By John DePutter & Dave Milne – May 6, 2020
The News:
“Brazilian officials expect the new coronavirus outbreak to spark a rise in global agricultural protectionism, as countries seek to secure local food supplies.”
Reuters, May 4, 2020
What it means:
Canadians may need a new way of doing business.
Protectionism was already gaining momentum before the pandemic hit, and it will likely now accelerate even faster.
The DePutter service has pointed this out before, in our various publications and seminars. Now it’s being more widely recognized. This week’s news report out of Brazil is a good example of the rising realization that several decades of globalization are over.
As we all know, Canada is a trading nation. A quick look at the website of the Canadian Agri-Food trade Alliance reveals that Canada is the fifth largest exporter of agricultural and agri-food products in the world, after the EU, US, Brazil and China. We export some $56 billion per year in agriculture and agri-food products. Approximately half of everything produced domestically is exported, as either primary commodities or processed food and beverage products.
Canada a reliable supplier to the world
To be sure, Canada has a lot of skin in the agricultural export game, and it is in farmers’ best interesting to keep those shipments moving.
For the most part, the world still needs Canada’s food. A recent report by Guelph, ON based Agri-Food Economic Systems revealed Canada to be one of just a few countries with the material capacity to generate net ag exports in excess of its own needs.
Indeed, the report stated that only Canada, Argentina, Australia, Brazil, Kazakhstan, Paraguay, Thailand, and Ukraine exceeded 30% net exports in excess of their own production in 2017. For context, the US sat at 22%, Russia at 29%, and China at -18%. Other developed countries experiencing significant agri-food deficits in 2017 included South Korea and Japan.
So, there is no need for Canadian farmers to panic – people in food deficit countries will still need to eat. Supply chains and trading relationships that took decades to cultivate are not simply going to vanish overnight. There are still far more countries in the world which depend on imported food than those able to supply it.
An alternative future
Regardless, it behooves Canadian farmers and others in the agricultural business to start thinking about an alternative future in which the lines of trading are redrawn and in which the international politics of food endure some notable shifts.
Farmers need to be careful about depending too much on any single non-Canadian market, as other countries scramble – sometimes via massive government subsidies which Ottawa cannot hope to match – to try to satisfy their needs from within.
At the same time, farmers and other agribusiness people may also want to consider diversifying their input sources, wherever possible, so that they are not frozen out when raw materials and products now manufactured outside our borders are diverted for domestic use.
Don’t confuse business strategy with government policy
Some might sit back and say this is something our governments should do, because it’s their job to ensure that trading doors remain open. That is true. Farmers do need to be politically engaged and supportive of governments which will go to bat for free trade and open borders for the movement of agricultural inputs and products.
But there’s more: it’s important to take a look at one’s own business with a critical eye to what could go wrong internationally that would create barriers.
One idea we’ve promoted for years, and continue to promote, is ensuring an element of diversity. The farm that produces crops that are exported to various destinations will be less vulnerable than the farm that depends heavily on one or two non-Canadian destinations. If one country slams its doors shut for any one crop, you want to have other buyers and income sources to fall back on.
Western Canadian farmers have already learned from their experience with China’s downturn in canola demand. In 2018, China bought 47% of our total canola seed exports, both in quantity and in value. That was before China’s imports came to a screeching halt. Western pea and lentil growers also learned that it was a mistake to build a business plan and marketing strategy around India snapping up the lion’s share of our peas and lentils, year after year. There will be more examples in the years ahead.
Diversity of crops, diversity of input sources
We’ve suggested for years that having some farm income not related to the big-three commodity futures markets (corn, wheat, soy), can contribute to the stability of a farming operation over the years. A farm that grows a contract crop or a crop used by a dependable local end user, for example, can lessen the income roller coaster which accompanies the big futures markets.
Looking around the ag-business landscape, we see some companies that are 100% dependent on China for certain required inputs. We see others that depend on two or three separate suppliers of raw materials, and these operations are better positioned to withstand sudden shocks in the supply chain.
To be sure, demand for Canadian agricultural products – some of the best produced in the world – will always be there. As Canadians, we will always have to source some our inputs from abroad, where they can be produced cheaper and more efficiently than at home.
Very few businesses can operate with a closed loop involving Canadian-only inputs and Canadian-only buyers. You can’t eliminate all of the risks. But you may be able to take small steps, in the years ahead, to lessen the risks.
To keep up with the big-picture geopolitical trends and developments, consider a trial run with the DePutter Market Advisory Service, a leading source for Canadian agricultural market analysis. Click here:
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