In 2014, the Food Institute of the University of Guelph, Canada predicted that overall food prices in 2015 would rise by up to 3%. As stated in a revised report published in February 2015, this prediction was based on a much stronger Canadian dollar vs the American currency. However, fruit, nut and vegetable price inflation rates rose at a much higher rate than expected due to a much weaker Canadian dollar. Some products embedded in other food categories like pasta in grains and other processed foods also pushed prices higher than anticipated. For 2016, the Food Institute is forecasting food inflation rates across Canada to be anywhere between 2-4%.
The average Canadian household will spend $8,631 on food, $2,416 of which will be outside the household (at restaurants), meaning that Canadian consumers will spend $345 more on food in 2016.
Food prices in Canadian stores rose by 4.1% this year, which was significantly above inflation. This means the average Canadian household likely paid about $325 more for food in 2015.
Canada also experienced a tremendous shift in its economic landscape in 2015. Lower crude oil prices and lower interest rates pushed the Canadian currency to unprecedented levels in recent years. The Canadian dollar lost almost 10% of its value in only one month in early 2015.
For the first time, in February, the Food Institute revised its forecast for two categories—vegetables and fruits and nuts. These categories are known to be highly vulnerable to currency fluctuations, as 81% of all fruits and vegetables consumed in Canada are imported. Procurement for these categories was clearly a challenge early on in the year for Canadian food importers. The U.S. drought compelled many to look for new suppliers, and particularly in California, points for organic fruits and vegetables remained at a fairly high level throughout the year.
Meat prices rose 5% in 2015, as expected. That’s why the Food Institute conducted an exploratory study on determinants of consumers purchase decisions for beef. Results suggest that a high proportion of consumers have changed their beef consumption behavior due to increase in meat prices. Canadian consumers are more likely to search for new protein alternatives, which may cause lower demand for meat and higher demand for vegetables and grains in future. Fish and seafood prices rose by 2.4%, which is slightly lower than forecasted. And, inflation for eggs and dairy products remained relatively stable. This category is subject to the effects of supply management, a quota-based production system coupled with high tariffs on imports, which make Canada a closed-in economy.
Food prices in restaurants rose by 2.7%, which is below the overall food inflation of 4.6%. Competition for both full-service and fast food industries has increased, which brings prices lower. Full-service restaurants are offering smaller portion sizes and healthier food options, with more waste-reduction measures in place, eventually reducing costs. For the first time, Canada may experience sales from the fast food industry exceed those of the full-service industry in 2016. Animal welfare has also been recognized as a driver in fast food, moreso this year than ever before. For example, McDonald’s Canada decision to procure only cage-free eggs by 2025 helps support this projection.
Factors affecting food retail prices
Here are some key drivers impacting food prices in the upcoming year.
Macro drivers. Climate change will remain one of the most significant, unpredictable influences on food prices. El Niño could be a significant factor in 2016. In fact, meteorologists predict next year’s El Niño to be one of the strongest on record. This may cause more precipitation in southern and western regions in the United States. Although these effects are highly unlikely to redeem the four years of drought experienced in some regions previously, this could influence agricultural productivity for fruits, vegetables and nuts. California and other drought-stricken regions could see more rain, which could in fact increase production. Fruit and vegetable prices could be affected as a result, making procurement easier for importers. Cattle production, which has been affected by droughts, will remain low enough to keep inventories at current low levels. Since rebuilding inventories is a very long process, this could keep beef prices high, but not at record levels as experienced in 2015.
Sectorial drivers. In 2015, with the departure of Target and the closure of many food retail stores, food retailers faced lower competition and generated higher profit margins. The sector was able to successfully transfer top-line gains into bottom-line increases. Other than Sobeys’ acquisition of Co-op Atlantic, and Metro with Moisson Montréal, no major deals were reported in 2015, however more consolidation is expected in the future. Consumer trends also influences prices. The three major consumer trends in 2016 are supply chain transparency and animal welfare, gut health and vegetable proteins (relevant to ethnicity). All these trends have the potential to increase retail prices over the long term.
Supply chain transparency will continue to be a focus in 2016. Many decisions in 2015 by major players show the industry is being shaken by external powers, resulting in an ingredient revolution of sorts. Food businesses are revisiting their procurement strategies and ingredient lists, as more and more consumers want to know where their foods come from, how they were made and under what conditions. The good news is that the industry is showing signs of adapting. The not-so-good news for food corporations is that the revolution has only begun, and it will become more complicated as time continues.
Labels and packaging may have little to do with this revolution; rather, it is the growing influence of corporation-consumer interaction, plus the increasing number of influencing sources that makes the organizational role of consumer relations so influential. Product innovation is not so much about reassuring the public rather than responding to public opinions on food issues and changing the DNA of the product itself. The “farm to fork” paradigm is slowly shifting toward a market-based “fork to farm” emphasis. When it comes to ingredients, social media has changed the relationship between corporations, stakeholders and consumers. Online consumers have the ability to criticize and damage corporations, even if claims are not always scientifically defensible.
Under the same theme of transparency is animal welfare and other ethical issues. For years, many in the food industry believed that the issue of animal welfare would be a short-lived issue, connected primarily to an urban-driven anxiety juxtaposed with the principles of pet ownership. It was assumed that consumers’ desire for convenience and affordability would trump this concern. Consumers continue to express this desire, but the issue is clearly retaining traction in ongoing conversations about agriculture. The industrialization of agriculture has successfully produced a large supply of meat, eggs and dairy products for urban centers, but some argue that this supply comes at significant costs to ethical treatment of animals on farms. Chicken, hogs, cattle, foie gras and now the dairy industry have been, at one point or another, the center of controversy over the last five years in Canada. Some jurisdictions adopted improved legislation to safeguard the health of animals on farms; however, the proper resources to support these laws were not forthcoming. The industry, on the other hand, is not waiting. For example, Cargill will shift to group housing by the end of this year, moving away from gestation crates for sows that animal welfare groups have opposed. More companies are starting to fund university research to better understand the societal and financial implications of tracing and tracking manifests displaying farm practices on food products. Some Canadian universities have launched programs focusing on animal welfare science. The agricultural industry is also beginning to use technology to facilitate transparency. An increasing number of facilities are now installing closed-circuit cameras to monitor employees and animals around the clock. The animal welfare issue is moving down the food chain as restaurants and retail chains are making changes to their procurement strategies. With the price of animal protein currently reaching record levels in food stores, videos revealing irresponsible behavior with livestock provides another reason for consumers to stop purchasing steak and chicken.
The second major trend expected in 2016 is the quest by consumers for products providing health benefits for their gut. The World Health Organization, Switzerland, made headlines by declaring that processed meats can cause cancer. It is believed that this statement will not alter demand for these products in Canada, at least for the short term.
The third trend is the emergence of vegetable proteins. As consumers look for protein alternatives, they may become more attracted to fish products, or perhaps pulses. The Food and Agriculture Organization of the United Nations (FAO), Italy, declared 2016 the year of pulses, and through promotional efforts, demand for pulses such as lentils and chickpeas may rise.
Domestic drivers. The U.S. Federal Reserve will likely move forward with a slow, steady increase of their overnight lending rate. This could put pressure on the Canadian dollar, which could swing lower. That said, more Canadians are spending their revenues on shelter, which makes it increasingly difficult for these households to spend more on food. However, wages are starting to increase in Canada again. In some parts of the country, Canadians are earning more after a few years of stagnation. This may give breathing room for some households, which felt under pressure these past few years.
This report employs seasonal auto-regressive integrated moving average (SARIMA) models with exogenous regressors, supplemented by the authors’ expert opinions to determine forecasts for the seven commodities.
For convenience and validity, all respondents had to be living in Canada for 12 months, and were at least 18 years old. The choice of country is not trivial. First, access to data was convenient for this study. Second, and most importantly, Canada has supply managed commodities that include poultry and chicken. In effect, Canada produces the amount of chicken it needs. Beef production is vulnerable to market volatility.
The data collection was conducted over a 4-day period. Since it is an exploratory study, a sample size of 504 was thought to be adequate. Each respondent took an average of four minutes to fill out the survey. The completion for the survey was 95%.