Grocery price gouging

CNBC headline:

"Harris to propose federal ban on ‘corporate price-gouging’ in food and groceries."

On Friday I wrote that food should not be cheap. There were a few months during Covid when Americans paid unemployment insurance to workers to encourage people not to go to work. We quickly learned that some workers are essential, agricultural workers among them. Those workers achieved bargaining power to get higher wages. As a farmer, I am paying them. I don't object. A lot of farm work is strenuous and tedious, done stooping over while outside in hot, cold, wet, dusty, or rainy weather. People who do hard, important work should not live in poverty. Those higher wages show up at the grocery store.

I realize that that is an unpopular comment. People want low prices and we are suspicious of "corporate greed." My own experience is that food is very price sensitive. Shoppers substitute food choices if prices seem out of line on some item. It is hard to "gouge." Moreover, factory-scale food sources are, if anything, too efficient and price competitive. Local, direct farm-to-consumer food is likely more expensive than grocery store prices. Non-corporate food producers compete on quality, freshness, and local-ness, not price. I could not compete with factory-farm melons coming out of California. Their melons weren't great, but they were good enough for consumers to choose, and they were cheaper than I could produce them. Food is a bargain in America.

College classmate Chip O'Hare works in a different segment of the food industry. He is a middleman, that essential, but easiest to criticize, segment of the food supply chain. Chip and his partners own and operate a grocery sales and marketing agency that represents over 600 clients. Over 80% of food sold in retail stores are sold by agencies, as processors and growers find it more efficient to outsource the sales function. Chip's company represents the brand whose products you see on grocery shelves.

O'Hare

Guest Post by Chip O'Hare

I’m enthusiastically voting Harris/Walz, but, like you, I was surprised and concerned when Harris announced a war on price gouging in the food industry, where I work and own a sales and marketing company. To me, it looked like pandering, as food inflation is now under control and Harris' attempt at "whack a mole" is no longer needed since the mole is basically dead. While Trump keeps telling voters that it's still alive, Harris would have been better off educating voters on how inflation is coming down thanks to Biden policies rather than feeding the narrative that greedy corporations are to blame.

Americans pay the lowest share of disposable income on food in the world at 11.2 percent. Plus, our country has the most efficient distribution system in the world. Europeans pay about 15%, and all other areas pay more, except communist countries, where the true numbers are not known but where shortages and under-nutrition are the norm. 

Food inflation is now down to 1 percent based on last month's data, which your graph showed in your Friday blog post. While profits did indeed increase under Covid, they were driven by market forces that were out of balance due to Covid. For example, restaurants closed and 95% of food consumption shifted to home preparation. But profits have now returned to normal. Did price gouging happen? Possibly, as companies found pricing power after several years of flat pricing, profits and share prices. 

Some of the largest corporations did make headlines that shaped public opinion, as Kraft-Heinz, the maker of Oscar Mayer, Jell-O, and Kool Aid, saw 2022 Q4 profits up nearly 450 percent and Cal-Maine Foods, the largest egg producer in the U.S., reported that its revenue doubled and profit surged 718 percent in Q1 of 2023. Kraft-Heinz saw demand surge and cost surge, which caused them to increase prices significantly. The jump in egg prices was caused when disease shrank the chicken population and some states passed laws on humane farming methods. The supply of eggs was down; demand for eggs stayed nearly even; the markets did what markets do. High egg prices were a signal to producers to rebuild their chicken populations, and they did. Egg prices are lower, but still relatively high thanks to new producers of humanely raised/high quality eggs like those from Vital Farms. The "gouging" that occurred is modest when viewed in the context of many years of modest inflation and mediocre returns, and it had a purpose. It brought a quick recovery in the chicken population.

I’m concerned that government interference in a market that is very efficient will have unintended consequences. Blaming corporate boogeymen doesn't match reality. Anytime things get out of balance such profiteering can happen. Then, in competitive markets like the grocery business, it disappears. I’m concerned that the anti-price gouging policy is reactionary. It is an attempt to control market behavior that no longer needs it. I liken it to investors chasing earnings from the prior quarter or year.

Also, as Peter noted, much of the inflation was caused by wage increases, which were a good thing given that the industry is low pay (i.e., Walmart) and food industry workers needed a boost. The Covid Relief Act, passed under Trump, ended up allowing workers to enjoy a subsidized strike, as workers decided to sit out the pandemic, thus causing an imbalance between workers and jobs. When things got out of balance, price increases occurred in a frenzy as companies sought to keep ahead of the cost wave. Wages at the low end of the supermarket business increased from $13/hour in 2019 to $22/hour today. But the frenzy is over. I'm concerned that government interference in a market that’s very efficient is poor policy. As many liberal economists have pointed out, history has shown that any attempt to control prices in a free market makes things worse.

The media blew up this past weekend on this issue, and that puts a damper on the honeymoon that Harris and Walz had enjoyed. It has also given grist to the mill of those who seek to tar the Democratic Party with a socialist brush. Even David Brooks and Jonathan Capehart panned the price-gouging policy announcement this weekend on PBS. This provides Trump with fuel for his argument that Harris is a socialist. It would have been better for her had she looked elsewhere for examples of corporate price fixing.  

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