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High feed prices mean Paul Sharpe is losing money on his cattle. (Martin Schwalbe for the Globe and Mail)
High feed prices mean Paul Sharpe is losing money on his cattle. (Martin Schwalbe for the Globe and Mail)

Lookahead: Economy

U.S. dry spell hits the grill and the plate Add to ...

There are certain cuts of meat that customers flock to in the summer months, says Bob Oravek, co-owner of Bloor Meat Market in Toronto.

Centre-cuts of beef such as strip loin, rib eye and sirloin steaks are popular now, even though Mr. Oravek has been forced to increase prices by as much as 10 per cent on some of his meat. He just hopes sales keep up into the fall, when he expects costs will rise even further beyond the roughly 18 per cent increase he’s seen since the spring.

It’s the effect of the worst drought to hit the U.S. Midwest in more than 50 years trickling down to Canadian businesses and consumers. Corn prices have surged by more than 58 per cent since the beginning of June, making it a lot more expensive to feed the cattle that wind up on the barbecues.

The cost of wheat is also up 37.6 per cent since early June and global food prices have climbed 6.2 per cent from last year.

More than half the world’s corn comes from the U.S., and there is a lot less to go around these days. Corn yields are expected to be about 25 per cent below normal, according to the U.S. Department of Agriculture.

A clearer picture of how this may be starting to affect consumer prices will emerge Friday when Statistics Canada releases inflation figures for July.

Canadian food prices are forecast to increase by 9.6 per cent in the past three months compared with the previous quarter, said Doug Porter, deputy chief economist at BMO Nesbitt Burns.

Price increases in July will be the “leading edge” of the drought’s impact, he said. Overall, annual food inflation is expected to be 2.5 to 3.5 per cent in 2012, increasing to 3 to 4 per cent in 2013.

“The rule of thumb is it takes about six to nine months for changes in crop prices to fully work their way to the grocery shelves,” Mr. Porter said. “In some ways I think what we’re going to see in the next month or two is almost a calm before the storm.”

Some economists and farmers are actually predicting a decrease in meat prices over the next few months as a glut of cattle moves through the supply. Exorbitant feed costs pushed many farmers to sell their herds sooner rather than spend more money feeding them.

“What you’ve got right now is a lot of people selling cattle because they don’t want to feed [them expensive] corn,” says Paul Sharpe, a farmer who raises about 1,000 cows a year near Guelph, Ont.

A combination of high feed prices and oversupply in the number of cows for sale means he is losing money on his cattle this year, Mr. Sharpe says.

But the temporary oversupply of beef will pass quickly, says Paul Ferley, assistant chief economist at Royal Bank of Canada.

The effect of the drought will have a more noticeable impact in 2013, Mr. Ferley said, and it won’t be just meat.

At Pita Break, a North York, Ont.-based commercial bakery business that sells pita and cracker products across North America, president Guy Ozery says he’s getting ready to sign a contract to purchase flour in January for about 20 per cent higher than current prices.

“It’s going to have a very profound effect on our business,” he said.

“If the fluctuations are not long term and are not large, we absorb everything, but if they’re going to be high for a prolonged period of time, then that could change our margins by a few percentage points ,which eventually has to be dealt with.”

Mr. Ozery says his company will try to cut costs in other areas, but at a certain point, higher costs might have to be passed on to customers.

“We’re [already] running a pretty lean facility,” he said.

But given that the economy is not particularly robust right now, businesses will have a tough time trying to pass on higher costs to savvy consumers, Mr. Ferley said.

“Consumers are fairly nimble,” he said. “If they’re confronted with a sudden run-up in prices they will check if there are alternative products they can purchase at a lower price.”

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