Brace yourself, Canada, for higher grocery bills

Any outsider looking at Canada's most recent consumer price index would be forgiven for concluding that we have somehow managed to dodge the food inflation bullet currently ricocheting around the world.

People in most countries are struggling with unprecedented price hikes in the most widely used foods. But a recent look at the cost of living in this country finds that the typical Canadian food basket in April 2008 was just 1.2 per cent more expensive than it was a year earlier.

A little more than one per cent in a whole year! Well done, Canada, we're apparently immune from the laws of supply and demand that dictate food prices everywhere else.

Well, it's time to put away the streamers, the experts say. The warning bells are already sounding. Analysts, farmers and grocery chains all agree that those checkout bills are about to get noticeably bigger.

A look inside the monthly price data from Statistics Canada quickly reveals some of the reasons why. Beneath the broad-stroke appearance of benign food prices lie some important anomalies.

Your daily bread

Let's start with our daily bread. As any regular food shopper knows, bread prices have been rising faster than, well, loaves of bread. StatsCan says a typical loaf costs 14 per cent more than it did a year earlier. Macaroni is up 25 per cent in the same period; the cost of flour grew by 18 per cent.

Those products all have one thing in common, of course: Wheat. And wheat prices have been soaring. They have eased back from their all-time highs set in February, but are still more than double levels from a year ago.

Canadian wheat farmers are one happy lot. Big grain buyers are less so. In fact, the country's biggest baker, Canada Bread, has already warned that more price hikes are on the way.

Vegetarians rejoice

So why the flat inflation picture for our current grocery bill?

Well, it turns out that the rising cost of pasta, bread and flour have largely been offset by big drops in the price of fresh produce. Given how much produce we import, in the winter months especially, that has provided Canadians with a cushion of sorts from overall rising food prices.

Oranges, grapefruits, apples, carrots, celery, mushrooms, onions, potatoes. You name the product and chances are Canadians have been paying less for it than they did a year ago. Fresh vegetable prices plunged 13 per cent in one year, StatsCan said, while fresh fruit prices fell four per cent.

Some of the drop is due to a damaging frost in 2007 in California that caused a temporary spike in the price of fresh produce last year.

But many of the current bargains are simply due to the higher Canadian dollar.

Most of those fruits and vegetables are imported from the U.S. A year ago, the Canadian dollar was worth just 85 cents US. Today it is close to parity.

That currency conversion benefit, however, will rapidly unwind as 2008 wears on. Consider that in the U.S., where consumers don't have the advantage of paying for local produce with rising loonies, overall food inflation is 5.9 per cent.

Internationally traded

Many foods like wheat, corn and soybeans also happen to be internationally traded commodities that are (like oil) priced in U.S. dollars. In a time of financial uncertainty, many investment funds have piled onto commodity futures as an alternative (and better performing) place to speculate withtheir billions.

The role this added attention has played in raising food prices is a matter of somedebate in financial circles. But as long as the investment interest remains high, prices seem unlikely to unwind and unprecedented volatility is part of the package.

Of course, it is not just the strong loonie that is providing Canadian consumers with some food price insulation. We have also been partially shielded from sharper increases in items like eggs, milk, poultry and pork because they are regulated by marketing boards.

Prices in the unregulated U.S. for similar products have risen much faster recently. Wholesale dairy prices in the U.S., for instance, have jumped 13.5 per cent in the past year. In Canada, dairy prices were up just 1.7 per cent in the same period.

We Canadians have also been insulated from food inflation by a good old-fashioned price wars. Selling groceries just doesn't generate the profits it used to, at least, not in Canada.

Thanks to the entry of Wal-Mart and its giant grocery-selling supercentres, the other Canadian chains have launched price wars especially in Ontario and watched their profit margins shrink. That maynot last and consumers will pay more if it doesn't.

Farm costs soaring

Farmers understandably try to pass on higher costs. And some of these "cost inputs," as economists call them, are jumping as never before.

Think of gasoline and diesel fuel. Farmers are huge fuel users and, as everyone knows, fuel prices are at or near record highs, up a whopping 50 per cent or more in the past year alone.

Think of fertilizer costs, much of which is also oil dependent. Potash prices have tripled in the past year as China and other food-growing countries rush to increase agricultural productivity.

Then there are the feed costs. Animal feed is a hugely dependent on corn and the soaring demand for ethanol (which is also made from corn, at least in the U.S.) has sent the price of corn to record highs. Great if you're a corn farmer. Not so much if you need mounds of animal feed.

Hog and cattle farmers have been struggling with low prices recently and skyrocketing feed costs have only made their situation worse.

The federal government recently announced a plan to pay hog farmers to cull 10 per cent of theirswine herd. That will help many of these farmers but it is also likely to drive up the prices we pay,thus bringing an end to some of the low meat bargains Canadians have recently enjoyed.

How high will food prices rise?

So let's look at what lies ahead: A continuing increase in the cost of baked goods; a looming end to the bargains created by our rising dollar; rapidly rising farm costs; growing demand for basic food commodities around the world; rising food transportation costs and perhaps an end to below-average margins at the grocery chains.

That's a recipe for bigger food bills.

Statistics Canada notes that this country overall is well positioned to weather the agricultural price jumps hitting the rest of the world. We are a net exporter of food and agricultural products and our surplus in agricultural trade is on track to hit a record high in 2008.

We are fortunate in this country that we spend an average of just 10 to 15 per cent of our disposable income on food, depending on who does the analysis. In some developing countries, people spend upwards of 80 per cent of their meagre income on food.

Imagine what a doubling in the cost of rice means to them and you can see why there have been food riots in nearly a dozen countries over the past few months.

The bottom line is that most Canadians have probably already noticed that the cost of some of their favourite foods is on the rise. Later this year and into next, analysts say we will likely see our overall food bill rising faster than inflation, with the poorest noticing it the most.

Still, when compared with much of the rest of the world, we will get off lightly.

Avery Shenfeld, a senior economist at CIBC World Markets who recently looked into the food inflation issue, sees food price inflation rising to 3.5 per cent in Canada by 2009, which would be enough to add half a percentage point to the consumer price index.

Noticeable, yes. A crisis? Not in this country.