Rapid economic growth in emerging economies, especially Asia, combined with recent higher but more volatile international food prices, have prompted some Canadians to wonder whether we are at the dawn of a new golden age for agriculture. After decades of declining real food prices and persistent preoccupation with agricultural surpluses and low farm incomes, has the situation changed so fundamentally that the main policy objective for Canadian agriculture’s future should be to maximize our country’s share of a rapidly growing and dynamic export market? Have we shifted to a new demand plateau, or are we simply experiencing the latest in the series of boom-andbust fluctuations that have traditionally characterized agriculture?
The two key drivers of food demand are population and income growth " in particular, the adoption of Western-style diets by people who previously relied primarily on staple foods such as grains and pulses. To feed a world population that is expected to reach more than 9 billion by 2050 (up from 7 billion in 2011), it is estimated that agricultural production will have to increase by about 70 percent. Demand for food in developed countries is virtually stagnant as a result of low population growth and satiated appetites. Thus, most of the increase in demand for food will come from developing economies, where population and income growth is much higher. The World Bank has estimated that three-quarters of the additional global demand for food in the next two decades will come from developing countries.
Growth in demand for food is fastest in the early stages of a country’s economic development. As countries become wealthier, consumers switch from purchasing more rice, pulses and other staples to a more diversified diet. As incomes rise and urbanization continues, the increasingly affluent middle classes, particularly in the large emerging economies of Asia (China, India and Indonesia), are rapidly upgrading their diets to include more meats, fats and oils, and fruits. Urbanization and income growth are also driving changes in food distribution channels and food processing as consumers shift to supermarket purchases and demand more convenience foods.
All of this stands in stark contrast to the situation that prevailed through most of the second half of the 20th century. For several decades the international market was dealing with chronic food surpluses, which were made worse by increasing import protection and the pervasive use of export subsidies. Today, governments in emerging economies are increasingly worried about food inflation and the social and political implications of high food prices, given a rapidly growing urban population. As a result, a number of countries have temporarily opened their markets to increased food imports. At the same time, there are growing concerns about the ultimate reliability of the world food market in face of the proliferation of export restrictions as markets tighten. Not surprisingly, these food security concerns have encouraged increased emphasis on domestic production.
There is an old saying among economists that the solution to high prices is high prices, since they stimulate increased production or reduce demand, or both. There is, to be sure, no doubt that producers in Asia will expand agricultural production in response to rising food prices. Hence, one can expect that much of the increased demand for food in Asia will be met by domestic and nearby regional production. However, resource constraints " particularly of land, soil quality and water " suggest that there will also be a need for additional imports of food from outside the immediate region. China, in particular, is likely to continue to need to import more feed grains and oilseeds. In the interests of food security, Beijing has sought to maximize production of food staples, but it also recognizes that China’s comparative advantage in agriculture lies mainly in labour-intensive, higher-value products such as meat, fruits and vegetables, as opposed to land-intensive grains or oilseeds.
In addition to increased domestic agricultural policy expenditures " Chinese agricultural subsidies doubled between 2005 and 2008 " many emerging economies, like some developed countries, continue to rely on tariff and nontariff barriers to encourage domestic production in the name of food security or self-sufficiency. Around the world, agricultural tariffs are much higher than industrial tariffs on average and frequently constitute a significant and sometimes prohibitive barrier to trade. Certainly many agricultural tariffs in Asia are high enough that preferential access as a result of bilateral or regional trade agreements would have a significant market displacement impact on imports from other countries. For example, although China’s negotiations with Australia are currently deadlocked, it is clear that if Australia eventually succeeds in winning preferential access to China for agricultural products, those gains will come at the expense of competing grain, oilseed and meat exporters, including Canada.
Governments in Asia have an additional reason to want to maintain existing levels of food self-sufficiency, at least for the main staples: the fear that they will be unable to secure sufficient supplies of key agricultural products in the event of world shortages In recent years there has been an increasing tendency for countries to impose agricultural export restrictions during periods of sharply higher prices. For example, in response to the food price surge of 2007-08, governments in a number of countries (such as India, Vietnam, Russia and the Ukraine) imposed partial or complete export bans on wheat or rice. Currently there are no effective international rules governing the use of quantitative export restrictions or differential export taxes. Lack of confidence in the international market’s ability to supply in tight supply/ demand situations is one of the core reasons why many domestic policymakers continue to lean toward protectionism in the name of food security and self-sufficiency.
Over the 2006-10 period, Canada slightly increased its share of China’s rapidly growing agricultural import market, from less than 3 percent to around 4 or 5 perent. During the same period, Brazil significantly increased its share of China’s agricultural imports, while Australia’s share fell from more than 8 percent to less than 6 percent.
Canada’s positive performance was due to its strength in oilseeds and oilseed products, China’s largest and fastest-growing agricultural import category.
Canada is the world’s largest exporter of canola and canola oil, fittingly so given that it was Canadian researchers who first bred canola from rapeseed in the 1970s (see box 1).
Canada’s pulse industry is also a major success story. Dried peas, beans, lentils and chickpeas have grown over the past two decades from minor crop status to a $2.1 billion export industry. Canada is now the world’s largest exporter of peas and lentils, and one of the top five exporters of beans. Like the oilseed sector, the pulse industry relies heavily on exports to Asia.
Although Canada’s pork and beef sectors are not as heavily geared toward exports as are oilseeds or pulses, shipments from these sectors to foreign markets are still extremely important and account for more than half of production. The United States is by far the largest market for Canada’s red meat exports and is expected to remain so for the foreseeable future. However, both the pork and beef sectors are extremely conscious of the need to reduce their exposure to, and dependence on, the US market and see Asia as the key diversification opportunity.
Canada is making impressive progress in diversifying its pork exports. Canada is the world’s third-largest pork exporter and Japan has long been the major offshore market. In more recent years, Australia, South Korea, Hong Kong, the Philippines and Taiwan have all become significant markets for Canadian pork. As a result, the relative importance of the US market has declined sharply. As recently as the mid-1990s the United States took more than 90 percent of Canada’s pork exports; by 2010 this had dropped to 31 percent.
The beef industry’s efforts to diversify have not been as successful. Although significant new markets have been developed in Asia, especially in Japan and Hong Kong, shipments of beef to the United States still account for more than 75 percent of Canada’s beef exports. During the past decade the sector’s efforts to diversify its export markets have been adversely affected by import restrictions imposed after a 2003 outbreak of bovine spongiform encephalopathy, commonly known as mad cow disease. It took more than eight years to regain entry to the South Korea market, which used to be Canada’s fourth-largest beef export market.
As the example illustrates, agricultural products are particularly vulnerable to import restrictions based on health and safety concerns. As economies develop, consumers have become more conscious of health and safety, and governments have improved their capacity to monitor and test imports. Indeed, the impact of these technical regulations on trade is now often more significant than that of conventional tariff barriers. In accordance with the World Trade Organization (WTO) agreements on sanitary and phytosanitary measures and technical barriers, such restrictions are supposed to be based on science and should be no more restrictive than necessary to meet a legitimate objective. Despite that, once they are imposed, often intensive and sustained efforts are required to remove or moderate them, either through technical discussions or, in extreme cases, by recourse to dispute settlement.
In recent years intensified publicprivate cooperation has enabled Canada to overcome a number of healthand safety-based import restrictions in a wide range of developed and developing markets. These efforts will need to be sustained and augmented if Canada is to take full advantage of the growing market opportunities in Asia.
Three decades ago, Japan accounted for more than half of Asia’s total food imports. Although food shipments into Japan have continued to grow in absolute terms, Japan’s share of total Asian food imports has declined significantly, to just over 26 percent in 2010. In contrast, China’s share has tripled since 1980 and now stands at just under 25 percent. South Korea, India, Malaysia, Indonesia and Taiwan (Chinese Taipei) have also significantly increased their food imports.
China’s imports of agricultural goods have been dominated by a handful of land-intensive products, especially oilseeds, vegetable oils, cotton and dairy products. This is not surprising, given China’s limited land and water resources. Most of the import growth (greater than 28 percent a year on average) occurred in the 2005-10 period in response to rising consumer incomes.
Roughly three-quarters of China’s agricultural imports consist of oilseeds and oilseed products (vegetable oil and meal). Soybeans and soybean oil combined account for more than half of these imports; these are supplied mainly by the United States, Brazil and Argentina. Most of the balance of the imports consists of palm oil from Malaysia and Indonesia and rapeseed/canola and canola oil from Canada. China has become the world’s largest import market for soybeans, palm oil and rapeseed/canola. In fact, China is expected to become the world’s largest single agricultural import market by 2020.
China’s imports of wheat, corn and meats have been erratic and, until recently, relatively small in relation to domestic consumption. However, in the past few years China has shifted from being a net exporter of corn to a net importer, and its need for imported corn as animal feed is expected to grow as the country continues to expand its production of pork and poultry. Meanwhile, although domestic meat production has increased sharply, domestic demand has increased even faster. Hence, meat imports (mainly poultry and to a lesser extent pork) have also increased dramatically in the last few years, reaching $1.4 billion in 2010.
China’s wheat imports have continued to fluctuate widely, mainly reflecting government policies such as the goal of maintaining grain production at around 95 percent of consumption. In recent years, in response to rising food inflation, China has introduced retail price controls. This has reduced the need for wheat imports, already low as a result of expanded domestic production. Wheat was once Canada’s main export to China, and in the 1960s it accounted for more than 60 percent of Canada’s total exports to China. However, in more recent years Canadian wheat exports to China have ranged from nothing in 2008 to less than $150 million in 2010. To put that in context, the total value of Canada’s food and agricultural exports to China in 2010 was nearly $3 billion.
Among other emerging Asian economies, the leading agricultural importers in absolute terms are South Korea, India, Malaysia, Indonesia and Taiwan; Thailand, Vietnam and the Philippines are also exhibiting tremendous growth. Although many of Asia’s emerging markets are traditional net agricultural exporters, it is worth noting that strong economic growth has also stimulated growing agricultural imports.
Canada’s agricultural exports to these economies are still dominated by wheat, particularly to Indonesia, South Korea, the Philippines and Malaysia. However, exports of pulses have also grown dramatically, particularly to India, Pakistan and Bangladesh, while pork exports to the Philippines, Taiwan and Korea have been strong. Pakistan is a growing import market for canola, while India has the potential to become a huge oilseed market, provided its exceptionally unpredictable market access conditions can be stabilized.
As recently as 2000, the three developed economies in the Asia region (Japan, Australia and New Zealand) imported more agricultural products than the rest of Asia, including China, combined. However, by 2010 agricultural imports into these three developed countries accounted for only one-third of the region’s total food imports.
As has been the case for much of the past half century, Japan is the world’s largest net importer of agricultural products, in part due to its limited export capacity. While Japan’s imports of agricultural products have grown relatively slowly over the past two decades, it still represents the second-largest market in Asia; it remains the world’s largest import market for pork and corn and the second largest for rapeseed/canola.
Japan remains Canada’s largest agricultural market after the United States and is still slightly larger than China and the European Union. However, there is little doubt that China will soon replace Japan as Canada’s secondlargest agricultural export market.
Japan has long been a large and stable importer of Canadian oilseeds, but unlike China, it is also a large and consistent importer of wheat, pork and a wide range of more processed foods. In contrast, Canada’s exports to Australia and New Zealand " both of which countries have experienced much stronger import growth than Japan " are less diversified, consisting mainly of pork.
While it is evident that Asia’s demand for agricultural products will continue to expand as a result of strong population, income and urbanization growth, the extent to which Canada will be successful in maintaining or growing its share of that market will depend in part on future trade policy developments. China already has a number of free trade agreements (FTAs) with other Asian countries, including the ASEAN members (Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam), as well as Pakistan, India, Bangladesh and Sri Lanka. It also has a bilateral trade agreement with New Zealand which, while limited in scope, provides for eventual duty-free access for New Zealand dairy products. Of much greater to concern to Canada, however, would be a preferential agreement between Australia and China, given Australia’s more directly competitive export profile.
The trade agreement that would cause Canada the most difficulty, if Canada were to not become a member of it, is the Trans-Pacific Partnership (TPP), currently the subject of negotiations involving Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam and the United States. If Canada remains outside of such an agreement, it will find itself at a significant competitive disadvantage to the United States and Australia " especially in Malaysia and Vietnam, two of the fastest-growing agricultural importers in Asia.
If Japan joins the TPP, the consequences for Canada would be even more worrisome. Canada’s agricultural exports to Japan are currently in the $3 billion range, and most face high tariffs (canola seed is the main exception). If Japan signed on to the TPP agreement but Canada did not, Canada would undoubtedly lose market share in Japan and could well see its exports decline in absolute terms. Close to $1 billion a year in sales of Canadian pork would be particularly vulnerable to US competition, as would canola oil. In the case of wheat, all imports into Japan are currently controlled by the Japanese Ministry of Agriculture, on a duty-free basis, subject to an overall tariff quota for wheat and wheat products. If it is not a TPP member, Canada could easily lose its traditional position in Japan as a preferred wheat supplier.
In late 2011, Japan and Canada (as well as Mexico) indicated their desire to join the TPP negotiations. If they are successful, the greatest political challenge for both will be how to deal with their respective sensitive agricultural sectors, especially rice in the case of Japan and dairy and poultry in the case of Canada.
Of course, Canada and Japan are not unique in having extreme import sensitivities. The United States limits imports of sugar and dairy products, among other products. If past experience is any guide, the most likely outcome of the TPP negotiations will be an agreement to phase out many, if not most, agricultural tariffs after some transition period, while only partly liberalizing trade in the most sensitive sectors. This could be done by, for example, permitting tariff-rate quotas (TRQs). Under a TRQ, imports up to a certain quantity are allowed to enter at a preferential tariff rate, or tariff free. Imports above that level are subject to much higher tariffs.
In the months following Prime Minister Stephen Harper’s decision to seek entry to the TPP, there has been considerable debate over whether Canada’s participation in the negotiations would inevitably require the end of supply management for dairy and poultry products.
Introduced in the 1970s, these programs impose individual farm production quotas in an attempt to align national output and domestic demand, thereby avoiding boom-and-bust price cycles.
Currently, imports account for only about 3 to 4 percent of Canada’s milk and dairy product consumption and 8 or 9 percent of chicken consumption. These numbers suggest that there is scope to provide expanded import opportunities for all supply-managed sectors. The pragmatic question is not whether supply management can survive partial liberalization, but rather what changes may be necessary to allow the system to coexist with a more open but still protected trading environment.
Depending on the extent of the changes required (and the degree to which they reduce the value of the quotas owned by farmers, which in the dairy sector alone total some $25 billion), it may be necessary to provide some level of financial assistance to help farmers adapt to the new import regime. There is a precedent for such assistance: in the late 1980s a joint federal-provincial trade adjustment package enabled Canada’s grape and wine industry to adapt (with great success) to the Canada-US Free Trade Agreement. A similar adjustment package, tailored to the specifics of the supply-managed dairy and poultry sectors, could also be developed. This would need to be done in collaboration with all industry stakeholders, including the provinces, which, with the federal government, are jointly responsible for creating and regulating the supply management system through marketing boards that control production and taxes, set prices and manage interprovincial trade.
In addition to any possible challenges represented by the TPP, Canada risks loss of market share in two of Asia’s other large agricultural import markets: South Korea and India.
Both the European Union (EU) and the United States have concluded free trade agreements with South Korea. Canada’s current share of the South Korean agri-food market will undoubtedly be at risk as the preferential access in favour of our two largest agricultural competitors is phased in. Of course, Canada has initiated its own trade negotiations with South Korea, but those talks have been deadlocked for several years and will need to be pushed to a conclusion if Canada is to avoid being displaced in its third-largest agricultural export market in Asia.
The EU and more recently Canada have initiated free trade negotiations with India, which in time may outstrip South Korea as an agricultural import market given the rapid growth of its middle class. The main constraints on exports to India are that country’s extremely high WTO tariff bindings and the unpredictable use of applied tariffs, which, although lower, are often still very high. The challenge for Canada, assuming the EU-India talks succeed, will be to move quickly to implement its own agreement with India so as not to lose market share.
The recent announcement of the start of bilateral negotiations with Japan, while welcome as an interim step, does not negate the long-term value to agriculture of Canada becoming a TPP member. The extreme political sensitivities of agriculture in Japan (even greater than those in Canada) are such that it is doubtful that Canada alone will be able to match the access improvements achievable using the combined negotiating leverage of the United States and the other agricultural exporting countries of the TPP. However, as long as Japan remains outside of the TPP, Canada will benefit from any preferential access negotiated as a result of a bilateral FTA. An additional consideration for Canada is that a bilateral negotiation will not require any concessions on dairy or poultry, since Japan has no export interests in these products and will want to exclude a number of its own agricultural import sensitivities. Nevertheless, at some point, both Canada and Japan will need to find pragmatic solutions to their agricultural import sensitivities if they are ever going to be invited to participate in the TPP.
How the United States squares its own agricultural import problems in the TPP will provide a good indication of how far Canada and Japan will need to go in agriculture. This is not likely to be discernible until after the US presidential election later this year. In the meantime, it appears that the United States, Australia and New Zealand are, to varying degrees, reluctant to allow Canada and Japan to join the TPP negotiations " at least for the time being. Clearly, one of their major concerns is Japan and Canada’s defensive postures in agriculture. It is not surprising that they are trying to obtain some up-front commitments from Canada and Japan before allowing them to join the negotiations. Nor is it surprising that the applicant countries are unwilling to make commitments until they are at the table and can see what others, particularly the United States, are prepared to give up.
The bottom line is that while all sectors are on the TPP table, it remains to be seen how far the US Congress is really prepared to go in liberalizing sugar, dairy and other sensitive products.
In any event, the proliferation of bilateral and regional FTAs in Asia offers an important lesson for Canada. If Canadian agricultural producers are to maximize their export potential in Asia, they cannot allow themselves to be placed at a competitive disadvantage compared with other exporters. At the same time, it will be essential to help import-sensitive industries in Canada adjust to further trade liberalization. Political sensitivities not-withstanding, the rest of the economy, including the 80 percent of Canadian agriculture that is tied to world prices, cannot afford to be held hostage to demands by dairy and poultry producers to preserve the status quo.
While improved and more secure access to Asian markets is imperative, it is equally important to ensure that Canada’s capacity to supply world-competitive agri-food products is maintained and strengthened by a growth-oriented research, regulatory and investment environment. Our export competitors also have their eyes trained on the Asian market, and Canada will have to compete hard for a share of this demand growth. Fortunately, policy-makers in Canada are beginning to recognize that problems such as chronic agricultural surpluses and depressed farm incomes will in future be more the exception than the rule.
The rise of China, India and other emerging markets has dramatically changed the outlook for Canadian farmers and agricultural processors. Canada’s agri-food sector has the potential to become a growth engine for the entire economy if governments work with producers and processors to take the steps necessary to maximize export opportunities.
Slower increases in domestic agrifood demand, largely because of declining population growth over the next 20 years, mean that Canadian agriculture will become even more dependent on exports. Asia will provide the major export opportunities, and Canada needs to ensure that its supply capabilities and market access are as good as or better than its export competitors.