Despite subsidies, Arctic food costs poised to rise

Produce is seen at Iqaluit’s Northmart store March 23. Prices for this kind of food are expected to drop when Nutrition North Canada starts April 1, but rising oil prices and global food shortages could push them back up again. (PHOTO BY CHRIS WINDEYER)

Officials with the North West Co. have said they expect to see prices on foods covered by Nutrition North Canada drop five to seven per cent when the program kicks in April 1.

That — complaints about other aspects of the new federal government program notwithstanding — is the good news.

The bad news, according to a report issued March 18 from TD Economics, is that Canadians can expect average food prices to rise seven to eight per cent over the rest of 2011.

“Canadians need to be prepared for rising food prices,” wrote Francis Fong, an economist with TD and the report’s author.

And in the United States, the U.S. Department of Agriculture predicts food prices there will rise across the board between three and four per cent this year, with the biggest increases in pork and dairy products.

Fong writes that developing countries have already been struggling with rapid increases in food prices, because demand for food in those countries is growing.

Population growth, combined with increasing levels of wealth in places like China, are driving demand for meat, which in turn drives demand for corn, which is used as animal feed.

Fong says a string of bad weather in major food producing regions like Argentina, Australia, Brazil, Russia and the Canadian Prairies reduced the supply of key crops like wheat, corn and soybeans and drove up prices.

The report says developed countries have generally been protected from these kinds of price increases because the percentage of food costs made up by commodities is relatively low compared to other costs like marketing and transportation.

Both producers and retailers in North America have engaged in intense price competition that’s held prices down.

But that’s beginning to change, Fong writes.

“Price pressures will continue to mount as the prior year’s gain in global food prices feed into prices paid at grocery stores,” he says.

Even with the predicted five- to seven-per cent drop in food prices thanks to the Nutrition North Canada subsidy program, Nunavut is still more exposed to price increases.

Nunavut’s distance from distribution hubs, small population and its transportation network that relies on small aircraft to move freight outside of Iqaluit make it more vulnerable to increases in fuel costs.

Oil has jumped from just over $90 per barrel a year ago to $103.90 on March 22. Some analysts forecast it could $119 a year from now.

A proposed 19.3-per cent hike in electrical power rates, sought by Qulliq Energy Corp. and currently before the Utility Rates Review Council, would further drive up overhead costs for business, some retailers have warned.

There’s also the question of what Nutrition North will do to the already limited competition in Nunavut’s retail sector.

The North West Co. is already dominant, and some fear that Nutrition North, which allows retailers to negotiate their own deals with wholesalers and shippers, will be able to undercut its smaller competitors.

North West CEO Edward Kennedy thinks his company stands to benefit from Nutrition North.

During a recent conference call with the publicly-traded company’s shareholders, Kennedy said North West Co.’s size is allowing to win better rates from airlines.

“We’ve sat down with carriers and we’re getting the cost decreases we should be getting with the amount of volume we’re bringing to the table,” Kennedy said in the conference call, a transcript of which was provided to Nunatsiaq News by APTN.

He added the company is investing in new warehouse space and inventory management systems that should also help keep costs down.

Kennedy said the subsidy changes, along with his company’s size, will allow it to be “local competitors” on price.

The new system will also allow the company to reduce what Kennedy called “out shopping” — Northerners buying goods online or while they’re down south travelling.

One source in the Iqaluit business community, who works outside of the retail industry, predicted North West’s advantage will be so great that it will end up being cheaper for small retailers to buy from North West Company wholesale, instead of going through other southern suppliers.

That means that over the long term, there could be less competition for Northern and Northmart stores, and less incentive for the company to keep costs down.

Regardless of how global economics impacts the cost of food for Northerners, Kennedy’s assessment of life with Nutrition North is rosy, at least for the North West Company.

“We’d like to think we are going to sell a lot more product under this system,” he said.