Outlook 2008 (The watch list): Food costs

The strong loonie should continue to shield Canadians from food inflation.

For consumers, the strong dollar has helped keep a lid on food prices by lowering the cost of imports. Add some fierce competition among grocery chains, led by Loblaw Cos., and the result is that food prices in October climbed by only 1.4% over those a year earlier. In 2008, the strength of the loonie should temporarily continue to insulate Canadians from food inflation, according to CIBC economist Avery Shenfeld.

Compare that to the situation in the United States, where food prices rose by about 4% throughout 2007, and are expected to climb at about the same rate in 2008, thanks in part to government policies that subsidize corn-consuming ethanol production. That has pushed up feed and grain prices, along with meat, dairy and egg prices in turn. Meanwhile, in China, an undervalued currency, along with rising incomes, pushed prices up by more than 17% in the 12 months ending in October.

Indeed, rising food prices globally mean Canada’s agricultural sector is “well positioned to grow,” says Derek Burleton at TD Bank Financial Group. “Agriculture…has entered a new era of high prices, supported by rising food consumption from emerging markets and the prospects of competing demand for crops as a source of bio-fuels,” he wrote in November. Some producers, however, complain the high dollar is hurting their export business, and they’re also competing against cheaper U.S. imports. Seems farmers can never get a break.