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Cargill, which operates in 66 countries, is a leading U.S. grain exporter, biofuels producer and energy trader. (Chris Bolin/Chris Bolin for The Globe and Mail)
Cargill, which operates in 66 countries, is a leading U.S. grain exporter, biofuels producer and energy trader. (Chris Bolin/Chris Bolin for The Globe and Mail)

Economy Lab

High food prices here to stay, group warns Add to ...

Higher food prices are here to stay, even in Canada where a strong loonie has helped protect consumers from rising costs, the Conference Board of Canada says.

"Consumers have grown used to cheap food, as their prices have fallen relative to other products for decades," says Michael Burt, associate director, forecasting and analysis, at the Ottawa-based group.

"No longer. Many of the factors driving prices higher are permanent, and this means that consumers should expect their grocery bill to gobble up an increasing share of their budgets."

Food prices, as measured by the Food and Agriculture Organization of the United Nations, have hit fresh records month after month, obviously having an impact in poorer regions of the world.

This has been driven by a variety of factors, Mr. Burt noted, including poor weather conditions, higher demand and rising energy prices. He cited drought in Russia and China and floods in Canada and Australia.

"High oil prices lead to increased demand for ethanol and thus the prices for corn and sugar have become increasingly linked to energy prices.," Mr. Burt wrote on the agency's website.

"For example, more than one quarter of the U.S. corn crop is now used to produce ethanol. Soybeans have also been indirectly influenced by this trend, as soybeans and corn are generally grown in the same regions. As such, higher corn prices may lead to fewer soybeans being planted."

The impact in Canada is mixed. The country is a major agricultural exporters, so higher prices are a boon to farmers. But food also represents almost 15 per cent of household spending in Canada, so even "modest" price changes can have a marked impact.

"The strength of the Canadian dollar is helping to shield Canadian consumers from the full effects of price increases, since the benchmark price for many commodities is set in U.S. dollars," Mr. Burt added. "Nonetheless, Canadian consumers will see higher food prices this year and that will leave less money to spend on other less essential items."

Mr. Burt expects something by way of a price correction in agricultural commodities, possibly by the second half of this year, as farmers boost their output to take advantage of the higher prices.

"However, the U.S. Department of Agriculture predicts that prices will rise steadily beyond a small correction in 2012," he said. "Much of the price increase is being driven by structural factors that will not dissipate for the foreseeable future. In short, consumers should get used to paying more for their food."

Mr. Burt is not alone in his warnings.

In Abu Dhabi yesterday, the head of the FAO warned in an interview with Reuters that higher prices are again raising the spectre of the food crisis of 2007-2008 in developing countries.

"The high prices raise concern and we've been quickly drawing down stocks," Jacques Diouf told the news agency. "For years we have warned that what is needed is more productivity and investment in agriculture."

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