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Tuesday, May 31, 2016

Grocery store economics lesson


Well imagine my surprise when I see today that 2L grapefruit juice, normally $3, is on special for $1.44.

And 1L honey, which was going for $10, has now been cut to $6.99.

And Minute Maid FCOJ, normally $1.50, is on special for 79 cents. I haven't seen these sorts of prices for years.

Over the past year we've seen Canadian groceries go up in price tremendously, but now they're coming back down. What happened?

Well, when oil crashed, the Canadian dollar crashed with it too. Our groceries seem to all come from the US nowadays, so all the American suppliers must have decided to jack up their Canadian grocery prices by a third to make up for the one-quarter drop in CAD.

But guess what? The value of CAD didn't drop because of inflation: it dropped because the price of oil dropped, so there was less demand for CAD.

Canadian consumer staples purchasing power, in other words, didn't go up by a third as CAD dropped. In fact, the drop in oil was a recessionary shock for us: purchasing power has actually decreased in CAD terms in some parts of the country, and Canadian consumer staples purchasing power in USD terms has still dropped by a quarter.

So the American suppliers who jacked up our prices by a third to maintain profitability in USD terms saw their demand dry up. The only people buying their shit anymore were idiot yuppies who don't know how to manage their grocery bill. Meanwhile, I guess the Americans didn't bother to scale back production, or cut exports to Canada, so e.g. in the case of FCOJ, they're now stuck with a billion cans of frozen Minute Maid sitting in storage in an Oakville food terminal just as this year's crop of oranges is coming down the pipe.

And the substitution away from higher-priced goods has caused a loss in consumer utility that isn't warranted in purchasing power terms: I guess you could call it a temporary disequilibrium in utility? No-name producers see that there is potential demand still there, the prices are just too high: so then they brutally undercut name-brand producers to gain market share, to clear out their own inventory backlog. Suddenly we get a race to clear backlog across all brands.

And prices go back down.

To where they should have been all along, because Canadian consumer staples purchasing power never changed.

I can't wait til Canadian apples and peaches hit market: at that point all American fruit will have to drop in price to maintain market share, or else all demand will switch to Canadian fruit growers.


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