Features Business & Policy Consumer Issues
Food prices: a boon for producers, a buffer for consumers

June 12, 2008

Canada is uniquely positioned to weather the storm of
sharply-rising prices for grains and rice, and is even poised to profit from
the current surge, according to a study released today in the Canadian Economic Observer.

Overall, consumer prices
for food consumed at home in Canada have risen only 1.2% in
the 12 months ending in April 2008. Food prices
increased 7.1% in the European Union and 5.9% in the United States during the same period. Countries
in Asia with rice-based diets are
experiencing the fastest increase in food costs, as the price of rice doubled
early in 2008.

While consumers in Canada face higher prices for bread and
cereal products, they have been insulated at the checkout counter from higher
overall grocery bills by stable or falling prices for most other products, the
study found.

The absence of price
increases for these other food products reflects factors such as the lower cost
of food imports in the wake of the rising Canadian dollar, and the relatively
small role that commodities play in what consumers buy.

For most food products,
services contribute the bulk of the value-added for food that consumers buy. As
well, sharp relative price shifts give consumers ample room to adapt by
substituting lower-priced foods.

From a broader perspective,
Canada overall stands to gain from the agricultural price
shock, the study found. Canada ran a surplus
of $9.0 billion in its trade in agricultural and fish products
in 2007.

In the first quarter
of 2008, the surplus was on track to break that all-time high, running at
an annual rate of $11.2 billion as wheat prices rose.

Moreover, farmers have
stepped up their planting this year, especially of higher-priced crops. Besides
directly increasing the value of agricultural output and the trade surplus, the
boom down on the farm will indirectly benefit a wide range of suppliers, from
machinery to transportation, financial and business services.

Agricultural exports hit
record high in 2007

Canada is a net exporter of food and agricultural products.
Last year our exports of these products hit a record high
of $34.6 billion, after hovering around $31 billion since
the commodity boom began in 2002.

The increase
in 2007 was driven by grains, which set a record on the strength of
a $1.5 billion hike for wheat and canola despite a poor crop on the
Prairies (the average yield per acre of wheat fell 12% last year).

Despite the poor harvest, Canada remained the world's second largest
exporter of wheat, after the United States. A 25% increase in crop sales
drove farm cash receipts to a record $40.5 billion last year, and
they continued to strengthen in the first quarter of 2008.

Canada has large surpluses for grains, meat and fish
products, which outweigh deficits for foods which are difficult or impossible
to grow here, such as many fruits, vegetables, coffee, tea and sugar, which
collectively show a trade deficit of over $4 billion.

Fruits, vegetables
dominate agricultural imports

Overall, more than 70%
of the food on Canadian tables is produced domestically. This includes
over 80% of meat and dairy products, partly because supply management
practices limit import competition for poultry, dairy and eggs. Bread and
cereal products also are largely supplied by Canadian farms and factories.

Conversely, imports account
for over 40% of all fish and fruit and vegetables purchased in Canada. Imports supply nearly one-third of
other food products, notably coffee, tea and some fats (such as olive oil).

Canada's imports of agricultural products are dominated by
fruits and vegetables, particularly in winter months when imports of fresh
produce nearly double. Imports of fruit and vegetables
totalled $7.3 billion in 2007.

Not far behind
at $5.4 billion were coffee, tea and sugar, all products that cannot
be grown in Canada's climate. Imports of fruits,
vegetables and other staples have been trending up in recent years, as lower
prices helped boost the volume of demand.

The cost of importing food
into Canada has fallen 7% from its average
in 2002 through the first quarter of 2008.

Distribution of the food
dollar: What the consumer is paying for

The study provides a
breakdown of value-added by food type, which shows that the rapid rise in some
food commodity prices (notably grains) affects only a small fraction of what
consumers buy.

For bread and cereals, the
cost of commodities represents less than a tenth of what consumers pay for
bread, even factoring in energy costs. This is the lowest share of any of the
major food products.

Meat and dairy products
have almost identical revenue structures: manufacturers receive nearly
one-quarter of all revenues, while farmers get just under 15%.

In contrast, manufacturers
and farmers garner only one-third or less of revenues from consumer spending on
bread and fruit and vegetables. Most of this goes to manufacturers, as farmers
received less than 3%.

Services contributed
between half and three-quarters of what consumers buy at the grocery store. The
share of services was lowest for fresh fish, dairy products, meat, and soft
drinks, at around 50%. Services account for about 60% or more of
consumer spending on breads, fruits and vegetables.

Wholesale and retail trade
dominates the value-added of services in food. This reflects the cost of
warehousing, stocking shelves, advertising and of course profit margins.

Surprisingly, finance and
real estate make a larger contribution than transportation in producing most
food products. This reflects the importance of renting buildings as well as
loans to finance day-to-day operations.

Transportation consistently
represents between 5% and 6% of value-added for all food products.
However, the gap between finance and transportation may have narrowed after
gasoline prices hit record highs early in 2008.