Rising cost of grain to send meat pricetags higher as well: grocer organization

David Friend, THE CANADIAN PRESS
TORONTO - Canadian shoppers, already paying more for bread and facing even higher prices for baked goods, should expect meat prices to rise as well in the coming months as grain costs continue to hover near record levels, says an organization for the country's biggest grocers.

Products made from grain, including pasta, cereal and other flour-based foods, have already incorporated much of the higher price levels, Dave Wilkes, senior vice-president of trade at the Canadian Council of Grocery Distributors, said Thursday.

But "downstream" foods - products from livestock which consume grain as feed - haven't yet been fully impacted, Wilkes said.

"As grains and corn go up, the cost to raise cattle, pigs, and poultry will also go up, and that will be translated into the cost of the final product ... in the next little while," he said.

"The challenge that the industry is having at this front is that it's such a foundational component of the food that we deliver to Canadians every day."

Wilkes said Canadians have already seen a 9.9 per cent rise in the price of a loaf of bread over the last year, tied directly to a 128 per cent increase in the cost of baking-grade wheat.

That has made it tougher for grocers to maintain low pricing for staple items. Bread for example, is selling for well above $2.50 a loaf and even higher in some parts of the country.

"The adjustments that occur throughout the supply chain may be just beginning," he said. "As the supplier increases their costs and translates that onto the retailer, that retailer will most likely have to reflect those changes at the shelf level."

On Thursday, Maple Leaf Foods Inc. (TSX:MFI) said it will boost prices after posting a small loss in its first quarter. Sales declined nine per cent while high grain costs ravaged profitability in its bakery and hog operations.

In its financial report, Maple Leaf said it lost $10,000 in the quarter, or breakeven on a per share basis, compared with a profit of $10.5 million or eight cents per share in the year-ago period.

Company president and chief executive Michael McCain told investors in a conference call that he expected wheat costs to decline in the last half of this year, which could help the company's margins recover by then, or even sooner.

"The new (wheat) crop, which comes online in the middle of the third quarter, while high relative to historical norms... is still (priced) lower than the second quarter," he said.

Meanwhile, Canada Bread Co. (TSX:CBY), 88 per cent owned by Maple Leaf, also warned that consumers can expect to pay more as the bread producer reported a 32 per cent drop in first-quarter profit amid "significant margin compression due to rising wheat prices."

Company spokeswoman Lynda Kuhn said that last month Canada Bread Co. started to "pass through" costs to customers, which increased the price of a bread loaf by 20 cents on average.

"On a forward looking basis we are continuing to consider whether additional pricing may be necessary. We don't have a specific price in mind yet," she said.

"It's contingent on watching where wheat markets, and other inflationary costs go."

Several factors have been driving up the price of grain. Two consecutive years of draughts in Australia, and dry conditions in other countries like Russia, have worked against offsetting the soaring demand from highly populated countries like China.

At the end of April, the official close of the current crop year in the United States, stockpiles of wheat in the U.S. are expected to be at their lowest level since the 1940s, said Pat Mohr, a commodities trader at Scotiabank.

"Globally, stocks are going to be at the lowest since the 1930s," she added.

Also driving up the price of food are soaring gasoline prices, which are built into the cost that shoppers pay at the register.

Representatives for the country's biggest grocery chains, Loblaws (TSX:L), Metro (TSX:MRU.A) and Sobeys, either didn't return calls seeking comment or declined to discuss their pricing strategy.

The major grocers have been embroiled in a price war with each other and Wal-Mart Superstores that has left them slashing the cost of everyday food products in hopes of luring in more shoppers.

While the battle has put pressure on their bottom line, relatively low food prices have kept the battle from getting out of control.

Canada has benefited from relatively tame food prices over the past year, compared to other countries, but all of that could be coming to an end, suggests CIBC World Markets economist Avery Shenfeld.

"It's clear that Canada's good luck on food prices is likely to run out in 2009," he wrote in a note on Thursday titled "Food Inflation: Coming to a Grocery Store Near You."

Shenfeld said that the higher Canadian dollar has helped soften price increases felt in the United States.

Milk and cheese prices are controlled by a national marketing board, but higher feed costs could force dairies to pay more for fluid milk and transportation next year, Shenfeld said.

"We look for wholesale prices to retailers to rise at a three per cent clip next year, up from 1.7 per cent year-on-year in March, according to the Industrial Product Price Index."

On Thursday, rice futures pulled back from an all-time high but remained near record territory a day after two major U.S. warehouse retail chains, Wal Mart Stores Inc.'s Sam's Club and Costco Wholesale Corp., imposed limits on rice purchases.

Rice prices have jumped 70 per cent so far this year, causing alarm over the potential of mass shortages.

© The Canadian Press, 2008