Study: Food prices: A boon for producers, a buffer for consumers

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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.

Definitions, data sources and methods: survey numbers, including related surveys, 1401, 2202, 2203 and 2301.

The study, "Food prices: A boon for producers, a buffer for consumers," is included in the June 2008 Internet edition of the Canadian Economic Observer, Vol. 21, no. 6 (11-010-XWB, free), now available from the Publications module of our website. The monthly paper version of the Canadian Economic Observer, Vol. 21, no. 6 (11-010-XPB, $25/$243), will be available on June 19.

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For more information, or to enquire about the concepts, methods or data quality of this release, contact Philip Cross (613-951-9162; ceo@statcan.gc.ca), Current Economic Analysis Division.