Despite the unprecedented drought the U.S. is experiencing this summer, alarmists are wrong to warn of rising food prices in Canada.
While markets look at demand rationing in the U.S. for grains, prices for corn, soybeans, and other commodities are likely to remain high due to the unprecedented drought Americans are experiencing this summer. As farmers in that country deal with severe climatic conditions, near-perfect growing conditions in most of Canadian farmland and skyrocketing corn prices mean many farmers in this country are cashing in. As American consumers brace for higher food prices in the coming months, the effect of the infamous U.S. drought of 2012 in Canada will likely not be significant.
Corn prices have risen almost 60 per cent since June, and hit an all-time high in recent days. Other grains such as soybeans, wheat, and rough rice, have also been trading much higher in the past few weeks. Despite this, the full impact of the commodity price hikes for packaged and processed foods will likely take six to nine months to move through to retail food prices. Nonetheless, distribution efficiencies prevent input costs from being symmetrically reflected on retail food prices.
Increases of 50 per cent because of “farmgate” may trigger retail prices to increase only slightly. For this summer, animal protein will likely be affected the most, but most experts do not expect price increases at retail to exceed four per cent before April 2013. In fact, we are seeing prices for some meats drop as farmers sell their livestock fearing higher input costs.
Other food categories won’t be affected at all. The cost of fruits and vegetables, for example, should not change substantially, largely because the geographic areas they are mainly grown in were not affected by the drought. The Canadian dollar also offers food imports continued buying power. In reality, food prices could go up by no more than 4.5 per cent in Canada next year, a modest increase when comparing food prices to the cost for lodging or energy. Considering that 38 per cent of all groceries bought in Canada are wasted, consumers can save by adhering to more responsible buying patterns. Indeed, therein lies the real problem in food consumption.
As for critics of the so-called “ethanol effect” for higher corn prices, these claims are often overstated. First, even if almost 45 per cent of the now-shriveled corn crop were intended for ethanol, the estimated aggregate domestic demand for corn in the U.S. would be down by 1.4 million bushels. Ethanol production in the U.S. has slowed down, even before the beginning of the drought. Second, farmers need incentives in order to produce, which is exactly what the ethanol mandate achieved. If corn prices were lower, corn production would be lower. It is as simple as that. Finally, not all is lost: About a third of the corn that is processed to make ethanol is subsequently converted into a form of animal feed called dried distillers grain.
We ought to accept the fact that climate change is hostile to modern farming practices. Opportunistic farmers are hardly to blame, but more actions to mitigate risks are required. Building better water irrigation systems and promoting the use of weather derivatives are promising solutions for farmers for the future. With the proper tools, farmers can better offset the bitter consequences of unforgiving weather patterns.
Conversely, it is high time for the U.S. to consider other, more efficient means to produce ethanol, one of those being sugarcane. Producing ethanol from sugarcane takes less land and uses less fossil fuel than corn grown in temperate climes. This is the preferred approach in Brazil, which makes the American ethanol version grotesquely wasteful. Last year’s elimination of import tariffs and tax credits in both the United States and Brazil on ethanol was a significant first step towards making ethanol a traded commodity. The two countries that produce more than 80 per cent of the world’s ethanol can sell in each other’s backyard at market prices. Of course, to heavily rely on food crops to produce fuel is not a long-lasting, sustainable approach to global food security.
However, on a global scale, the story is very different. We should recognize that the rest of the developing world will be hit harder by this drought than Canada and the United States. While Canadian and American consumers, despite a modest rise in cost, will still enjoy access to the most affordable food prices in the world (excluding Singapore), consumers in emerging economies will face higher food prices. Corn price rallies have brought along other commodities for the ride. For example, the price for rice, a fundamental food staple for more than three billion inhabitants on the planet, is posing a particular problem. Projections see rice prices climb as much as $30-$40 per metric ton. The fears of embargoes and governmental knee-jerk reactions like we have seen in the past could make the situation worse and lead to new food riots.
Alarmists in our country should recognize how lucky we all are before complaining about so-called “rising” food prices.
