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Maple Leaf plans to hike prices 3-4 per cent.

Peter Power/The Globe and Mail

Canadians are about to start paying the price of last summer's record drought at the checkout counter.

Maple Leaf Foods Inc., maker of Maple Leaf and Schneiders meats as well as Dempster's bread, warned Tuesday that it will start passing along the higher costs facing its hog and baking operations.

"The effects of food inflation driven by the North American droughts of 2012 will be felt mostly in the first half of 2013," Maple Leaf president and chief executive Michael McCain said as the company released its results for 2012.

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"As a result, we expect some short-term volatility in our earnings as we pass those cost increases on in the marketplace."

Maple Leaf plans to hike prices on various prepared meat products by 3-4 per cent as it copes with various cost pressures, including a squeeze between lower margins in its own hog production business and higher feed costs. "There are about five factors that are giving us cause for concern and unpredictability," spokesman Nick Boland said.

The drought – the worst in the U.S. Midwest since the 1950s – sent global corn and grain prices soaring last fall.

Food price hikes outstripped inflation in 2012, but experts said the worst may be still ahead. And the Maple Leaf warning may signal a wave of impending industry price hikes.

Canadian retail food prices rose 2.4 per cent in 2012, while the inflation rate was 1.5 per cent. Prices also rose at a 1.1-per-cent annual pace in January – again outstripping overall inflation.

Restaurants are bracing for much higher costs in the months ahead.

"This drought will hit us," said Garth Whyte, president of the Canadian Restaurant and Foodservices Association. "People are on watch because the bread basket was hit quite hard, particularly down in the U.S."

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The rising cost of ingredients is the No. 1 concern for the association's members, based on a fourth-quarter survey, according to Mr. Whyte. More than 40 per cent of respondents said they plan to raise menu prices in the first half of the year.

It's natural that Maple Leaf would want to pass along higher costs to customers, said Doug Chorney, president of Keystone Agricultural Producers, a Manitoba-based farm policy organization. "Processors try to hedge their costs as far out as they possibly can," Mr. Chorney said. "So it's likely and plausible that they are now seeing their ingredients face the higher prices that we saw this past fall. The consumer is going to see that in the price they pay for groceries."

But while corn and wheat prices are still very high, meat prices have been much more stable, he said. "Hog prices are low and that's a big part of Maple Leaf's product offering."

Maple Leaf has bought up several hog producers in recent years. So if it's paying more, it's paying itself, according to Mr. Chorney. "They're certainly not paying the farmers who supply them more now," he added.

The price surge isn't only a Canadian and North American phenomenon. The drought, combined with rapidly rising demand, is causing a protein crisis throughout the global food supply chain, said Sylvain Charlebois, associate dean of the college of management and economics at the University of Guelph. "Access to affordable protein is becoming more difficult for consumers," he said. "Companies like Maple Leaf know that. So people have to get used to paying a premium for good protein."

Last summer's drought and record-breaking temperatures across much of the continent withered crops and scorched soil, leading to sharply lower harvests. Drought conditions persist across more than half of the United States, although climate experts say this year won't be as bad.

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U.S. Department of Agriculture chief economist Joseph Glauber said last week that he expects a rebound in crop yields this year, including record corn and soybean harvests. But low supplies from last year will keep grain prices high. And that's expected to push up retail food prices 3 to 4 per cent this year, according to the USDA.

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