Food costs carry bigger bite

Author: Colleen Winter

Date: Jun 02, 2008

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Ron Howden

Rising gasoline prices are being reflected in the increased cost of food seen in the stores, but it’s commodity prices that are having the biggest impact.

Industry watchers say gasoline prices could peak anywhere between $1.30 and $1.50 per litre over the coming months. While it’s becoming increasingly painful to fill up the tank, the pumps aren’t the only place that Canadians are feeling the crunch.
The distribution of goods throughout Ontario relies heavily on trucks and with the rise in the cost of fuel, many shipping companies are seeing an impact on their bottom lines.
“It’s not good,” said Gord Smith, President of Manitoulin Transport, referring to the rising gas prices. “It has a negative impact on profitability for all truck companies.”
The price of diesel fuel has risen 21 per cent in the past year and while fuel surcharges (an extra fee billed to clients that reflects the changing cost of fuel) help offset some of the increases, when the price rises quickly, like it has been since last October, transportation companies don’t recoup their costs.
“The fuel surcharges really help,” said Smith, “but it does not recoup the full cost increase of the fuel price.”
Shippers get hit due to the lag between fuel surcharges and rising prices, but much of the impact flows through to their clients, who in turn pass it on to their customers. In many instances, fuel surcharges come from both material suppliers as well as transportation providers, resulting in a ‘double whammy’ by the time the product reaches the shelf.
“It flows through all the way to the economy,” said Smith, “It’s a big hit to the Canadian population.”
Where consumers are already seeing an impact is at the grocery store. From February 2007 to February 2008, the average bread price rose 9.9 per cent, flour 8.3 per cent and pasta a whopping 26.5 per cent.
According to David Wilkes, senior vice-president at the Canadian Council of Grocery Distributors, it’s not fuel costs that are having the highest impact.
“It’s more commodity (prices) than gas,” said Wilkes, listing corn, barley, wheat and rice prices. He cites a new demand paradigm for these commodities that is changing the structure of how food is produced and delivered around the world.
“Canadians can’t be immune from discussions on food globally,” he said.
Two factors are contributing to the change. One is the increasing population worldwide and the ability of developing economies to affect the overall system with their purchasing patterns and purchasing power. The increased demand with existing supply, results in higher prices.The second factor is one that Barrie residents are familiar with through the proposed ethanol plant. With corn now being used for alternative purposes, such as bio-fuels, land once used for other commodities is being diverted to corn production, resulting in a decreased supply.
“It’s all coming together at once,” said Wilkes, adding that he doesn’t see the situation changing. “The world is going through a substantial change.”
He expects the changes to have an impact across the spectrum, both in products that use the commodities directly and those affected by the costs of feeding livestock. One commodity price increase already visible on the shelves is the increase in the price of pasta, which is a direct result of baking-grade wheat prices having risen 128 per cent since February 2007.
While gas prices may not be the biggest factor affecting food prices, they’re still not completely blameless.
“That 21 per cent (increase in diesel fuel cost) has a direct impact as trucks move across the highways,” said Wilkes. “Our industry is very dependent on transportation. Every community has a corner store and there are very few alternatives (for getting the product delivered) other than putting it on the trucks.”
In addition to transportation, the price of plastic bags, a petroleum-based product that is used extensively in packaging and throughout the store, has also increased.
How much the increases appear at individual stores will depend on each organization’s strategies and goals and what Wilkes calls “competitive positioning.”
As with any structural change, it’s an evolution that has taken time, but ultimately, it’s about adjusting.
“I don’t see relief in the changing demand factors, but we’ll see how that translates. There’re plenty of examples of people being creative in the face of change and I don’t underestimate our ability to manage this,” he said.