Why it’s hard to identify sources of inflationary pressures in agri-food supply chains
Our post last week looked at some of the facts about price transmission in the producer-to-processor link of Canada’s dairy and hog/pork supply chains. This second post explains several factors behind price transmission in the Canadian agri-food supply chain overall.
Price transmission in Canadian agri-food sectors
As we outlined last week, tracing price transmission through the agri-food supply chain isn’t straightforward. While there's some line of sight from the increased prices for farm-level inputs (e.g., feed grains) to increased prices for processed food products, that clarity varies by agricultural sector.
Price transmission can be defined as the relationship between prices in two related markets: as prices in one market respond to changing conditions, prices in other markets may be adjusted accordingly. Price transmission explains inflation as “a general increase in prices and decline in the purchasing value of money.”
“Full” price transmission is said to occur when the price of an input accounting for 1% of the total costs doubles (increases 100%) and results in the product price increasing by 1%. Full transmission makes it relatively easier to identify the source of inflationary pressures. Any deviation from full transmission for any reason may be labelled “Imperfect” price transmission, defined as anything less than full. Agri-food supply chains are characterized by imperfect price transmission at each level of the supply chain. It then becomes very difficult to accurately source or track inflationary pressures throughout it.
For example, supply-managed sectors operate in environments where shifts in the cost of production estimates lead to adjustments in the farm output price according to pre-determined formulas. But even here, “full” price transmission isn’t guaranteed. In the case of dairy, both production costs and the overall consumer price index impact the farmgate milk price. Each driver rises (and falls) at different rates.
The processors’ output price is a function of multiple factors, each of which has been subject to considerable and wide-spread volatility between 2019 and 2022: the shifts in the farm product price, inflationary pressures on other inputs (such as energy and labour); and negotiations with buyers (e.g., retailers) on the degree to which they can pass on their higher costs.
Non-supply managed sectors are also usually (if not always) characterized by imperfect price transmission. They’re typically more exposed to global markets than are supply-managed sectors and have little control or influence over prices. Canada’s livestock producers and meat processors are “price takers”: The hog prices received by Canadian producers come from within a North American market, wherein U.S. prices play the largest determining factor.
The U.S. hog sector is strongly influenced by demand from pork packers which is, in turn, influenced by global market forces such as production and import volumes in China, the world’s largest pig and pork market. Price transmission in this market has been hard to decipher since the 2018 initiation of African Swine Fever in the Chinese pig herd sent shockwaves through global feed and meat markets, resulting in increased price volatility that has persisted into 2022.
Feed grains are also priced within a global market, subject to variations in (among other things) biofuel usage, supply shocks such as Russia’s war and extreme weather disruptions. A change in any of those drivers will affect the prices Canadian livestock producers pay for feed without the possibility of transmitting further the change in costs.
Three drivers of imperfect price transmission
Imperfect price transmission can exist because of the following:
- Lags between a producer’s production and marketing decisions.
- Contracts are often negotiated, or production decisions are made, when costs are “x,” but the product is delivered at a point when costs are “y.”
- It’s possible that some “costs” can’t be transmitted (e.g., currency appreciation or exchange rate “losses” between contract signing and goods delivery dates). Other costs applied indiscriminately and unexpectedly (e.g., non-tariff barriers applied in an uncertain geopolitical climate) can neither be fully recaptured.
- The degree of product differentiation and substitutability in global and domestic markets.
- A highly differentiated product (e.g., organic meat) has a higher likelihood of recouping costs in its selling price than a less-differentiated product (e.g., feed grains).
- Transport and transaction costs.
- Computed as part of the cost of raw materials, they can vary independently of any changes in the prices for the raw inputs alone.
2019 – 2022 has been a period of tremendous price volatility and inflation of all basic agricultural inputs – at both the farm and processor levels. Each input price increase has played a role in elevating food prices. But while it’s not always obvious how those increases are transmitted from producer to processor, one thing is clear: Determining the source of food inflation is complex and uncertain. So, at the next party, when someone asks why prices are so high, you can give economists’ favourite answer and say, “Well, it depends.”
“Food inflation and higher input costs for farms and food processors: is there a link?” is Part 1 of the series.
Martha joined the Economics team in 2013, focusing on research insights about risk and success factors for agricultural producers and agri-businesses. She has 25 years’ experience conducting and communicating quantitative and qualitative research results to industry experts. Martha holds a Master of Sociology degree from Queen’s University in Kingston, Ontario and a Master of Fine Arts degree in non-fiction writing from the University of King’s College.