Is food really dearer in Canada than in the United States?

Anyone who has lived near the border has heard it: milk, cheese and chicken are cheaper on the other side, so fill the cooler and make the trip. The claim is partly true, partly a matter of which store and which week, and partly the result of comparing things that are not alike. The honest answer to the question is that some foods cost more in Canada, some cost about the same, and a few cost less, and the reasons are different for each group.

Start with the exchange rate

Any price comparison between the two countries runs through the exchange rate, and the exchange rate moves a lot. When the Canadian dollar traded close to par with the US dollar, as it did through much of 2011 and 2012, Canadian prices looked high to anyone who simply compared the sticker numbers. When the Canadian dollar weakens, the same Canadian prices converted to US dollars look lower, even if nothing in the store has changed.

Store prices do not adjust quickly. Retailers buy on contracts, carry inventory and avoid changing shelf prices every week. So for months after a large move in the dollar, a gap can open or close simply because one side has not caught up. A comparison made in one year may not hold two years later.

The structural reasons

Beyond the dollar, several features of the Canadian market push costs up compared with the United States. None of them alone explains the whole gap.

Scale matters more than people expect. The United States has roughly ten times as many consumers. A manufacturer can run a packaging line for a US product for weeks; the Canadian version, with French and English labels and sometimes a different size, runs for days. Warehouses and distribution networks also serve fewer people per kilometre of road in most of Canada.

Retail concentration is often blamed, and the structure of Canadian grocery retail, with a small number of large chains holding a big share of sales, is real. But high concentration does not automatically mean high margins, and the evidence on how much it adds to prices is contested. It is one factor to weigh, not the whole explanation.

Supply-managed foods are a separate case

Dairy, chicken, turkey and eggs are different. Canada manages the supply of these products through production quotas and sets farm prices based on the cost of production. To keep the system working, imports above set quota volumes face very high tariffs, above 200 per cent for many dairy and poultry lines, with cheese at 245.5 per cent. Because those tariffs block most imports, Canadian farm prices for these products can stay well above US prices.

This is where the largest and most consistent gaps tend to appear. Fluid milk, cheese and chicken are often noticeably dearer in Canada. The reasons and the arguments for and against the system are covered in the milk supply management debate in Canada, explained.

Sales taxes cut the other way

Here the comparison often flatters the United States unfairly. In Canada, most basic groceries are zero-rated under the federal GST and the harmonized sales tax, meaning no sales tax is charged on them at the till. Fresh fruit and vegetables, milk, meat, eggs, bread and most staples carry no sales tax. Snack foods, soft drinks, candy and prepared meals are taxed.

In the United States, sales taxes are set by states and local governments. Many states exempt groceries or tax them at a reduced rate, but some apply their full rate, and US shelf prices are shown before tax. A shopper comparing shelf prices on staples is usually comparing a tax-free Canadian price with an untaxed US price that may have tax added at the till.

Comparing like with like

A fair comparison has to control for things that are easy to overlook:

• Package size. Milk in Canada is commonly sold by the litre, in the US by the gallon (about 3.8 litres). Converting to a price per litre or per kilogram is the only fair test.
• Store format. A warehouse club in one country should be compared with a warehouse club in the other, not with a corner store.
• Promotions and loyalty prices. One week's flyer special on one side can make an item look much cheaper than its usual price.
• Brands and grades. A national brand should be matched with the same brand, and a store brand with a store brand of similar quality.
• Location. Prices in a large city differ from those in a small town on either side.

A worked example: an illustrative basket

The prices below are invented round numbers chosen to show the method, not real prices from any store. Assume an exchange rate of 1 Canadian dollar = 0.90 US dollar, and a US state that taxes groceries at 4 per cent.

In this example the Canadian basket costs about 17 per cent more. Almost all of the gap comes from the three supply-managed items: milk, cheese and chicken. Strip them out and the remaining items cost $11.50 in Canada and $11.55 in the US after converting, before tax, so the difference largely disappears. Change the exchange rate to par and the US basket rises to $28.18 in Canadian dollars, and the overall gap widens.

The lesson is less about the total than the method. A headline gap between two baskets can hide items that are dearer, items that are the same and items that are cheaper.

What the cross-border trip leaves out

A household that drives across to shop also pays for fuel, time and, above personal exemption limits, Canadian duty and taxes on what it brings back. The savings on a full cooler can be real, but they are smaller than a shelf-price comparison suggests, and they depend heavily on what goes into the cart.

For how the price numbers in these debates are built and how to read food price forecasts, see how food inflation is measured and forecast in Canada. More on grocery costs and margins is under food prices and retail.