17 April 2008

NOT the case in Calgary

Against the grain

Amid a deepening global food crisis, the cost of food for Canadian consumers has done something unusual: gone down. Households across the country are enjoying the benefits of food deflation. Food from grocery stores was 0.6% cheaper in February than a year ago – a stark divergence from the US, where food prices are rising at 4% a year, and China, where they soared 21% in the first quarter. Canada's stronger dollar is playing a role in keeping some food prices down for consumers, especially imported fruits and vegetables, analysts say. But the surging loonie doesn't explain everything. A closer examination shows food commodity prices are actually rising in Canada – they're just not being passed on to consumers at the supermarket.

The Bank of Canada's commodity index shows food prices at the raw materials level have soared more than 50% in the past year. The index is in US dollars, but even after converting to Canada's currency, food commodity prices have risen 28%. Consumers are benefiting from trench warfare between grocery stores, said CIBC economist Avery Shenfeld, who has dissected the food chain to determine how consumer prices are declining while raw material prices are soaring. Lower food prices in Canada have been driven by discounter Wal-Mart Canada, which introduced its Supercentres with full grocery aisles in late 2006. Supermarket leader Loblaw Cos. has taken on Wal-Mart by lowering its prices, forcing rivals to follow suit. The retailers are all pressing suppliers to keep their wholesale prices down. But the efforts by duelling supermarkets to keep a lid on prices don't tell the whole story, Shenfeld said. “It's not just at the retail level,” he said. “It's further back.” Price controls at the wholesale level imposed by marketing boards, including the dairy and egg boards, are playing a role, he said. Dairy price controls in particular help to explain the food pricing differences with the US, he said.

Canada's prices may be kept low because the country is producing so much of its own food – possibly too much, said Bank of Nova Scotia senior economist Adrienne Warren. Pork and beef prices are stable or falling because there's currently an overcapacity in Canada, leading to the recent government announcement of assistance to farmers who cull livestock. For now, the benefits of low food inflation spread beyond Canadians buying groceries. Low inflation means the Bank of Canada has free reign to cut interest rates and bolster economic growth, while the US Federal Reserve is constantly worried about cutting rates too far and igniting further inflation. But it can't last, Shenfeld said. “A price war can't go on forever without decimating profits,” he noted. And eventually, the marketing boards will begin passing higher production prices along to consumers. As for the effect of the climbing Canadian dollar, few analysts expect the loonie to continue its flight, and so the inflation-dampening benefits of a strengthening currency will diminish. “Canada will start to feel the pain from global food and energy prices in 2009,” Shenfeld predicted.
(Globe and Mail 080417)

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