her running mate, Minnesota Governor Tim Walz, attend a campaign rally in Milwaukee on Tuesday. (AP Photo/Jacqueline Martin) (ASSOCIATED PRESS)
The only sector that will be profitable post-coronavirus is household and personal products, led by companies like Procter & Gamble. But benefits exceed costs by only 1 percentage point, which is basically nothing.
There are notable examples of declining profits for food companies. The restaurant is particularly noteworthy. Since COVID-19, the division’s profits have increased by 8%, but costs have increased by 50%. When McDonald’s, Chipotle (CMG), Starbucks (SBUX) and other chains say they’re doing their best to keep price increases under control, they have the data to back it up. Other sectors are also showing declining profitability, represented by companies like Philip Morris (PM), Mondelez (MDLZ), Kraft Heinz (KHC), and Coca-Cola.
If companies aren’t price gouging, what explains high food inflation? This is not a single thing, but one of the many things consumers have started hearing about over the past few years. It’s a factor.
The big one is personnel costs. Strong economic growth and labor shortages in some regions have pushed labor costs to their highest level in years. From 2010 to 2019, total compensation costs increased by an average of 2.2% per year. From 2022 onwards, the average increase is 4.6%. When wages go up, they usually stay raised. This is one reason why some inflations, including food inflation, are “sticky.” The good news is that workers’ salaries are increasing due to rising labor costs.
Read more: Mobile phones, TVs and used cars: Here’s where prices are falling as inflation cools
Like motorists in general, the food industry is facing rising fuel costs. This is due in part to the disruption caused by Russia’s invasion of Ukraine in 2022, which increased transportation and production costs. Fertilizer prices have soared due to global shortages and remain high. Supply chain disruptions caused by the new coronavirus were another factor.
In fact, Biden has focused on the root causes of inflation, including an oil emergency release in 2022 to help lower energy prices and the creation of various task forces to unclog ports and ameliorate other disruptions. I have done everything I can as president to address this. If greedy gluttons were eating away at families’ grocery budgets, we’d probably know who they are by now. But the search for a villain seems likely to continue until the issue is forgotten.
Rick Newman is a senior columnist at Yahoo Finance. Follow him on X @rickjnewman.
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