It’s easy to see rising food prices on store shelves, but it’s much harder to pinpoint who or what is responsible.
Democratic presidential candidate Vice President Kamala Harris wants to ban “price gouging” in the food industry to address food inflation, which has plagued the economy for the past three years. Since Joe Biden entered the White House in 2021, food prices have risen 21%. Wages have risen just 17%. Shoppers are shrinking their grocery budgets.
During Donald Trump’s presidency, food prices rose only 6.5%, while wages rose 15%, which is one of the main reasons some voters give Trump the edge on his management of the economy. Food and rent inflation has pushed Biden’s approval rating below 40%, and was one of the reasons he dropped out of the presidential race in July.
Prime Minister Harris clearly wants to reverse that negative mood, but pinning blame on bad actors for rising food prices is not going to be the way to do it.
To investigate price gouging in the food industry, Yahoo Finance looked at profit and cost data for eight sectors that are representative of the entire food industry, including agriculture, food production, distribution and retail. This includes some big names you’ve probably heard of, like Walmart (WMT), McDonald’s (MCD), Coca-Cola (KO) and Procter & Gamble (PG), as well as many of their competitors.
Standard industry classification codes were used to collect data for eight sectors of the food industry. Data was collected using the Dow Jones ticker symbols for each sector and S&P Capital IQ. Each ticker symbol represents a subset of publicly traded companies in the S&P 500 (^GSPC) index. Therefore, the profit and cost data analyzed represent an aggregation of data for all companies represented by each ticker symbol.
We compared average costs and benefits from 2016 to 2019 with the same data from 2022 to 2024. The first period represents the pre-COVID economy, where inflation was lower, and the second period represents the post-COVID economy, where inflation was higher.
Price gouging becomes evident when profits have grown significantly faster than costs over the past few years. This indicates that a company is raising prices more than necessary to cover its rising costs, thereby increasing its profits.
But we found little of this: In only three of the eight industries we looked at were profit growth outpacing costs, suggesting that companies in those industries were passing on their rising costs to consumers, plus a little on. But in the other five industries, companies appeared to be absorbing the costs themselves, rather than passing them on.
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The biggest gains in profits relative to costs have occurred deep in the food supply chain, where most consumers would not notice: In the produce and services sector, profits have increased by 129% post-COVID, but costs have only increased by 75%, meaning the industry is more profitable now than it was in the four years pre-COVID.
The sector’s largest player is ADM (ADM), formerly Archer Daniels Midland, which processes corn and other agricultural products, stores and transports grain, and produces ethanol and a variety of food additives. ADM has been boosting its profit margins in recent years; from 2016 to 2019, margins averaged 2.4%. By 2022, when food inflation hits 12%, that figure rose to 4.3%. On the earnings call, executives explained why newfound “pricing power” is driving profits.
Does that amount to “price gouging”? Well, it doesn’t. Companies, especially publicly traded companies, have a legal obligation to their shareholders to maximize profits. They will raise prices whenever they’re allowed to. It’s the government’s job to check whether companies are abusing monopoly power or other unfair advantages. And ADM’s 4.3% profit margins don’t seem excessive when compared to a company like Apple (AAPL), which has a 26% profit margin.
Either way, ADM’s margins are slipping again, and in its most recent earnings call, executives discussed the challenge of lowering prices, not raising them. ADM did not respond to a request for comment.
The only sector that has seen a significant increase in profitability in recent years is consumer staples retail, which includes chains like Walmart, Costco (COST), and Target (TGT). The sector’s post-COVID profits increased 67%, but costs increased 51% — a difference that doesn’t seem big enough to constitute price gouging. The improved performance could be the result of companies facing steeper wholesale costs making greater efforts to streamline operations and becoming more efficient.
Democratic presidential candidate Vice President Kamala Harris and running mate Minnesota Gov. Tim Walz attend a campaign rally in Milwaukee on Tuesday. (Photo by Associated Press/Jacqueline Martin) (AP)
The only sector that has been more profitable since COVID-19 is the home and personal products division, represented by companies such as Procter & Gamble Co. But profits are just 1 percentage point above costs, essentially breaking even.
There are notable examples of food companies experiencing declining profitability. Restaurants stand out: the sector’s post-COVID profits are up 8%, but costs are up 50%. Chains like McDonald’s, Chipotle (CMG) and Starbucks (SBUX) claim they are doing their best to keep price hikes in check, and they have the data to back that up. Other sectors, including companies like Philip Morris (PM), Mondelez (MDLZ), Kraft Heinz (KHC) and Coca-Cola, are also experiencing declining profitability.
If companies aren’t inflating prices, what explains soaring food inflation? It’s not due to a single cause, but rather to several factors that consumers have been hearing about for the past few years.
A big factor is labor costs. With robust economic growth and labor shortages in some regions, labor costs are at their highest level in years. From 2010 to 2019, total compensation costs rose 2.2% per year on average. From 2022 onwards, the average increase is 4.6%. When wages rise, they usually stay risen, which is one reason why some inflation, including food inflation, is “sticky.” The good news is that rising labor costs mean workers get paid more.
Read more: Cellphones, TVs, used cars: Areas where prices will fall as inflation subsides
Like drivers, the food industry has been hit by rising fuel prices, partly due to the disruption caused by Russia’s invasion of Ukraine in 2022. This has increased transportation and production costs. Fertilizer prices have soared due to a global shortage and remain high. Supply chain disruptions caused by the coronavirus are another factor.
Biden has indeed done everything he can as president to address the root causes of inflation, from emergency oil releases in 2022 to lower energy prices to setting up various task forces to decongest ports and ease other disruptions. If some greedy merchant was eating into families’ food bills, we probably know who it is by now. But the search for a villain seems likely to continue until the problem is forgotten.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on X. Follow.
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