Why Canadians shouldn’t be worried about rising food prices
The recent drought is about much more than an exceptional dry spell for farmers.
There must have been a time when drought was a prolonged dry spell that made life even tougher for farmers and crop failures caused food shortages and higher prices.
The drought that has plagued much of the U.S. this year seems to be only tangentially about those things. In 2012, it's about everything from monetary policy to presidential politics to geopolitical strategy to ethanol production.
The general view, to date, is that this exceptional period of dryness is by no means as severe — and politically destabilizing — as the drought of 2008.
In fact, the consensus seems to be that the hot, dry weather will have a relatively limited impact on the cost of food — especially in Canada. At most, it's supposed to bump up the overall price of groceries by about four per cent — though not until 2013 at the earliest.
In part that's because Canada hasn't been as hard hit as the U.S. by harsh summer weather. And then there's the fact that on average we spend less than 10 per cent of our household budgets on food. (And by the way, about 38 per cent of the groceries we buy moulder in the fridge for a few weeks before being tossed straight out as waste.)
Furthermore, raw farm commodity prices only account for about 14 per cent of retail food purchases.
Because corn and soya beans are used as feed for animals, meat prices will ultimately reflect higher commodity prices. But that will be delayed in the near term — for at least six to nine months — by the fact that any herds are being slaughtered early in order to save on the cost of longer-term feeding.
North American economists are obviously very focused on the implications of higher food prices for inflation and economic growth. But for Canadians, the relatively strong dollar is a buffer because it preserves our buying power and mutes the impact of higher cost imports.
By way of context, recent spikes in gasoline and housing prices have come in at much greater than the four per cent range.
In the U.S., despite all the clamour about impending doom, consumer prices were actually flat in July for the second consecutive month and year-over-year price increases were the smallest in 18 months. That should give the central bank some scope to ease interest rates and improve employment prospects — something that's important in a presidential election year. (If the money supply is too tight, it's hard for businesses to get the credit to expand and create jobs.)
However, the fear of food price inflation — especially the impact on poorer families — is likely to keep monetary policy extremely tight. And Canada's central bank isn't likely to deviate from that lead too far either. There's not much interest in boosting our currency value too high above that of the U.S. — which is what would happen if rates rose.
And then there's the whole issue of ethanol, the more climate-friendly fuel that's made from corn. And in Canada, it's mandatory that gasoline have a five per cent biofuel content.
As the drought has made corn scare, prices have soared and ethanol production has tumbled. That imbalance in supply and mandated demand has the potential to drive up gasoline pump prices once again.
Finally, the drought has a bearing on geopolitical balance as well. Countries facing food shortages are politically unstable — something that was demonstrated in 2008 by global riots over food shortages.
Although riots aren't expected this time around, China is under close scrutiny. Historically, it has been reluctant to buy grains on world markets, preferring to be self-sufficient. It has recently started to buy on the world market in a modest way, but if that increases significantly it could skew global supplies quickly.
That's borne out by the fact that prolonged drought in Russia has been driving up world wheat prices over the past few weeks.
With so many economic, political and social issues hinging on the weather forecast over the past months, it may be time for the new Facebook meme — Facebook Rain Dance — to finally kick in.
MSN.ca Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.