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Profit-driven inflation

Posted by Rebecca Kneen on

what's behind the rise, really?

Is the war in Ukraine behind inflation in Canada? From Forbes business magazine – a conservative business voice, hardly given to criticism of the economic system:
“(after 2019)...the average CEO to worker pay ratio was 324 to 1, up 23% from 2019, or nearly twice the rate of inflation. CEO earnings grew 18%, 4 times the rate of wage growth. S&P 500 profits rose by 17.6% in 2021. Profit margins crested at 15.5% in 2022, the most profitable year since 1950, while corporations issued more than $300 billion in stock buybacks to institutional shareholders like Kapito’s BlackRock. The timing with price inflation is uncanny.
...Companies have 3 choices when they receive cost increases. They can absorb and take a hit on their margins. They can pass through and share the pain with customers. Or they can put an additional mark-up above and beyond the rate of cost increase, padding their margins at the expense of customers. Up and down the value chain, this profit-driven model is responsible for over 50% of consumer price inflation. And without profit inflation, price increases would be tracking more closely with wage growth.
... Just 4 companies control 70% of the global grain trade and 4 companies control up to 85% of meat and poultry processing. Cargill belongs to both groups. 2021 was Cargill’s most profitable year ever, with almost $5 billion in net income and up to a 70 basis point increase in margins.... The other top grain traders, including Archers-Daniels-Midland, Bunge BG -0.3% and Dreyfus also saw record sales growth and profits due to rampant speculation in early 2022. Tyson’s net income soared 47% to over $3 billion while spending $700 million in shareholder buybacks, while 30,000 Covid-19 infections and 151 deaths occurred at their facilities. JBS passed 17% higher prices onto consumers, and even though volumes decreased, posted a 345% net income increase.”  (link to the full article here)

How can this happen? In the food system, it’s both profit-taking by vertically integrated companies that control the entire supply chain, and speculation. (Note: vertical integration means a company owning all the steps between primary production and retail: from farm to trucking to processing plant to next processing plant to retail distribution. When a company is vertically integrated like that, it can take profit from every step of the chain, as well as exerting total control over all steps. It's a reliable way to maximise overall profits.) As with housing, food is part of the commodities markets that are publicly traded on the world’s stock exchanges. Futures trading in pork bellies, grain, oilseeds and other food drives a huge part of the global pricing on food. Futures trading means guessing at the future price and availability of any commodity, and it’s the sort of fabricated reality that allows for rapid price changes and ballooning differentials between price paid to the farmer (which is at least somewhat based on real costs, though usually below the actual cost of production) and price charged to the consumer (which is entirely dependent on how much profit the middle companies choose to take).

While farmers continue to receive low prices at the farm gate, traders take more and more profit. Those who are not involved in primary production take no risk, but have all the power in the food system.When food is turned into a commodity, publicly traded as though it were not critical to life, we all lose. The more hands are in the process, the more opportunity there is for prices to rise without relationship to the actual production of food or the needs of the consumer. What we see now is that highly processed “foods” are made with more derivatives and less actual food – more high-fructose corn syrup, lecithin, etc. - and put on the shelves at what seems to be a cheaper price than actual food like potatoes, corn and flour. (This is of course somewhat imaginary, but a discussion of how expensive it is to be poor is another topic.)

Apart from food, though, profit is driving price increases beyond the cost of production all over the economy. Whether it’s gasoline, cleaning products, pharmaceuticals or shipping, everything is on the rise – but it’s driven by corporate profits all over the system. Meanwhile, economists are pretending that the reason is cost increases at the production end, shortages or “instability” (aka. speculation, but they’ll never use that word because it’s a dead giveaway).

Remember that the responsibility of corporations is to increase shareholder return – only that, not to take care of workers or consumers. This means that maximizing profits is not only the goal but the golden rule, and is considered the most ethical possible action by these corporations.

How is it that profit-taking at the expense of everything else is considered ethical? What does this say about our priorities?

And how can we hit reset on those priorities for our government and our economy?

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