The following was written by Michael Burt, Associate Director, Forecasting & Analysis, Conference Board of Canada.

Food is already a big part of family budgets, and recent spikes in prices for agricultural products mean that it will take an even bigger bite out of shopper’s pocketbooks. Consumers have grown used to cheap food, as their prices have fallen relative to other products for decades. No longer. Many of the factors driving prices higher are permanent, and this means that consumers should expect their grocery bill to gobble up an increasing share of their budgets.

For the second time in four years, prices for agricultural products have spiked, and they are now setting multi-decade highs. The increases are widespread, from sugar to wheat, corn and soybean. As a result, the Food and Agriculture Organization of the United Nations (FAO) reports that its food price index rose to a record high in February.

A variety of factors, including bad weather, rising demand and higher energy prices, have contributed to the price increases. For example, unusual weather patterns—notably drought in Russia and China, and floods in Canada and Australia—have or are expected to affect wheat crops among these major producing countries. Weather has a temporary effect on prices—when yields improve, prices will correct, but other issues are contributing to the rise in prices.

One of these is the rise in energy prices. For the products used to create ethanol and biofuels, such as corn and sugar, high oil prices have been a major contributor to higher food prices. High oil prices lead to increased demand for ethanol and thus the prices for corn and sugar have become increasingly linked to energy prices. For example, more than one quarter of the U.S. corn crop is now used to produce ethanol. Soybeans have also been indirectly influenced by this trend, as soybeans and corn are generally grown in the same regions. As such, higher corn prices may lead to fewer soybeans being planted.

Fundamental changes in demand are also a factor. The world’s population continues to grow, and average incomes continue to rise, particularly in emerging markets, where many people still live on subsistence diets. This means that aside from the effects of an absolute increase in the world’s population, per capita consumption is also rising, as people in emerging markets are able to afford more food and a wider variety of foods beyond staple crops. Among other things, this has meant increased demand for meat. Since animals are often fed grains like corn this has placed additional pressure on grain supplies since it requires more calories to create meat than consumers get from it.

In Canada, higher food prices have mixed implications. Because Canada is a major producer and exporter of agricultural products, higher prices benefit Canadian farmers. However, since food accounts for nearly 15 per cent of household expenditures, even modest price changes can have a measurable impact on consumers and their purchasing power. The strength of the Canadian dollar is helping to shield Canadian consumers from the full effects of price increases, since the benchmark price for many commodities is set in U.S. dollars. Nonetheless, Canadian consumers will see higher food prices this year and that will leave less money to spend on other less essential items.

Outside of Canada, higher food prices will affect the ability of people in developing countries to afford and obtain nutritious food. Thus far, rice, which is a staple crop in many emerging markets, has not yet experienced the same spike in prices as many other grains. If rice prices increase the challenge of feeding populations in developing countries will become even more of a global concern.

Looking forward, a partial price correction in agricultural commodities can be expected in the near term, potentially as soon as the second half of this year, as farmers respond to higher prices with increased production. However, the U.S. Department of Agriculture predicts that prices will rise steadily beyond a small correction in 2012. Much of the price increase is being driven by structural factors that will not dissipate for the foreseeable future. In short, consumers should get used to paying more for their food.