High food prices ‘the new normal’, the report warns

High food costs are “the new normal” as labor shortages and extreme climate events continue to plague the industry, an RBC report warns.

Food prices have risen 18 percent in the past two years, making Canadians more expensive at the grocery store. In April, food prices were still 8.3 percent higher than a year ago, according to Wednesday’s report.

While food prices will not rise as fast as they did last year, ongoing challenges such as climate change, labor shortages, supply chain issues and geopolitics mean that food costs will not return to pre-pandemic levels.

“As more people retire and fewer people enter the workforce (in the food sector), labor shortages will persist in the long run,” said Nathan Janzen, assistant chief economist at RBC and co-author of the report. “And extreme weather conditions will limit crop production, putting further pressure on our supply.”

Food prices are determined by many factors, Janzen said, the largest of which is food processing, including packaging and local transportation. Usually these costs remain stable, but in 2022 transport costs – ocean shipping, domestic rail and trucks – increased enormously due to higher energy costs and fewer employees.

The labor shortage has also led to higher wages for workers, which are passed on to consumers, the report said.

Labor shortages for certain jobs, such as truck drivers, have been a problem for decades, Janzen said. But now there is a greater shortage of labor in the industry, putting pressure on production.

“These labor and supply chain factors will persist, resulting in long-term disruption, keeping food prices high,” he said.

In addition, costs for raw food products used in food production, including wheat, wholesale meats and oils, rose due to a perfect storm of “adverse weather conditions and geopolitical turmoil,” the report added.

The Russian invasion of Ukraine caused wheat prices to skyrocket, causing fertilizer and natural gas prices to rise sharply. And severe drought hit Prairie counties, causing a sharp drop in domestic crop production in 2021.

Extreme weather events also disrupt the supply chain as roads flood and infrastructure crumbles, says Sheila Block, senior economist at the Canadian Center for Policy Alternatives.

“This report underestimates the impact of climate change not only on agriculture, but also on the supply chain of getting products from one place to another,” she said.

The report also fails to examine the effects of large grocers who have seen their profits grow during a time of high inflation, Block said, which has had a major impact on consumers.

In addition, geopolitics must be priced into food costs, and Ukraine is just one case study of how conflict can have a major impact on food production and prices, said Sylvain Charlebois, director of Dalhousie’s Agri-Food Analytics Lab.

“What happens if China invades Taiwan? You have to hedge against these opportunities,” he said. “There’s a lot of uncertainty with geopolitics and it makes things less predictable.” (Taiwan is a world leader in manufacturing semiconductors, or electronic chips, that power machines in many industries, including manufacturing.)

While food prices will fall this year, Charlebois predicts fresh produce prices will remain higher as imports from California are limited due to regional flooding, and the Canadian Dairy Commission will approve incremental price increases for dairy products, he said.

Beef prices will also rise significantly in the coming months as extreme drought affects beef production in the US

Canadians may see overall prices stabilize this year, but consumers are paying more for less food, the report said. The cost of food has increased, but the quantity purchased is less compared to the end of 2019.

“These food surges are painful for middle- and low-income households,” Block said. “We have seen a huge number of people using food banks. Higher food prices are the new normal, so we need more income support for low-income Canadians to ensure their food security.”

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