contact May 4th, 2008
From msn.ca:
“Canada cannot remain immune to the skyrocketing food prices that already affect much of the world and it may be only a matter of months before the impact here has a major impact on the economy, says a new report from Bank of Nova Scotia.
Except for baked goods, Canada been mostly spared the price spikes in basic foods that has roiled the developing world and even caused two major food retailers in the United States to ration some types of rice as a “precaution” against hoarding.
Because most agricultural commodities like grain, fuel and fertilizer are priced in U.S. dollars, the stronger loonie has cushioned Canadians from many of these shocks. Consumers have also benefited from stiff competition among grocery chains.
“But I don’t think Canada can escape the sort of food pass-through that has been going on in the global economy indefinitely,” says Derek Holt, vice-president at Scotia Capital Economics, who wrote the report.
“This is the year it starts to catch up to Canada. We’ve already started to see in some key categories and that will intensify in the summer months.”
Scotiabank’s warning is the latest in several issued recently by Canadian businesses and international agencies.
The United Nations Food and Agricultural Organization reports that global food prices have increased 57 per cent from last year, while the price of rice has doubled.
Meanwhile, the World Bank has forecast the higher prices are likely to last at least two years before moderating slightly.
Holt said that Canadian spending habits could change profoundly once food prices begin rising, along with higher gasoline and heating prices that have already hit Canada.
“It’s a very material risk that people will start seeing themselves having to spend dozens or hundreds of dollars a month more on basic groceries, home heating and gasoline costs,” Holt says.
“You’ve got to do something, so you start to rein in spending on everything else and you postpone plans buy that HD television, or build a backyard deck.”
Several analysts have also forecast that Canada’s holiday from food price shock will not last forever.
But where Holt’s analysis differs from others is that he believes the likely impact will not be higher inflation, but lower prices for everything except food and energy.
Holt argues that sky-high energy and food prices could actually be disinflationary for Canada because consumers will have less to spend on everything else.
“That becomes a very dangerous scenario where you can have some sectors doing very well, food and energy, but other sectors see their pricing power totally evaporate,” Holt said.
While low inflation is generally regarded as a good thing, disinflation could trigger an economic slump because it may result in consumers and businesses holding back on purchases and investments in expectations of lower prices down the road.
“I think rationing in food is a possibility,” he said. “But an even bigger danger is that we go back to the days when we thought price and wage controls were a smart thing, this time applied to a particular sectors.”
One encouraging development is that farmers have begun to switch to cash crops to take advantage of the higher prices, but Holt said it will likely take three to four years before the higher production is felt in the market.”