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Friday, December 3, 2021

Food inflation is the next big threat to Canadians’ finances

Cattle graze at the Plateau Cattle Co. south of Calgary. With grazing grass increasingly scarce and the price of replacement feed shooting up, rancher John Smith decided to downsize his herd, sending about 140 cows to market.Handout

After months without rain in the foothills of the Rocky Mountains south of Calgary this past summer, beef cattle rancher John Smith faced some tough choices. His herd of around 550 cows had munched its way through what little grass was growing in the nearby pastures. With grazing grass increasingly scarce and the price of replacement feed shooting up, Mr. Smith decided to downsize his herd, sending about 140 cows to market – considerably more than the 40 or so culled in a typical year.

“It was kind of sad,” said Mr. Smith, who runs the cow-calf operation Plateau Cattle Co. with his wife, Laura Laing. “We ended up culling cows that were over nine [years old]. There were cows there that I could see were still good cows. It wasn’t their fault.”

Across Western Canada, many ranchers have made similar decisions in recent months. The drought that scorched the Prairies over the summer not only shrivelled crops, causing a dramatic drop in Canadian grain production, it also caused a significant reduction in beef cattle herds. That could have a sizable impact on beef prices over the coming year or two, as fewer calves are born and overall beef production goes down.

It would hardly be the first time that beef or other food products are subject to wild price swings. Food inflation can be especially volatile. It doesn’t take much – say, crummy weather in Mexico – to drive up prices. And right now, they are certainly on the upswing.

The bad taste of food inflation will linger – here’s how people are coping

Canada’s inflation explained: How the surge affects you and what you can do about changing prices

In September, food inflation hit 3.9 per cent, the highest annual rate since early 2016, according to Statistics Canada. Fresh or frozen beef jumped 13 per cent. Condiments and spices rose 9.6 per cent. Dairy products climbed 5.1 per cent. And eggs were up 5.4 per cent.

The acceleration is unlikely to end soon. In a recent report, Toronto-Dominion Bank said food inflation could hit 5 to 6 per cent in the coming months. “The risks are tilted to the upside,” wrote TD economist Omar Abdelrahman. In non-economist language, that means food inflation could climb even higher.

Poor weather has been a huge factor. Canada is coming off its worst drought in decades, resulting in massive drops in production for key crops, such as wheat. The so-called “heat dome” in Western Canada – which saw temperatures near 50 C in the summer – and ensuing wildfires killed farm animals and withered produce, delivering a bleak vision of food security in a warming climate.

But it’s not only foul weather at play. Food production is being pressured by all the major headaches in economics today: supply routes that are clogged with shipments, leading to delays; higher energy prices, driving up production costs; and labour shortages, which are forcing food processors and restaurants to pony up for workers.

“It’s been a perfect storm, where a whole bunch of factors are all working together,” said Chuck Penner, owner of LeftField Commodity Research in Winnipeg. “The food inflation itself is still in its earlier stages.”

The situation adds potent fuel to the inflation conversation, which has grown increasingly clamorous in recent months as inflation rates in Canada and around the world have hit multidecade highs. Central bankers have been forced to backtrack on their view that high inflation will be a short-lived phenomenon, and prepare to raise interest rates they have held at rock-bottom since the start of the COVID-19 pandemic.

The issue has become politically combustible as well, with the Conservative Party blaming the Liberal government and the Bank of Canada for the run-up in consumer prices.

Like other central banks, the Bank of Canada tends to look beyond food and gasoline prices to “core” measures of inflation, giving it a better sense of underlying trends. After all, there’s nothing the bank can do about bad weather in Florida or oil production cuts in the Middle East.

But consumers are different. Grocery-store shelves and gas pumps are critical venues where households form their views of inflation – and, broader yet, the economy’s performance. That means higher food prices can colour popular notions of the economy, regardless of other statistics that show it’s doing relatively well.

This creates a problem for both the Bank of Canada, which is trying shift its narrative around rising prices without sending inflation expectations soaring, and the federal government, which has to manage the political fallout from inflation fears.

“If you ask people on the street how they’re doing economically, they will say, ‘My goodness the price of broccoli is twice as high as it was last year,’” said Ellen Goddard, co-operative chair in agricultural marketing and business at the University of Alberta.

“The fuel pumps and the grocery store are places where we do constant repeat purchasing, so we have reference prices in our head, and it’s triggered when the reference price is very different than what we expect it to be.”


MTY Food Group Inc. is facing inflation from seemingly every angle.

The Quebec-based franchisor of roughly 7,000 restaurants and food-court locations under dozens of brands, including Mr. Sub and Thai Express, has outlined a flurry of price pressures during earnings calls with analysts this year. Shipping costs are higher. Labour is more expensive. And suppliers are charging more – for protein, cooking oil, food packaging and so on.

“There’s inflation at every step of the way” in the supply chain, MTY chief executive officer Eric Lefebvre told analysts last month, noting the company raised menu prices at most of its chains. “We really have no choice. This is the way it is in 2021, and I’m not sure how it’s going to unfold for the future.”

MTY has plenty of company. Saputo Inc., the Montreal-based dairy giant, has hiked prices, citing higher costs of labour and raw materials. Maple Leaf Foods Inc. has pulled forward price increases for meat products. High Liner Foods Inc. has raised prices due to loftier shipping costs.

The outlook is peppered with hazards. The Canadian Dairy Commission recently announced that dairy farmers will receive 8.4 per cent more for their milk, starting in February. The increase, while subject to provincial approvals, would be nearly double the previous record. And while it’s likely that only a fraction of that increase would be passed on to consumers, the opaque price decision-making process has drawn ample criticism of late.

Meat prices could be affected by labour issues at processing plants. The price of beef shot up 8 per cent from May to June of 2020 after Cargill’s beef processing plant in High River, Alta. – the largest in Canada – closed for several weeks following a major COVID-19 outbreak. Now the plant faces potential strike action, with the union representing workers serving a strike notice to Cargill this week.

In Ontario, the provincial government recently proposed that servers and bartenders get paid a minimum of $15 an hour starting next year – a 20-per-cent hike from the current $12.55. It’s a major win for workers, but also pushes up labour costs for restaurants that are struggling to recover.

Energy prices are another headwind. Natural gas prices have risen sharply, forcing European fertilizer producers to reduce output. China and Russia are also curbing exports of fertilizer, pushing up prices even further.

“Once you remove a couple of the big suppliers from the supply chain, that certainly drives up prices,” said Jim Wickett, a farmer near Rosetown, Sask., about 115 kilometres southwest of Saskatoon.

Mr. Wickett is coming off a rough year. The drought was brutal for his crops, with wheat production dropping by around 80 per cent. Fertilizer costs are the latest headache. Though his soil is rich in potash, he needs nitrogen and phosphate fertilizers, and both are priced on international markets that are stretched for supply.

“In Canada, we’re extremely exposed, because we don’t produce what we need,” he said.

If pressures persist, they could lead to some tough decisions for farmers. Facing higher input costs, some producers may deliberately reduce yields or switch to crops less reliant on fertilizer, the TD report said.

Translation: another year of weak supply – and high prices.


The Great Cauliflower Crisis of early 2016 holds some lessons for today’s circumstances.

Nearly six years ago, the vegetable surged to $8 a head at Canadian grocery stores, inspiring news headlines for a week. The bout of hyperinflation – tied to cold weather in California that wiped out a portion of supply – fizzled out quickly and prices returned to normal, garnering little attention on the downswing.

In September, food inflation hit 3.9 per cent, the highest annual rate since early 2016, according to Statistics Canada.Fred Lum/the Globe and Mail

That’s not particularly surprising. People are mentally inclined to notice higher-than-expected prices more than stable or lower prices, said Michael von Massow, associate professor and chair of food system leadership at the University of Guelph.

“Over the last few years, I have argued that we have this perception that food prices are going up more than they actually are,” he said. “When we see $10 cauliflower – when we see some of the natural fluctuation in prices – we sort of feel like the sky is falling.”

In any given month, it’s easy to flip through Statscan’s inflation report and pick out major swings in food prices – up or down. Despite the general upturn in prices, some items are sluggish. In September, fish prices rose just 1 per cent from a year earlier. Coffee and tea were up 1.1 per cent. And fresh vegetables dropped 3.2 per cent, the seventh consecutive month of deflation. Food has actually lagged behind the overall inflation rate for most of this year.

Still, price perceptions appear to be a major consideration for Recipe Unlimited Corp., which operates several restaurant chains, including The Keg, Harvey’s and Swiss Chalet.

“We want to be very cautious about how we price, because once you take your prices up, it’s very difficult to get any credit for taking them back down,” CEO Frank Hennessey told analysts on an earnings call last week.

Tim Rogers, co-owner of the Lancaster Taphouse in Regina, is wary of alienating customers. Despite sales running at just 50 to 60 per cent of prepandemic levels, he hasn’t hiked menu prices since the COVID-19 crisis began. To help contain costs, Mr. Rogers is sourcing more of his food directly from local farmers, cutting out suppliers that charge more.

“There’s a breaking point in what you can charge,” he said. “Nobody likes seeing an $18 burger and a $10 pint of beer, but that’s what we’re charging. Going any higher on this kind of stuff, you wonder how much people can handle.”

Low-income households are hit particularly hard in the current situation, because they spend a larger portion of their disposable income on food than wealthier ones. It’s likewise tough on poor countries that import a great deal of their food supply. An index published by the United Nations shows global food prices have surged a whopping 31 per cent over the past year. At such rates, food inflation becomes political, threatening to overhaul governments.

Relative to most countries, Canada is in an advantageous position. It is a net exporter of raw and processed foods – meaning the country has a positive trade balance in both. Canadians, on average, also spend a smaller portion of their disposable income on food than consumers in most other countries.

Canada is hardly immune to the forces driving up food prices, but there’s also a scenario that inflation decelerates to fairly tepid territory next year as pandemic-related factors subside, such as clogged supply routes.

Better weather would be another big help.

“It’s Mother Nature. When you farm, you work at her mercy,” Mr. Wickett said. “You can’t control the weather. You can’t manipulate it – you just learn to adapt to what you’re given.”

“Rain fixes everything,” said Mr. Smith, the cattle rancher. “If it rains, and you get a good amount of rainfall and proper growing conditions, with a little bit of grass management, we’ll be able to come out of this.

“But if it’s dry again, that’s what I’m really worried about.”

Canada’s inflation rate hit 4.4 per cent in September. Personal finance columnist Rob Carrick answers questions about some of the factors driving inflation and how people can reduce its impact on their household budget.

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James Mackreides
'Mac' is a short tempered former helicopter pilot , now a writer based in Sofia, Bulgaria. Loves dogs, the outdoors and staying far away from the ocean.

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