Citing increased operating costs, Tim Hortons raised prices on some baked goods and lunch items this week – muffins now cost about five cents more and sandwiches about 10 cents more.

The change comes as some food industry leaders and analysts warn prices for groceries may rise over the next few months if the North American drought continues.

Maple Leaf Foods Inc. president and CEO Michael McCain said Thursday that rising prices for grain – specifically corn, which is used to feed livestock – could affect the entire food chain.

“We don’t know exactly what the extent or the timing is of any price increases attached to this because the story of this year’s crop conditions is still not fully told,” McCain said.

“As this unfolds into the fall we’ll have a much better picture.”

The drought has slashed corn production in the U.S., driving the price of corn up 27 per cent last month, the biggest gain since 1988. Wheat surged 17 per cent.

How grocery prices are affected will depend on how much inventory producers and retailers have on hand and how they position themselves in the marketplace, said David Wilkes, senior vice-president of the grocery division at the Retail Council of Canada.

“There is no date where you can say, this is where the increase will be. I think consumers can expect to see it over the next several months.”

Rob Gerlsbeck, editor of Canadian Grocer magazine, said the grocery market is so competitive right now that retailers are reluctant to pass price increases along to consumers for fear of losing market share.

In addition to the regular players in the market, Walmart Canada is moving aggressively into grocery retailing in Canada and U.S. discount retailer Target plans to sell groceries when stores open in Canada in 2013.

“There is more square footage out there in grocery than there needs to be,” said Gerlsbeck.

Total grocery sales through traditional channels grew a paltry 1.2 per cent in 2011, the worst year-over-year increase in more than 15 years.

This despite the fact that food inflation was being predicted in 2011 because the costs of meat, some produce and bakery items were climbing.

“Instead, retailers found themselves mired in a cycle of price discounts and special promotions in an effort to appease ever more price-conscious customers,” according to an article in the magazine in February.

“Retailers aren’t dumb. They know that when they raise prices volume may fall or shoppers may go elsewhere. They are willing at points to eat those costs to remain competitive,” said Gerlsbeck.

Consumers have grown used to frequent sales. They shop around more for deals or load up the pantry when sales are on. The attitude appears to be more or less permanent now.

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“That has been going on since the recession hit,” said Gerlsbeck. “Toronto consumers are not in the mood to see huge price hikes and grocers know that.”

With files from Bloomberg News and Canadian Press

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