Food inflation on store shelves is easy to spot. Figuring out who or what caused it is far more difficult.
Vice President Kamala Harris, the Democratic presidential candidate, wants to ban “price gouging” in the food industry to counter food inflation, which has been the scourge of the economy for three years. Food prices have risen 21% since Joe Biden entered the White House in 2021. Wages have risen only 17%. Shoppers are losing ground on their grocery budgets.
When Donald Trump was president, food prices rose just 6.5 percent while wages rose 15 percent. That’s a big reason why some voters give Trump’s handling of the economy an edge. Inflation in food and rent helped push Biden’s approval ratings below 40 percent, one of the reasons he dropped out of the presidential race in July.
Harris clearly wants to reverse this negative sentiment. But pinpointing a culprit for high food prices is not the way to do it. To track down price drivers in the food industry, Yahoo Finance examined profit and cost data in eight different sectors that represent the entire food industry, including agriculture, food production, distribution and retail. This includes big names that everyone knows, like Walmart, McDonald’s, Coca-Cola and Procter & Gamble, as well as many of their competitors.
We used standard industry classification codes to collect data on eight sectors of the food industry, using Dow Jones ticker symbols for each sector and S&P Capital IQ for data collection. Each ticker symbol represents a subset of the publicly traded companies that comprise the S&P 500 index, so the profit and cost data we analyzed represents an aggregation of data for all companies represented by each ticker symbol.
We compared average costs and profits from 2016 to 2019 with the same data from 2022 to 2024. The first period represents the pre-COVID economy, when inflation was low, while the second represents the post-COVID economy, when inflation was high.
Price gouging would be obvious if profits had increased much more than costs in recent years. This would show that companies are raising their prices more than necessary to cover their own higher costs and thereby make more money.
But we found little of that. In only three of the eight categories we examined did profits rise more than costs, suggesting that companies in those categories were passing on their own higher costs and a little more to consumers. In the other five industries, however, companies appeared to be bearing the higher costs rather than passing them on.
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The largest profit-to-cost gains occurred deep in the food supply chain, where most consumers wouldn’t even notice them. In the agricultural products and services sectors, profits increased 129% post-COVID, while costs rose only 75%. That means this industry is more profitable today than it was in the four years before COVID.
The largest company in this sector is ADM, formerly known as Archer Daniels Midland, which processes agricultural commodities such as corn, stores and transports grain, and produces a variety of food additives in addition to ethanol. ADM has actually become more profitable in recent years. From 2016 to 2019, its average profit margin was 2.4%. This rose to 4.3% in 2022, when food inflation reached 12%. In conference calls, executives explained how the newfound “pricing power” helped boost profits.
Is that “price gouging”? Well. Companies, especially public ones, have a legal obligation to their shareholders to maximize their profitability. Companies raise prices whenever they can get away with it. It’s the government’s job to find out if companies are taking advantage of their monopoly position or other unfair advantages. And ADM’s 4.3% profit margin hardly seems excessive compared to a company like Apple, which has a 26% profit margin.
In any case, ADM’s profit margin is now declining again, and in the last earnings call, executives talked about the challenges of lower, not higher, prices. We’ve reached out to ADM for comment and will update this article if the company responds.
The only other sector where profitability has increased significantly in recent years is consumer goods retail, which includes Walmart, Costco, Target and other chain stores. Post-COVID, profits in this sector rose 67% while costs rose 51%. That doesn’t seem like enough of a gap to call it price gouging. Such an increase in performance could be due to efficiency gains, as companies facing increases in wholesale costs work harder to streamline their operations.
The only other sector that is more profitable post-COVID is home and personal care products, which includes companies like Procter & Gamble. But profits only exceed costs by 1 percentage point, making it essentially a zero-sum game.
There are notable examples of food companies becoming less profitable. Restaurants are particularly notable. After COVID, profits in this sector have increased by 8% while costs have increased by 50%. When McDonald’s, Chipotle, Starbucks and other chains say they are doing their best to limit price increases, they have data to back it up. Other sectors, including companies like Philip Morris, Mondelez, Kraft Heinz and Coca-Cola, are also showing declining profitability.
If companies are not engaging in extortionate pricing, what is the explanation for high food inflation? It is not a single factor, but a series of factors that consumers have been hearing about in recent years.
One big problem is labor costs. Strong economic growth and a shortage of workers in some areas have pushed labor costs to their highest levels in years. From 2010 to 2019, total wage costs rose an average of 2.2% per year. Since 2022, the average increase has been 4.6%. When wages rise, they tend to stay up, which is one reason why some inflation – including food inflation – is “sticky.” The good news is that rising labor costs inflate workers’ salaries.
Read more: Cell phones, televisions, used cars: Prices are falling as inflation eases
Like regular motorists, the food industry is grappling with higher fuel costs, partly due to disruptions caused by Russia’s invasion of Ukraine in 2022. That has increased transportation and production costs. Fertilizer prices have skyrocketed due to global shortages and are still high. Another factor has been supply chain disruptions due to COVID.
Biden has actually done as much as a president can do to address the causes of inflation, including emergency oil releases in 2022 to lower energy prices and setting up various task forces to decongest ports and mitigate other disruptions. If greedy money-grubbers were raiding families’ food budgets, we would probably already know who they are. But the search for the bad guys will likely continue until the problem is forgotten.
Rick Newman is senior columnist for Yahoo FinanceFollow him on X at @rickjnewman.
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