Prime Minister Trudeau’s mandate letter to Agriculture and Agri-Food Minister Marie-Claude Bibeau tasked her with establishing Canada as a global leader in sustainable food production, in partnership with provinces and producers. But if we expect producers to drive innovation and growth in our agricultural sector, we need to address the challenges they face as a result of a lack of competition in Canada’s food ecosystem.

Farmers have demonstrated their willingness to adopt new methods of production. But their entrepreneurial opportunities are inhibited by a competition regime that facilitates high levels of consolidation and focuses on generating greater returns for owners. This regime dresses up short-term cost-cutting measures as improved efficiency and allows harmful mergers to proceed.

The food system can be simplified into four groups, each dependent on one another to feed Canadians: input suppliers, producers, processors and retailers. Take the case of grain: input suppliers provide the seeds and chemicals; producers grow and harvest the crop; processors transform the crop; retailers sell the finished product to consumers.

Maintaining fair and healthy competition within and across these groups has challenged governments for over a century. In his 1993 book The Intimate Commodity, University of Guelph professor Tony Winson traces this history from the formation of farming collectives as a form of countervailing power against monopolistic grain elevator and railway operators, to the rise of the chain-retailer landscape that still persists today.

Winson identifies a shift of power away from producers – first to processors responsible for transport and transformation of producers’ goods, then to nationwide retailers increasingly able to dictate terms to the rest of the food supply chain. Although Winson’s book is almost three decades old, we see the evidence of this shift today, and the effects of increasing consolidation at each node of the supply chain, in both Canada and the U.S.

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A common measure of consolidation is the “four-firm concentration ratio” (CR4), which reflects the percentage of market share held by the four largest firms in a market. As a key indicator, 40 per cent is the threshold that signals higher concentration and the potential for the formation of oligopoly. Globally, agro-chemicals is at 65 per cent, animal pharmaceuticals is 58 per cent, seeds is 52 per cent, and farm equipment is 45 per cent. It’s even worse in Canada, where the options for farmers are even more restricted.

Canada is the top global producer and exporter of canola, with 43,000 farmers annually producing almost 20 million tonnes of canola worth $29 billion to our economy. But these growers are dependent on just two companies for critical seed varieties: either Bayer-Monsanto or BASF.

We have known since the late 2000s that food processing and retailing in Canada also exhibit high levels of concentration. In 2008, Statistics Canada data showed that dairy, grain and oilseed milling, sugar and confectionery, meat, and fruit and vegetable preserves and specialty food all had CR4 ratings in excess of 40 per cent. The top four dairy processors accounted for 66 per cent of sales.

A 2021 United States Department of Agriculture (USDA) report showed that Canadian food retail has a CR4 of 69 per cent (Loblaw, Sobeys, Empire, Costco) –  a figure that has risen as Empire has since acquired Longo’s. This level of concentration grants retailers power to pass excessive costs onto processors, and calls have been made to establish a code of conduct for grocery retailers to curb unfair business practices.

Trade spend – the cost to processors for getting grocery products onto shelves – has grown twice as fast as the rate of sales over the past five years, and in Canada trade spend accounts for 28 per cent of processors’ costs, compared with just 18 per cent in the United States.

Canadian competition policy has long supported consolidation in exchange for the alleged efficiencies from increased economies of scale and integration of business operations. Reflecting this, Canada’s merger law is uniquely permissive of consolidation. Successful challenges by the Competition Bureau to block mergers are rare, and there are virtually no successful court decisions reversing potentially harmful mergers and acquisitions. This permissiveness means a pending Competition Tribunal decision regarding grain elevator consolidation is likely to continue this trend.

But who benefits from these efficiencies is itself a question of competition. If a meat packer must compete for the business of ranchers, ranchers may benefit from more efficient meat packers through lower prices or increased service quality. When a merger extinguishes competition, the efficiencies that justified the merger accrue only to the more powerful merged corporation and its shareholders.

In 2021, Cargill and JBS, the two companies that process nearly 85 per cent of Canada’s beef, reported record profits. This has coincided with Canadian meat prices rising more than 10 per cent in the last year, more than double the rate of food inflation in general. Despite this, ranchers’ margins have been squeezed so thin that family farms are being forced to sell off their herds and exit the industry. A similar story is playing out in the United States, where cattle ranchers find themselves at the whims of four consolidated meatpacking giants.

Beyond beef, analysis by the National Farmers Union suggests producers have largely been left out of the gains from higher prices in product categories such as bacon, corn and, infamously, bread. Without sufficient profits available to reinvest in their operations, farmers have turned to debt and off-farm jobs to keep their operations going.

Canadian farm debt has increased every year for the past 27 years, and as of 2020 it totalled over $120 billion, placing a huge strain on producers’ mental health as farmers continue to borrow enough each year to service their existing debt. Yet these same producers remain on the hook for the investment and risk-taking necessary to achieve the sustainable growth and innovation of our agricultural sector.

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Unfortunately, the policy conversation on competition in agriculture in Canada tends to be limited to supply management and lowering interprovincial trade barriers. Although these are both legitimate topics of debate, this myopic discussion ignores the competitive outcomes in Canada’s food supply chain, and implicitly assumes that consumers and producers are well-served by current levels of competition.

In 2010, the Canadian Senate recommended that the Competition Bureau collaborate with Agriculture and Agri-Foods Canada (AAFC) to perform an in-depth study of competition in agriculture. The federal government did not pursue this project, stating it was happy with existing third-party reports on the issue. This response differed from those of our American counterpart, whose Department of Justice and USDA launched public workshops across the country to hear from stakeholders on competition and the efficacy of antitrust enforcement in the sector.

But more than just investigation and deliberation, Canadians need stronger merger laws to prevent further consolidation and protect what competition remains. Halting the process of consolidation is the first step to rebalancing the role of producers in our food ecosystem, enabling them to make the investments necessary to meet critical sustainability and innovation goals.

Our country should be setting ambitious goals for our food system, but those goals will always be out of reach as long as our producers remain at the whim of concentrated power in our food system.

This article is part of the Canada’s Competition Law is Overdue for an Overhaul special feature series.

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Keldon Bester is CIGI fellow and an independent consultant and researcher studying issues of competition and monopoly power in Canada. He was a special adviser at Canada’s Competition Bureau. Follow Keldon on Twitter @KeldonB
Andrew Nixon is a PhD management candidate and Arrell Scholar in the Lang School of Business at the University of Guelph. He researches entrepreneurship and competition in Canadian agriculture. Follow Andrew on Twitter @awnxn

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