CANADIAN AGRICULTURE BEGINS A NEW ERA
Growth Opportunities Abound

Canada’s agriculture sector is accustomed to dealing with adversity. But the past half decade has to rank as one of the most challenging periods on record. Since 2002, the fortunes of the sector have been pummeled by a number of unexpected surprises, chief among them include a soaring Canadian dollar, elevated energy prices, bovine spongiform encephalopathy (BSE), drought, and avian flu. Yet through ongoing efforts to adapt and adjust, many agricultural producers have emerged from this period in a position of strength, with the sector as a whole retaining its status as an important driver of productivity and prosperity in this country.

In recent months, agriculture has moved to centre stage, but not because of stories of challenge or hardship. Instead, the pendulum has recently swung to the sector’s unprecedented opportunities – and not just for farmers but the entire agricultural value chain. Heightened efforts globally to develop new energy sources and meet rising emerging market demand for food have led many forecasters of late to ratchet up their medium-term agricultural price forecasts. The increased public emphasis on the environment, food safety and health is opening the door to significant potential in areas such as bio-products and organics. Canada’s farming and agri-food community is well-positioned to take advantage of these opportunities, although the extent to which success occurs will partly boil down to the effectiveness of government policy.

Agriculture a critical cog in Canada’s economic wheel

Reflecting in part a world-wide shift towards urbanization, the nation’s primary agriculture sector, or upstream crop and livestock activities, has witnessed a gradual decline in its share of total national output, falling from about 25% in 1900 to about 5% in the late 1970s then to 1-1.5% of GDP in recent years. But while the importance of primary agriculture appears modest at first glance, it remains at the core of a much larger agri-food system, which encompasses processing and distribution activities. For instance, factoring in secondary food processing and input and service suppliers raises the GDP share to about 4-4.5% of GDP. Some estimates of the economic contribution of the agriculture and agri-food chain even take into account food service and food retail and wholesale industries. Based on that broad measure, the sector makes up a sizeable 8% of GDP and one in eight jobs in Canada. As the accompanying chart shows, the relative importance of agriculture and agri-business varies widely by province – with the highest reliance in P.E.I. and the prairies.

Agriculture and related businesses continue to throw their economic weight around in other areas. Supported by an increasingly integrated North American and global marketplace, the sector remains a major driver of exports – in fact, Canada is the world’s fifth largest agriculture and agri-food exporter after the European Union, the United States, Brazil and Australia. And notwithstanding the fact that Canada is also the world’s fifth largest importer of agricultural products, the area still makes a disproportionately high contribution to Canada’s overall merchandise trade surplus ($6 billion or roughly 10% of the total). Grains and oilseed products, live animals and red meats account for more than half of Canada’s export sales.

The knock-on effects from activities in agriculture and agri-food to other areas of Canada’s economy are significant. For example, primary agriculture is a major user of energy products, machinery and maintenance and repair services, while food processing is a heavy consumer of paper, fabricated metal products, plastics, glass and glass products. On the supply side, agriculture and agri-foods is a key supplier of products such as fuel wood and cork, raw animal hides and animal and vegetable fertilizers.

New challenges arise over the past half decade

There has been no shortage of challenges facing the agricultural community over the past half decade. Not only have crop farmers been hit by difficult growing conditions – with average rainfall on the decline and temperatures on the rise – but the livestock industry has faced a barrage of surprises. The outbreak of avian flu – both at home and abroad – has adversely affected the chicken industry in Canada. Still, the most important development was the United States’ decision in 2003 to close its border to live Canadian cattle and beef exports after the discovery of BSE in Alberta. Although beef exports to the U.S. began flowing again later that year, it wasn’t until 2005 that the U.S. border was re-opened to live cattle shipments for animals under 30 months. About two years later, on November 19, 2007, the U.S. government permitted Canadian cattle imports of up to 78 months. While the U.S. actions were most detrimental to Canadian cattle and beef producers, other countries – including Japan and New Zealand – also imposed restrictions following the 2003 BSE incident that were slow to be lifted.

On top of these sector-specific challenges, few players within the agricultural arena have been immune to the squeeze on bottom lines that has resulted from the soaring currency and rising input costs. Agricultural prices are commonly quoted in U.S. dollars, so that a rising Canadian dollar reduces the returns to farmers after conversion. It shouldn’t come as much of a surprise then that the 60% surge in the loonie since 2002 has taken a real bite out of the operators’ revenues and left crop and livestock prices in real (after inflation) Canadian-dollar terms hovering at extremely depressed levels – that is, until recently, as we discuss in more detail on page 5. In the export-oriented food processing sector, the run-up in the currency has virtually eliminated any competitiveness advantage that has traditionally been enjoyed with its U.S. counterpart.

Meanwhile, agricultural input costs have been on the rise. The rally in crude oil and natural gas prices over the past five years has hit the farming sector both directly, through higher diesel and gasoline prices and indirectly, through increased costs for fertilizer (where natural gas is an important input). Domestic rail freight rates and elevator company handling charges have been growing at a relatively muted rate over the past few years, but ocean freight rates have soared on the back of rising global trade activity and capacity shortages. While the cost of borrowing remains at relatively low levels, rates have been tracking upwards since early 2004. Property taxes have been increasing rapidly in certain parts of the country. Lastly, the agriculture sector has been faced with tight labour market conditions – particularly out west where producers have been competing with booming conditions in resource sectors. As a result, rising wage costs have further pinched bottom lines.

With costs outstripping revenues, the persistent decline in real net income earned by Canadian farmers that has been observed since the mid-1980s has continued so far this decade. In 2005, for every dollar earned in gross sales, Canadian farmers paid out 83 cents to 91 cents in operating expenses.

The sector responds

The recent release of the 2006 Agricultural Census, which covered the 5-year period ending in 2005, provided reassuring evidence that the nation’s agriculture sector is responding to many of the challenges on its doorstep. Especially notable have been moves designed to improve efficiency, raise economies of scale and lower costs. Over the first half decade, the average size, value of assets and net worth of the average farm continued to rise. The trend towards higher crop and livestock yields remained intact. There was also a shift in commodity export sales away from wheat and course grains towards oil seeds, red meats and special crops, which reflected further efforts to diversify and take advantage of areas offering greater revenue potential.

The farming community has been busy implementing new technologies and changes to processes and techniques in order to ramp up productivity. The ability of the industry to take advantage of the new equipment has been made more viable by declining prices. More specifically, although a rising Canadian dollar has a net negative impact on the agriculture and agri-food businesses as a whole, there are some offsetting benefits – one being a reduction in prices of U.S.-made capital goods. A few examples of the productivity improvements include: