BACKGROUNDER: Canadian food industry a world backwater

October 20, 2011

By Larry Martin
and Kate Stiefelmeyer
Macdonald-Laurier Institute

GUELPH, ON, Oct. 20, 2011/Troy Media/ – More food will be eaten over the next half century than has been eaten by human beings since the dawn of history. The combination of increasing population and incomes, decreasing poverty, and increased non-food use for many food staples (e.g. bio-fuels) has resulted in an explosion of food demand for the foreseeable future. Indeed, by almost every measure the world will transition to a period of food shortages rather than the surpluses that have characterized recent history.

Canada should be poised to capitalize on this opportunity to feed the world. We are uniquely positioned due to our vast tracts of arable land, abundant water, infrastructure, and long experience in the sector. These advantages should result in more and better employment, investment, and opportunities.

Canadian agriculture not keeping pace

And yet despite this unprecedented opportunity for Canada to again become a global food superpower, the Canadian agriculture and agri-food business is not even keeping pace. Our share of world markets is falling, not rising, our agricultural productivity is falling, not rising, our influence in world trade talks about agriculture is falling, not rising. As a result, our rural communities are foregoing greater prosperity, our food processors are losing out on export opportunities and our economy is missing out on potential growth. That is a missed opportunity for Canada. But it is also far more: at a moment when it is not clear that the world can meet the growing demand for food, it is a potential humanitarian tragedy for the globe. Canada faces both an economic and a moral imperative to do better.

The solution is largely in the hands of Canadians and their governments. Policymakers in particular must face up to the fact that this country’s laws and regulations are sadly out of date, reflecting a mistaken belief that agriculture and food processing are industries of the past, not the future. Canada’s potential as a food superpower can yet be unleashed by removing the barriers erected by poor policy. Following is a high level strategy to achieve just that.

Future demand for food – a fundamental shift

Demand for food has been growing at a rapid pace and, assuming incomes in developing countries continue to rise at rates consistent with the past two decades, it is clear that demand will continue to grow almost geometrically in the near future. Estimates are that the demand for food will double by 2050. Most of the growth in demand will be in developing countries because of both population and income growth in those regions. Indeed, we have witnessed the largest migration of people out of poverty in human history over the last two decades.

Demand for food will not grow materially in developed countries because incomes are already high and so is consumption. The major components of demand growth in the developing countries will be livestock products, fats and oils, and fresh horticultural products. By implication, this also means that there will be substantial growth in demand for feed grains and oilseeds.

The growth in demand for food will be exacerbated by demand for energy. Current policy in some developed countries creates markets for grains and oilseeds to be used to produce bio-fuels. This could change if there is a change in policy or if there are scientific breakthroughs in finding efficient new sources of energy. At this point, neither appears to be on the horizon. However, we appear to be entering a fundamental shift toward increased energy demand. Many of the alternatives being considered as sources of energy in the future rely on molecules from food products or their substitutes. Therefore, it is highly likely that the food/fuel tension will continue into the foreseeable future.

These two factors combined mean a very different marketplace in the future, one that may continue to be characterized by shortages, rather than the surpluses of the past 60 years.

Canada’s opportunity

Canada has both natural and accumulated advantages offering an opportunity to become the premier supplier of agricultural and agri-food products to the world. Canada has the third largest endowment of arable land per capita in the world behind Australia and Kazakhstan. However, Australia’s arable land is of relatively low quality due to poor access to water and Kazakhstan lacks infrastructure. Most of Canada’s competitors have less than half the arable land per capita than we do.

Another advantage for Canada is the quality and health of our soil. Many of the world’s soils have been badly degraded, including much of Asia and Africa where growth in food demand is occurring. These soils have lost quality, productivity, and utility due to erosion, desertification, and/or significant use of chemicals instead of organic matter to try to improve productivity. Canada has some of the most stable soils in the world, which constitutes another significant advantage for our country.

A final natural advantage for Canada is our access to water. Much of the world faces some degree of fresh water scarcity. Like soil degradation, many of the areas in the world facing severe water scarcity are also the areas with enormous growth in food demand. Canada is one of the few nations on the earth not to experience water shortages. Canada contains approximately 9 per cent of the world’s renewable freshwater supply and our use of renewable water resources (as a per cent of total resources) is very low compared to our competitors.

In addition to these natural advantages, Canada also possesses two accumulated advantages. The first is infrastructure. In a comparative sense, it is much easier for Canadians to deliver their products to markets than many of our potential competitors. In addition, Canada maintains a recognized scientific and research-based infrastructure to support the industry. The second accumulated advantage is our long history and experience with the industry. Indeed, agriculture is one of the founding industries of the nation.

Canada’s performance to-date

Against this potentially dramatic increase in future demand for food, Canada stands as a country that could gain materially. However, Canada has lost market share. Analysis shows that Canada is losing market share in every major product except pulses. The loss in market share is both at the farm level and in food manufacturing.

Underlying the loss in market shares is lagging productivity in Canada’s agriculture and food sector. This is true for both primary agriculture as well as food processing. The data show that, by all measures, Canada lags the United States in multifactor productivity at the primary level and in labour productivity at the food processing level.

Explaining Canada’s poor performance

Part of the reason for lagging productivity in manufacturing is the nature of Canada: its geographic size and distribution of the relatively small population means that distribution costs are high and that it is difficult to achieve economies of size. Moreover, the sector has additional risk because of currency fluctuations.

However, there is also considerable evidence that productivity lags because of reasons internal to Canada that have nothing to do with its geography. It is important to point out that “labour productivity” is highly linked with capital investment: labour productivity rises when workers have automation, and when workers work in plants that have economies of size. Our analysis of investment shows that in the food manufacturing industry over the past decade there has been less new investment than capital depreciation. This is tantamount to disinvestment. It is therefore not surprising that there have been few gains in productivity.

Reform path to prosperity

Several factors appear to contribute to Canada’s poor performance, which can be changed through government leadership and reform:

• The Regulatory System. Canada’s regulatory system is slow, cumbersome, and inefficient. It discourages the adoption of new technologies at the farm level and in food processing. It discourages food companies from developing new products that can provide health and other benefits to consumers. As a result, it removes the opportunity for farmers and food companies to differentiate their products. It is, in a word, an oppressive blanket on innovation in the food sector that not only discourages investment, but drives it out of the country and it removes any opportunity for Canada to be an early adopter of technology in any area. It should be the subject for immediate and substantial reform aimed at simultaneously providing healthy products to Canadians and encouraging innovation and efficiency in the food supply system.

• Agricultural Policy. Canadian governments spend over 70 per cent of their budgets on farm income support. When one adds in the economic benefit to the dairy and poultry industries resulting from supply management, price and income support represents roughly 90 per cent of total government agricultural and food policy. In total, according to the OECD, Canada’s market support for agriculture remains between 20 and 25 per cent of gross farm income on average year in and year out. Other countries have transformed their policies, either to reduce market support below 10 percent, as in Australia and New Zealand, or have begun to replace market support with policies aimed at improving productivity and the environment. While Canada’s market support is nowhere near the highest proportion of total producer returns among OECD countries, the most recent data indicate it is the only country that is not changing the nature of its policies. The Canadian economy could benefit from reform to the current policy. Canada’s agri-food policy, like that of most other developed countries, is a product of six decades of surplus. If continued prosperity occurs and the more likely prospect is scarcity in the future, then it is more than time to rethink our policy structure. This is especially so for a country whose agriculture and food sector relies heavily on export markets and would benefit from orderly expansion of export markets in the future.

• Preoccupation with Small Operations. Both inside agricultural policy and outside, many programs, sometimes with direct government investment, aim to increase the number of small operations. This reduces our competitive advantage and directly and indirectly reduces the amount of capital available for investment. For example, there were 100,000 farms in Canada (2004-2008) with sales of less than $100,000 per year that represented 55 per cent of the total number of farms, generated only 5.7 per centof net operating income but collected 16.2 per cent of support payments from government. These farms also had about $4.2 billion in income from other sources (non-farm). While a few of these operations may be legitimate farms, very few of them contribute much to the economy.

• International Trade Policy. Canada suffers from serious tariff and non-tariff barriers in accessing markets that demand Canadian products. In other words, there are markets where consumers demand products made in Canada but which Canadian firms have trouble accessing because of trade barriers. Nothing illustrates the importance of market access better than the example shown below of the Canadian pork industry. Millions of dollars in public funds were invested in a money-losing industry during the past five years that declined by about 20 percent, even as demand for its products was dramatically increasing in much of the rest of the world. Expanded and secure market access is the solution for not only Canada’s pork industry but the entirety of the agriculture and agri-food sector.

In conclusion, Canada enjoys natural advantages, maintains strategic resources, and has an outstanding reputation as a reliable supplier of high-quality products, which positions us more favourably than almost any other country to capitalize on the growth in food demand. However, our current faltering performance is rapidly turning us into a backwater at the very time the world could benefit from our leadership. Canada desperately needs to develop a cogent and logical domestic and international trade strategy for its food industry as outlined above and detailed in this study.

Larry Martin is a Senior Research Fellow at the George Morris Centre in Guelph, Ontario. He is also a Research Advisory Board Member for the Macdonald-Laurier Institute. Kate Stiefelmeyer is a Research Associate at the George Morris Centre in Guelph, Ontario. This is the executive summary of the Macdonald-Laurier Institute’s latest paper in their Hungry for Change Series, Canadian Agriculture and Food: A Growing Hunger for Change.