November 4, 2011
Behind-the-scenes action within the food and energy CPI sub-categories
Chief Economist, CanaData
At any given time, there are developments behind the scenes that will have long-term impacts on the economy.
The Consumer Price Index (CPI) is one of the most important places where those changes show up.
In the latest CPI readings, both north and south of the border, the two sub-sectors where prices have been increasing faster than others have been food and energy. Those are also the two categories left out in the calculation of the more stable “core” inflation rate.
The CPI food sub-index rise in Canada in September was +4.3% year over year. That compared with the “all-items” climb of +3.2%.
In the U.S., food prices in the latest month were +4.7% year over year, versus an overall gain of +3.9%. Even more telling, “food at home” south of the border was +6.3% year over year.
In Canada, there are indications of a movement away from regulated prices in agriculture and an opening up of markets to more competition.
For starters, Ottawa is planning to dismantle the Canadian Wheat Board (CWB). The farming community is deeply divided in expressing praise or condemnation for this move.
Some want the greater flexibility this will provide in seeking buyers for their crops. It is argued that even if prices drop — good for the rest of us; not so good for farmers — there will be a plus side. More high-end processing will be done at home. Most wheat and barley is currently shipped to the U.S. in its raw state.
Others don’t believe elimination of the wheat board will be to their benefit. They’ll have to market on their own. In times of excess supply, they’ll be forced to take whatever price is offered. The CWB has been able to control supply and thus have a bigger influence on price.
In any event, the trend is towards dispensing with cartels. Canola, which rivals wheat as the largest crop in the West, is already being sold without benefit of a marketing board.
If Ottawa’s CWB move heralds a dismantling of marketing boards in other areas of agriculture — for example, dairy and egg products — this would have a significant impact on prices.
The price of milk in some parts of Canada is estimated to be twice as expensive as in the U.S.
It remains to be seen whether government has the stomach to take on the farming community — with its considerable voting clout — in rural Quebec, for example.
The removal of marketing boards would win a great deal of praise internationally.
Structured farming in many countries has been an obstacle to reducing trade barriers globally.
It’s why the latest round of tariff-lowering talks, begun in Doha, Qatar in 2001, and conducted between members of the World Trade Organization (WTO), has failed to make much progress.
Other obstacles to lower prices keep cropping up. The latest example is the “Buy American” provision in the new “American Jobs Act”. This will add to costs and therefore prices.
President Obama’s total jobs bill won’t see passage, but the infrastructure portion will likely win approval when it is introduced as a smaller separate package.
In the U.S.’ stimulus measures of 2009, Canada was able to win an exemption from “Buy America” provisions. This time around, the political climate in Washington, plus the mood of the electorate with regard to prioritizing job creation, will make that harder to achieve.
On an opposite tack, the U.S. has just signed free trade agreements with Panama, Colombia and South Korea. This is the biggest move to liberalize trade (and lower prices in the partner countries) since the North American Free Trade Agreement (NAFTA) was negotiated in 1994.
The other sector where massive change is underway is energy. September’s year-over-year energy sub-index change in Canada’s CPI was +12.5%. In the U.S., it was +19.3%. The high percentage increases resulted mainly from oil prices. In the overall energy scene, however, dramatic change is underway.
Throughout the U.S. and Canada, new finds in oil and gas are altering the outlook. In particular, the U.S. is increasing its sources of fossil fuels by opening up previously inaccessible shale gas and oil deposits. The primary fields are in Pennsylvania, Colorado, North Dakota and Texas.
Canada has its own major new sites in northeastern B.C. and southern Saskatchewan.
Transporting the “shale” gas and “tight” oil to market will mean big business for pipeline suppliers and contractors. One strong indicator of how positive the future appears for this industry has been Kinder Morgan Inc.’s $21 billion bid to take over the assets of rival El Paso Corp.
Kinder Morgan will greatly increase its reach into the southeastern U.S. El Paso has the largest pipeline network feeding out of the Marcellus shale gas basin in Pennsylvania, one of the biggest such structures in North America.
In the Canadian energy sector, TransCanada is trying to win approval for its Keystone XL oil pipeline in the U.S. and Enbridge wants to ship oil to markets in Asia by means of its Northern Gateway project.
Natural gas producers have come to realize they may need to seek Asian buyers as well,
Canadian gas shipments to the U.S. have fallen significantly of late. If markets other than the U.S. can’t be lined up, the gas will stay in the ground. This will take away the chance of development in remote regions and squander employment and government tax-revenue prospects.
There are plans for major liquefied natural gas developments on the West Coast, near Kitimat.
Standing first in line, with a $5 billion project, is a partnership led by Apache Corp. This has already received an export license. Giant gas producer Encana is one of the partners.
The price of natural gas is far higher in Asia than in North America. Royal Dutch Shell is the second firm to step forward with a proposal for an LNG export terminal at Kitimat. It is thought to have buyers in South Korea and Japan.
Expenditures on pipeline projects in North America are likely to be in the hundreds of billions of dollars over the next decade or so. One chief beneficiary will be the steel industry.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
