By Vineel Raj
“A recent study by four Canadian universities found that due to higher commodity prices, a family of four could spend $695 more on groceries next year to lift the annual household food bill to $13,907. That marks the highest predicted dollar increase in 11 years of publishing the annual report.”
Commodity prices have risen to record levels over the past year as the Global Pandemic took hold. Disruptions and events like the Suez Canal ship blockage and the Texas power outage have magnified the global supply chain problems leading to commodity shortages worldwide. The result is an increase in most commodities that are trickling down to Canadian families and consumers.
A recent study by four Canadian universities found a family of four could spend $695 more on groceries next year to lift the annual household food bill to $13,907. That marks the highest predicted dollar increase in 11 years of publishing the annual report. “The pandemic affected the entire agri-food chain from farm gate to consumers,” said the report by Dalhousie University, University of Guelph, University of Saskatchewan, and the University of British Columbia. “In 2021, we can expect to feel the continued effect of COVID-19 on our agri-food chain and global food systems, in addition to the growing impact of climate change.”
If we look at, for example, the homebuilding industry in Canada, increasing prices, coupled with supply chain disruptions, are exacerbating the housing supply shortage and many thousands to the cost of a house or renovation.
“At the top of the list of commodity prices rising is lumber and what we have seen is a scorching housing market both in terms of new construction and renovations and also in the resale market,” said Kevin Lee, CEO of the Canadian Home Builders’ Association (CHBA).
“At the top of the list of commodity prices rising is lumber and what we have seen is a scorching housing market both in terms of new construction and renovations and also in the resale market,” said Kevin Lee, CEO of the Canadian Home Builders’ Association (CHBA). The pandemic has accelerated the shortage of housing supply and pent-up demand that already existed.”
The pandemic accelerated the shortage of housing supply and pent-up demand that already existed, adding the housing market in Canada and the United States took off last summer. “The U.S. relies heavily on Canadian lumber, so with all of that housing activity and that shortage of housing supply and all of a sudden the dam sort of bursting surprisingly through COVID, there is a scarcity of lumber. The lumber mills in Canada and the U.S. slowed right down early in the pandemic, but the housing market rebounded faster than the mills got back up and running. With the integrated North American market, you really see the shortage affect price, so we’ve seen lumber prices skyrocket, and that hasn’t abated.”
A CHBA member survey found the average delay time in new home construction is, on average, six weeks. In addition to lumber and oriented strand board (OSB), prices are also rising for steel, appliances, plumbing fixtures, windows, doors, and electrical materials, making them more challenging to get. “What we do see is lumber prices staying elevated for the first half of the year,” Lee noted. “We do expect those prices to start to come down to a degree in the second half of the year. It might be a long time for them to get back to where they were in pre-pandemic times.”
One local Vancouver housebuilder says construction for new houses and renovation has increased by at least 20% due to the increase in lumber and other building materials. “We have no choice but to pass the cost on to developers and homeowners.” However, some commodities are also trending well above their pre-pandemic levels. Copper, joined lumber, canola, iron ore, rare earth metals, and palladium in breaching all-time highs. Copper and other rare-earth metals are used extensively in automobiles, especially hybrid and electric cars, leading to parts shortages used in auto manufacturing; thus, higher prices as the extra cost is passed on to the consumer.
Notably, the Pandemic recovery process has been tilted heavily towards the goods sector in which commodities are vital inputs. Solid growth in manufacturing and industrial production has lent support to base metals.
This recovery has been met with growing supply bottlenecks and capacity constraints across supply chains, including commodities. For instance, shipping costs had spiked amid rising capacity constraints. The demand outlook for Alberta oil, however, has not recovered yet to its pre-pandemic levels. Meanwhile, U.S. natural gas production has declined from its pre-pandemic peak. But growth in LNG export capacity has helped partially alleviate the supply glut in North
American markets. La Nina, Latin American harvest concerns, and the delayed impact of a flawed U.S. harvest in 2019 tightened soybean and corn markets in food production. Canada, which imports fruit and vegetables from California, is set to see higher prices in Canadian supermarkets for these staples due to supply chain issues and higher cross-border transportation costs. Meat prices have also risen as animal feed prices have also risen. Commodity markets have been in full swing this year. Evidence suggests that recent movements have been spurred by short-term demand and supply imbalances, lifted further by an increased speculative appetite for the sector. It’s still early days. While there is no early-2000s-style supercycle yet, there is certainly scope for an extended run in some areas of the commodity complex in the next decade.
In an interview with CBC On-Line, Amy Peng, associate professor at Ryerson University’s department of economics in Toronto, said she
expects to see rising inflation prices for many products to continue to increase because of supply chain challenges. “We wish there is a button or a lever so when the economy shuts down, we can just push the button, and the economy returns. But the problem is this restart is actually difficult because there are global logistic problems.”
Inflation has remained close to the Bank of Canada’s target of two percent. However, some experts anticipate it could temporarily rise to three percent because of rising commodity and energy prices, such as lumber, metals, and oil. Food and home prices have increased, while clothing and recreation costs have fallen. It is expected it will take between 12 and 24 months for the supply chain to return to normal, and by then, the higher prices could become the new standard.
Sources: Statscan, CanadaConstruct housing, CBC On-Line, Bank of Canada, Government of Canada energy regulator. Report authored by Dalhousie University, University of Guelph, University of Saskatchewan, and University of British Columbia.