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Higher food prices may not hurt Canadian shoppers

Wheat represents only 3 per cent of the total cost of bread, meaning consumers won’t see a major price hike at the checkout counter.

Peter Power/The Globe and Mail

Bad weather across much of the United States and parts of Europe is driving up the cost of some food stuffs, but Canadian consumers are not expected to feel the full effect.

Corn and soybean production in the U.S. has been cut by up to 13 per cent this summer because of drought and prices for those commodities have jumped by as much as 40 per cent since June. Poor weather in Ukraine, Russia and other parts of Eastern Europe has hurt wheat crops and sent wheat prices up 36 per cent this year. The question now is how hard those rising prices will hit consumers.

For Canadians the answer is not much, according to Paul Ferley, assistant chief economist with Royal Bank of Canada. In a report to be released Wednesday, Mr. Ferley said food prices will rise by 3.5 per cent toward the end of 2012 and by up to 4 per cent in 2013.

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Food prices climbed about 3.8 per cent in 2011 and by 1.4 per cent in 2010. While those increases look significant, Mr. Ferley said they will be manageable in part because food accounts for just 16 per cent of overall consumer spending and lower energy prices will provide some offset.

As a result, even with rising food costs, he expects overall inflation to remain below 2 per cent in 2012 and 2013.

Raw inputs also make up only a small part of most processed foods, meaning even soaring commodity prices will not have a major impact at the retail level.

For example, the amount of wheat in a loaf of bread represents about 3 per cent of the retail price. So even if the price of wheat doubled, bread would rise just 3 per cent. One exception could be the price of meat, which could move up sharply because of rising prices for feed stocks such as corn and wheat.

"The pressure will be there," Mr. Ferley said. "But we're in an environment of modest growth and still high unemployment so it's not an environment where price pressures can take hold and start doing more damage to inflationary expectations."

Matthieu Arseneau, a senior economist at National Bank of Canada, came to a similar conclusion in a report released Tuesday. Mr. Arseneau said rising commodity prices will have less of an inflationary impact in Canada and the U.S., but could hit some European countries harder.

"By our calculations, the shock of the past few months represents for China and Brazil a rise in food inflation of about 5 percentage points (pp). Among the developed countries, Ireland (2.9 pp), Great Britain (2.4 pp), Germany (2.1 pp) and the United States (2.0 pp) are the ones that should record the sharpest increase in food inflation attributable to the recent movement in grain prices," he wrote.

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However, rising food prices will be a bigger issue in poorer countries, where consumers spend as much as 80 per cent of their income on food.

The World Bank's Food Price Index, a monthly measure of local prices for several food stuffs, increased by 10 per cent in July after declining in May and June. The Bank and other international agencies have said that while prices are climbing close to levels reached in 2008, which sparked a crisis in several countries, the situation so far is different. That is partly because supplies of key staples such as rice remain high and international cooperation to manage tight supplies has improved.

On Tuesday, officials from the Food and Agriculture Organization of the United Nations and the UN World Food Program issued a joint statement calling on world leaders to take action before rising prices reach crisis level.

"We need to act urgently to make sure that these price shocks do not turn into a catastrophe hurting tens of millions over the coming months," said the statement. The agencies called on countries to avoid panic buying or export restrictions, both of which occurred in 2008. Those policies "are generally inefficient and make life difficult for everyone else."

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