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Know how Fuel Price increases affect Retail Food Prices

Courtesy of Lee Hart.

Fuel prices can be a considerable component of crop and livestock production costs, but any price increases are largely absorbed by the producer, say agricultural economists. Even increasing transportation costs throughout the supply chain are largely borne by the supplier and aren't directly passed on to consumers through a corresponding increase in the price of food.

"Certainly, at the farm level, unfortunately farmers are price takers," says J.P. Gervais, Farm Credit Canada's Vice President and Chief Agricultural Economist. "Any increase in the cost of inputs won't be reflected in farm commodity prices. It has to come out of the producer's bottom line."

He says producers involved in direct marketing of agricultural products to consumers or food service (restaurants) may be able to pass along a bit of fuel and other input cost increases, but even then, they are limited. All levels of food retail are very competitive business, so whether it is at the farm gate or at the grocery giant checkout counter or favorite restaurant, prices must remain competitive.

Fuel costs are an important factor in overall farm operating costs. In a 2019 crop cost of production report produced by Manitoba Agriculture, it estimates farm fuel costs can range anywhere from $22 to $33 per acre, depending on the crop being produced. The report calculates a total of 15 different operating input costs for the main grain and oilseed crops. Fuel costs represented anywhere from 10 to 15 per cent of overall operating costs - third in line, after seed and fertilizer costs. Again, any increase in the cost of those inputs has to be hopefully covered through a combination of the price paid for the commodity and yield per acre.

"Increases in fuel prices throughout the supply chain - from the farm right through to suppliers delivering products to the grocery store - have to be absorbed," says Sylvain Charlebois, a professor in food distribution and policy in the Faculties of Management and Agriculture at Dalhousie University in Halifax. "Consumers don't really notice changes in fuel prices in products bought at the retail level.

"Grocery stores in particular operate on very close margins, so they are strict in terms of keeping prices in check," he says.

Even a study conducted a few years ago by the Bank of Canada looking at the impact of crude oil prices on the cost of food still holds true. That report found "There is no evidence that oil price shocks have caused more than a negligible increase in retail food prices in recent years. Nor is there evidence from the prevailing wisdom that oil-price-driven increases in the cost of food processing, packaging and transportation and distribution are responsible for higher retail food prices."

Both Gervais and Charlebois say one of the main factors affecting increases or decreases in food prices is the age-old law of supply and demand.

"If there is some interruption in the supply of a particular product to the food chain, that will usually translate into an increase in food prices," says Gervais. "Poor weather or a disease that affects production of a particular product usually results in price increases." A shortage in production, will often force food distributors or retailers to scramble to find alternate suppliers if possible.

Consumer demands can often affect an increase in food prices for specific products, says Charlebois. For example, a recent fad or trend toward the potential benefits of celery juice in the diet, created a dramatic increase in demand for celery. The demand - combined with supply problems related to bad weather - pushed the price of celery to between $4.50 and $6 for a single bunch in some major Canadian grocery stores.

"Depending on the situation, there can be a strong demand or supply problem that can cause price spikes... but after a while, prices will calm down," says Charlebois.

He also notes the value of the Canadian dollar can have an effect on imported food retail prices. "Currency can be a big issue," he says. A low Canadian dollar is usually good news in terms of keeping retail food prices lower.

Danny Le Roy, Associate Professor of Economics at the University of Lethbridge, also notes there are a wide range of costs that affect food prices.

"When you go to a restaurant for example, probably the most expensive aspect of the meal are the wages for the person serving the food and the people in the back who are cooking it," he says.

Le Roy agrees fuel prices have little impact on the price of food at the retail level or in the food service industry, but at the same time they have a significant impact on the supply chain.

"There is a cumulative affect related to increased costs," says Le Roy. "If you have increasing fuel costs or a carbon tax, for example, they do increase costs throughout the whole supply chain. The impact on the consumer might be quite negligible but the consequences of these costs are not trivial. Every stage of the supply chain will bear the brunt. The important thing to remember is that the increase is a cost for whom?"