08/06/2012 06:00 EDT | Updated 10/06/2012 05:12 EDT

U.S. Drought Will Raise Food Prices 3 To 4 Per Cent In 2013

A field of soy beans, left, meets drought-damaged corn in Mead, Neb., Tuesday, July 31, 2012. Soy beans, while distressed, are less sensitive than corn to the drought. The drought covering two-thirds of the continental U.S. had been considered relatively shallow, the product of months without rain, rather than years. But a report last Thursday showed its intensity is rapidly increasing, with 20 percent of the nation now in the two worst stages of drought — up 7 percent from the week before.(AP Photo/Nati Harnik)

TORONTO - Food prices may grow by as much as four per cent next year, economists predict, as drought conditions in the U.S. are expected to inflate the cost of everything from pork to cereal.

RBC economist Paul Ferley says the increases will be similar to those seen in 2011, when demand from emerging economies like China and India pushed food prices higher.

"Growth there is slowing, so we would have expected a bit of moderation in commodity and food prices, but because of the drought it looks like we'll be getting another wave," said Ferley.

He predicts that food costs will go up by 2.5 to 3.5 per cent in 2012 and three to four per cent in 2013.

Extreme drought conditions in several U.S. Midwest states are causing corn and soybean crops to wither, and analysts say the effects will ripple through the food chain.

Because corn is used to feed livestock in the U.S., the rising cost of beef and pork will be most noticeable on grocery store shelves, said Patricia Mohr, a commodity markets specialist at Scotiabank (TSX:BNS). Poultry may also be affected.

"This will trickle through the cost of production for food, and eventually will have an impact at the grocery store," said Mohr.

"It's hard to say exactly when this will show up."

Some types of grain have been affected by the drought, which may inflate the price of baked goods and pasta, said Mohr.

Fructose and corn syrup, which are used in many kinds of processed food, may become more pricey, as well as items made from canola like margarine and salad dressing.

Many Canadian food producers are either already feeling the pinch or planning for the future.

Tim Hortons raised the price of certain baked goods and lunch items last week, citing higher operating costs and pricier ingredients. The coffee and doughnut chain said the price of a muffin is five cents higher, while sandwiches have gone up by about 10 cents. The price of coffee has not changed.

And Maple Leaf Foods president and CEO Michael McCain warned last week that the food processor will have to jack up its prices.

Because Maple Leaf (TSX:MFI) buys ingredients in advance, consumers likely won't see higher prices for its products until the end of this year, McCain said.

"We don't know exactly what the extent or the timing is of any price increases attached to this because the story of this year's crop conditions is still not fully told,'' said McCain.

"As this unfolds into the fall we'll have a much better picture.''

Analysts also noted last week that food producers from bakery giant George Weston (TSX:WN) to pop and juice maker Cott Corp. (TSX:BCB) could face higher costs on their key ingredients like flour and sugar.

But they also said that grocery stores, facing an increasingly competitive market, may be hesitant to pass the costs onto consumers.

"Competitive pressures could temper the ability of retailers to pass through these cost increases," said Ferley.

National grocery chains Loblaw (TSX:L), Metro (TSX:MRU.A), and Sobeys parent Empire Co. Ltd. (TSX:EMP.A) have faced fierce competition, particularly in Ontario, from each other and retailers like Shoppers Drug Mart (TSX:SC) and Walmart who are increasing their food offerings.

Tim Hortons and grocery store chain Metro Inc. will report their earnings on Thursday.

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