What record diesel prices mean for Canada’s agrifood system, from farm profitability to food inflation

Diesel prices in Canada reached record highs this autumn and, despite recent stability, remain historically elevated. Prolonged periods of high prices are having widespread impacts, from the farmer to the processor to – potentially – what consumers pay for their groceries. We unpack the farm-to-table fallout from high diesel prices in this report.

Already tight farmer profitability will be squeezed further

The Government of Saskatchewan released its 2026 cost of production guide in January (notably before the war in Iran began) which provides us a starting point to assess costs for the three major soil zones in that province. If we shock the price per litre used in the guide by 80%, we see that canola margins are compressed anywhere from $14 to $21 per acre, all else being equal (Figure 1). We get a similar range for different crops in different soil zones. Keep in mind this is at the extreme end of scenarios, given we assume all diesel used for the entire growing season is priced at today’s higher price; some relatively cheaper diesel may have been used earlier in the year.

Figure 1: Costs per acre by soil zone, canola, Saskatchewan, different scenarios

Sources: Government of Saskatchewan, FCC Economics

Considering that total costs range from $430 - $550 per acre, excluding land, these numbers may look relatively small. However, at a total dollar value, they will look and feel bigger. For example, we estimate a 5,000-acre farm would see an increase in its fuel bill between $68,000 and $106,000 in 2026 based on this difference in diesel prices.

The Government of Ontario also provides cost estimates for the year, but rather than breakdown by soil zone, they estimate costs based on tillage system. We apply the same 80% shock to the pre-war diesel price in that province and get a margin compression estimate ranging from $16 to $30 per acre (Figure 2).

Figure 2: Costs per acre by tillage system, Ontario, different scenarios

Sources: Government of Ontario, FCC Economics

Regardless of how one looks at it, the bottom line is that at a time when margins were already tight heading into 2026, increases in diesel prices can and will erode margins further. Note that these are just direct fuel costs; drying costs will increase if/when propane or natural gas prices rise and higher trucking costs (see below) will find their way onto producers’ income statements as higher expenses.

The direct impacts to livestock producers are harder to quantify, given relatively limited data available. The Canadian Dairy Commission (CDC) released its annual cost of production study earlier this month and reported fuel and oil costs to produce one hectolitre of milk rose over 41% between 2025 and August 2026. For cattle and hog producers, aggregated cost of production estimates makes it hard to isolate the impact of higher diesel prices on producers’ bottom lines.

Trucking and rail freight costs on the rise

On farm production is one thing; getting product through the rest of the supply chain is another.

Transportation companies have been resorting to fuel service charges (FSC) more often to protect margins in the face of record diesel price. FSC, as a total component of transportation costs, have been on the rise since February, and now account for nearly 45% of base freight (Figure 3). These surcharges increase the cost of moving anything by truck: grain to an elevator, market-ready cattle and hogs to abattoirs, inputs delivered to the farm for the 2027 growing season, and food onto grocery shelves.

Figure 3: Fuel surcharges now account for a larger share of base freight

Sources: Canadian General Freight Index, Apps Transport Group

Sources : Canadian General Freight Index, Apps Transport Group

Underlying freight prices have softened slightly in 2026, but rising fuel surcharges have offset much of that relief, keeping overall transportation costs elevated for agricultural producers.

On the rail side of things, many grain producers and shippers might be wondering whether higher fuel costs will push grain freight rates higher. For the 2026-27 crop year, the answer – surprisingly - is not necessarily. The Canadian Transportation Agency (CTA) has already established the key regulatory measures that govern prices for most western Canadian grain movements, including the inflationary adjustment used to update the Maximum Revenue Entitlement (MRE). That adjustment remains modest for the 2026-27 crop year, with the MRE index increasing by approximately 0.7% (Figure 4).

Figure 4: Increases in western grain rail freight rising less than 1% this crop year

Sources: Canadian Transportation Agency, FCC Economics

The MRE framework allows railways considerable flexibility in setting freight rates. Carriers can adjust rates across corridors, offer incentives for larger unit-train shipments, and respond to changing market conditions, provided their total regulated grain revenue remains within the permitted limit. As a result, freight rates can – and will – change during the crop year but rising diesel prices alone are unlikely to be the primary reason.

Because the 2026-27 values are already set, recent fuel market changes are more likely to affect future freight calculations than current rates. For example, diesel prices surged after Russia’s invasion of Ukraine in February 2022, but the cost pressures were reflected mainly in the following year’s MRE adjustment. So, the recent energy shock could have a meaningful impact on regulated grain freight rates during the 2027-28 crop year if elevated prices persist.

The impact is different for grain movements outside the MRE framework, such as shipments to the United States and movements east of Thunder Bay. Because these freight rates are set commercially rather than regulated, higher diesel costs can be passed through more quickly. As a result, some grain shipments may face higher transportation costs sooner, while most regulated western Canadian grain movements are unlikely to see a significant diesel-related impact this crop year.

At sea, the Baltic Dry Index – which tracks the cost of moving raw dry bulk materials, including grain – has moved higher since February. Fuel costs are estimated to be 40% of the operating costs of a vessel, increasing the cost of moving commodities to their final destination.

At the food processing level, the direct impacts of higher diesel prices are relatively small. Diesel accounts for only a small share of direct costs in Canada’s food and beverage manufacturing sector: in 2024, energy, water and vehicle fuel expenses represented roughly 2% of industry total expenses, well below the cost of raw materials and supplies.

However, the real impact of diesel prices is indirect as its effects ripple through the value chain via higher input and logistics costs. As outlined above, higher fuel prices raise the cost of moving commodities from farms to processing facilities and transporting finished products from plants to distribution centres and retailers. Higher energy prices are also providing support to grain and oilseed prices, putting upward pressure on some raw materials purchased by processors. These cost pressures, along with flat sales volumes, are putting pressure on food manufacturing margins.

Will this affect your grocery bill?

The ultimate question for consumers across the country is whether this surge in diesel prices will lead to higher food inflation. On the surface, it appears a sure thing: after all, with diesel prices touching everything from farms to the trucks shipping products to retailers, amplified by Canada’s vast geography, how could it not pressure food prices?

To date, the rise in diesel prices has not resulted in an increase in the rate of food inflation. In fact, the annual food inflation rate in Canada has actually been slowing down this year, rising just 2.2% in September, down from 7.3% in January. There are good reasons for that. For starters, large food wholesalers/retailers often have inventory of shelf stable products when possible (i.e., goods produced when energy costs were lower), which they can run down without having to raise prices to protect margins. This creates a delay between the energy spike and the sticker shock for the consumer. There are also contractual buffers that allow those suppliers to avoid being hit immediately by an energy price surge e.g., contracts that guarantee fixed transportation or raw material costs for the next six to 12 months. Put another way, there are some logistical buffers in place that can create a lag between energy shocks and food inflation. The Bank of Canada’s own research shows a six-to-nine-month lag between general cost pressures and food inflation.

Furthermore, what makes it difficult to estimate is that it’s not a direct one-to-one relationship between higher diesel prices and higher food prices. Historical experience suggests that other factors, including exchange-rate weakness, can have a more direct influence on food inflation. When we look at times in recent history where we have had a sharp rise in diesel prices, the resulting change in food inflation is a bit of a mixed bag (Table 1). Indeed, during these periods under analysis, it’s been when the Canadian dollar has weakened that we’ve seen an uptick in food inflation.

Table 1. Food inflation tends to rise in periods of increasing diesel prices, depreciating dollar

An appreciating loonie can help keep a lid on imported food prices and blunt the impacts of rising diesel prices. This is especially true in the winter months when Canada imports much of its fresh produce. However, today Canadians do not have an appreciating dollar to shield them from surging diesel prices. We expect food prices will begin to reflect higher diesel prices by the end of the year.

Bottom line

Record-high diesel prices are creating meaningful cost pressures across Canada’s agrifood system. Producers face higher fieldwork and transportation expenses at a time when margins are already tight, while trucking surcharges and rising input and logistics costs are also squeezing livestock operations and food processors.

For consumers, however, higher diesel prices do not automatically translate into an immediate or proportionate increase in grocery prices. Energy and transportation are only part of the final food bill, and inventories and fixed-price contracts can delay cost pass-through. With the Canadian dollar already under pressure, prolonged high diesel prices would add another layer of cost throughout the supply chain—but they are more likely to reinforce broader inflationary pressures than to be the main driver of higher grocery bills.

Graeme Crosbie, Senior Economist
Justin Shepherd, Senior Economist
Leigh Anderson, Senior Economist
Ulrich Zombre, Senior Economist

Stay tuned next week for a follow-up blog on biofuels.