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HAMILTON, 17 JUNE, 2016. Josie Rudderham, left and Nicole Miller opened Cake and Loaf Bakery in Hamilton five years ago this August.

Glenn Lowson/The Globe and Mail

A loaf of cheddar bread sells for $6.25 at the Cake & Loaf Bakery in Hamilton. But co-owner Josie Rudderham wonders if customers will still buy it if she ups the price another 25 cents.

Whether to raise prices or not is one of the decisions facing business owners like Ms. Rudderham after the Canadian Dairy Commission announced it was raising the price of industrial milk, which is used to make cheese, yogurt, ice cream and butter, by 2.76 per cent on June 15.

The increase takes effect on Sept. 1, and it's the second price increase this year. The CDC increased industrial milk prices by 2.2 per cent in February.

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"I wasn't expecting another price increase this year," Ms. Rudderham says. "It's pretty significant for us. It means we have to make some tough choices."

Those tough choices include potentially raising prices for the breads, cakes, pastries and candies Ms. Rudderham and business partner Nicole Miller sell at their bakery, and holding off on providing wage increases for their 22 full– and part-time employees.

For small businesses in the food industry that use lots of dairy products, this nearly five-per-cent increase is a big deal. Ms. Rudderham says her bakery uses 120 to 140 pounds of butter and 40 to 50 pounds of cheese per week. She notes that 10 to 12 per cent of her revenue is spent on dairy products annually.

"We have to pass that price increase on to the consumer," Ms. Rudderham says. "But we don't want to price people out of being able to shop at the Cake & Loaf."

The CDC is a Crown corporation that implements national policies for milk production. It said in a July 15 press release that it raised prices for industrial milk to offset a "significant reduction in producer revenues in the last year" brought on by a decrease in world prices and partly due to larger sales of surplus milk protein in low-priced markets.

CDC spokesperson Chantal Paul says revenue for milk production was down about four cents per litre in the last 12 months. When the commission saw that reduction, it decided to initiate a price review and after consulting with various segments of the supply chain, looking at revenues from dairy farms and other economic indicators, as well as data on the current cost of producing milk, the CDC "made a judgment that the situation was sufficiently critical that it was relevant for the commission to announce an increase," Ms. Paul says.

Canada's dairy industry, which the CDC says employed over 23,000 workers in 2015, has operated under a supply management system for industrial milk since the early 1970s. That means farmers must manage their production for certain periods so that it coincides with forecasts for demand for their products during the same periods.

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Bill Pratt, chief executive officer of the Dartmouth, N.S.-based Chef Inspired Group of Restaurants, which owns 11 restaurants and food trucks including the popular Cheese Curds Gourmet Burgers + Poutinerie, says he recognizes the CDC's role in protecting Canada's dairy farms. However, he is still frustrated by these latest price increases, which he says will eat into already "tight" profit margins for restaurants across Canada.

"Why can't the CDC look at creative ways to help consumers like the restaurant business instead of saying, 'Here is the price increase, deal with it,'" Mr. Pratt says.

Mr. Pratt says dairy products, particularly cheese, are one of the main commodities he uses in his restaurants and food trucks. And when the price of that commodity increases, he has to make up for it somehow. He says he can't make large price increases to his menu because customers might go elsewhere to eat. He also won't use cheaper, inferior dairy products because it will hurt the quality of his food. Mr. Pratt adds he's not ready to lay off any of his 105 employees, either.

So what is his solution? "I've got to find other ways of being creative to keep people coming in," says the 37-year veteran of the food industry. "I need more volume to make up for the price increase, and I'm going to have to pay more for marketing and advertising. Hopefully it works because it costs a lot of money to do that."

Owners of restaurants and bakeries aren't the only ones affected by rising food prices; regular Canadians are feeling the pain as well. Statistics Canada's Consumer Price Index says food prices rose 1.8 per cent year-over-year in May, although that was the smallest year-over-year gain since March 2015.

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