The Communicator asked three industry experts for their take on industry ramifications of the current state of tariff and non-tariff trade barriers.

From left to right:

J.P. Gervais
Vice-President and Chief Agricultural Economist, Farm Credit Canada (FCC)
Gervais has previously been a professor of agricultural economics at North Carolina State University and Laval University. He also held the Canada Research Chair in Agri-Industries and International Trade at Laval.

Jason Newton
Chief Economist & Head of Market Research, Nutrien
Newton leads the team that is responsible for generating and disseminating agricultural market research and intelligence to Nutrien’s senior leadership and forecasting crop input fundamentals and prices.

Mac Ross
Director, Market Access and Trade Policy, Pulse Canada
Ross works on behalf of growers of pulses and special crops to achieve resolution to ongoing market access issues. He also helps to position the industry to get out in front of future trade problems before they occur.


J.P. Gervais
Vice-President and Chief Agricultural Economist, Farm Credit Canada (FCC)
Gervais has previously been a professor of agricultural economics at North Carolina State University and Laval University. He also held the Canada Research Chair in Agri-Industries and International Trade at Laval.

Jason Newton
Chief Economist & Head of Market Research, Nutrien
Newton leads the team that is responsible for generating and disseminating agricultural market research and intelligence to Nutrien’s senior leadership and forecasting crop input fundamentals and prices.

Mac Ross
Director, Market Access and Trade Policy, Pulse Canada
Ross works on behalf of growers of pulses and special crops to achieve resolution to ongoing market access issues. He also helps to position the industry to get out in front of future trade problems before they occur.


The Communicator: Can you identify significant or notable tariff or non-tariff barriers to trade (or outright bans on Canadian commodities) that have had, or will have an impact on Canadian ag retailers?

J.P. Gervais: We’ve got some significant barriers in place right now; as to which of them will affect ag retailers, well, all of them. We’ve got barriers on pulses to India which hurts our prices – it can be a very volatile price cycle. Italy is using protectionist measures against durum imports and of course there is the situation with China and canola. These trade tensions lower prices that producers receive and lead to a decline in exports of commodities; ultimately impacting farm income in a negative way. Farm cash receipts were flat in 2018, trending downward in 2019 due to trade tensions and weather disruptions. This could impact retailers if producers look to cut back expenses.

Mac Ross: This is really an unprecedented time with the market access barriers we face as a country in our key export markets for the major crops. The U.N.’s trade body (UNCTAD) has a statistic showing that since the beginning of 2017, protectionist measures disguised as technical and regulatory requirements have seen a six-fold increase. Ag and agri-food products have been hit the hardest compared to other sectors. In November 2017 India abruptly implemented 50 per cent tariff on peas that remains today. Since then we’ve seen more restrictive measures including 33 per cent on lentils and 66 per cent on chickpeas, quantitative import restrictions on peas and unnecessary phytosanitary requirements. This has led to an 82 per cent decrease in pulse exports to India from the 2016-17 crop year to the 2017-18 crop year, down from 2.5 million tonnes to about 500,000.

Jason Newton: Adding to J.P.’s point about farm incomes, the presence of these trade barriers casts a cloud of uncertainty over all levels of the industry which can have an affect on producer spending. This uncertainty can also come into play when ag retailers are planning their inventory. There is potential for increased volatility in input prices and changing cropping plans.

The Communicator: Are trade barriers changing producers’ cropping plans, and is this influencing their spending at the retail level?

The challenges we face in the global marketplace are going to have an effect on all levels.
Mac Ross

MR: So far, we haven’t seen dramatic changes to pulse acres. We’re a country that exports over 80 per cent of what we grow, it doesn’t matter what we’re growing. The challenges we face in the global marketplace are going to have an effect on all levels. I have heard in a lot of cases, growers have viewed things through a more agronomic lens when making their planting decisions because there are market issues faced by the multitude of major crops that they can grow here in Canada.

JN: I completely agree. In terms of the changes in acreage, they haven’t been very dramatic yet. That is in part, I think, because growers are sticking to rotation and in part because there is no one alternative that looks a lot better than the others. Overall, the impact has been reduced farm income.

But we did see this year that canola acreage is down close to 2 million acres, which does have a negative impact on expenditures, particularly for crop inputs like seed and fertilizer, because the per acre costs for canola of those inputs are higher than the substitute product, mostly cereals. To that point, one of the outcomes of these trade disputes, is that they provide a distorted signal to the grower. We see growers switching – or potentially switching – to other crops they would have grown less of otherwise. So, it creates more supply of those crops and puts pressure on the prices of all crops, and the overall outcome of that is negative for farm incomes.

JPG: At the margin level there will be some adjustments based on expected net revenues. At the end of the day, all cropping plans are mostly based on agronomics. That’s likely to continue being the case unless we see some significant and permanent changes in the state of trade relationships between Canada and our most important partners. And I don’t see that happening in the near-term. I did address the point before about the farm expenses being impacted, which is important to remember. If farm income is lowered, then this is likely to trigger a response when it comes to farm input purchases.

The Communicator: What are some strategies for retailers to weather these marketplace disruptions?

JPG: What I have in mind is not entirely different than how a financial institution would think about the issue. In a world with tighter profit margins for your customer, focus on the value proposition that you offer, i.e., the customer experience. Make sure that you really understand and market what you have to offer. I do believe that farm operators will place emphasis on the relationships that bring value. Farm businesses are becoming more complex, more sophisticated. You need to help your customers solve problems and grow their business. Producers overall are adopting a “CEO mentality.” What I mean by that is, you don’t have to be an expert at everything on your farm. In the environment that we’re in, it’s too much to expect producers to always be on top of their game when it comes to growing their crops, marketing their crops, understanding their finances, knowing their equipment and extracting value from data, etc. That’s where relationships come in. Producers need business relationships to complement their own expertise, and that includes the farm input supply side of things. That’s one strategy that I see as significant and critical for the success of agri-retailers.

JN: I think that’s great advice; focus on adding value and controlling those variables that you can control, because there is so much out of the control of the grower and the retailer in terms of market conditions. I don’t think we can really generalize too much, as different retailers are going to be providing different services and everybody is unique, but I think this just creates another layer of risk that needs to be taken into consideration when a retailer is taking on inventory. Looking forward, these marketplace disruptions in the form of trade restrictions seem to be increasing in prevalence. While there may be positive outcomes on one front, there might be new trade restrictions on another. I think it’s important to always remember that there is the potential for these disputes and restrictions to take place.

MR: From a pulse industry standpoint, the focus to weather this storm has been on diversification – diversification by way of end uses and markets for Canadian pulses. I talked about how Canada exports over 80 per cent of what we grow. There were times when over 40 per cent of that just went to India, and we still have over half of our exports concentrated into two major markets. When we experienced significant barriers with India, we saw China fill that gap on peas, and we know that China is just as focused on diversifying their supply source as we are on diversifying our end markets. So, our 90 per cent market share in a market like that could be at risk. This comes at a time when the Canadian pulse industry has set a goal to have 25 per cent of production, or about 2 million tonnes of Canadian pulses, going into new uses and new markets by 2025. J.P. talked about focusing on the value proposition you provide. To achieve these diversification outcomes and find applications in new markets that will have the greatest volume impact, our focus is on the functional and sustainability value our Canadian pulses can provide over our competition.

The Communicator: Are these bans affecting the morale of the industry?

MR: As mentioned, it’s been an unprecedented time with the number of trade barriers that we face. It seems like any market we send to, there is risk of non-tariff, trade barrier hiccups. When you have a hiccup, you just hope it’s not in a large market like India. We’re seeing the effects throughout the entire value chain effecting profitability of Canadian pulse growers, processors and exporters. That’s tough for the entire value chain. I think prospects for Canadian pulses through our diversification are keeping us focused on the light at the end of the tunnel. We’re in a transition phase right now from our historical commodity-based market, where value was based off size, shape and colour; and we can produce a lot of it so we can sell a lot of it into these big markets. Whereas, now we’re moving into these new markets and new uses for Canadian pulses that will require knowledge on end-use functionality and sustainability metrics. The utilization of pulses in North America and Europe for non-traditional processed food and pet food applications has been steadily increasing. We’ve seen the buzz around plant-based proteins here in North America. We’re trying to transition to a point where we don’t have to rely solely on these big and sometimes volatile markets and a significant part of our success will be achieved through new uses and new markets for Canadian pulses.

It’s a difficult environment right now, but it’s been nothing like what the U.S. farm economy has seen.
J.P. Gervais

JPG: Producers are very resilient. I’d say the majority of farm operators made good investment decisions in recent years. They made investments analyzing, “How do I gain value through making this investment?” They’re not purchasing a piece of equipment just for the sake of purchasing equipment. They’re not purchasing additional acres just for the sake of farming more acres. They’re investing with the intent of saying, “Hey, I got a better return here because of economies of scale, because of more productive assets that I can deploy on a larger scale,” etc. For the most part, farm operations have made some strong investments and that’s going to serve us well in this environment. Again, to draw a comparison with the U.S. – we know the environment here in Canada is really difficult right now. I’m going to qualify that: it’s a difficult environment right now, but it’s been nothing like what the U.S. farm economy has seen. I hope we can put these barriers behind us in the near future and continue to grow our farm economy.

We also need to have realistic expectations about what the future is going to look like. If you look at farm income statistics all the way back to the mid 80s – the outset of the farm credit crisis –we had annual average farm gross revenue growth of around 2.5 per cent. In the really good years from 2005 to 2015, we saw 4.5 per cent cash receipts annual growth, leading to significant income growth between 2005 and 2015. Now, if you’re looking at the outlook right now, it was definitely flat last year, perhaps even declining in 2019. But I think we’re well positioned with the investments that we’ve made to sustain a thriving ag sector. I’m not trying to downplay the fact that the market and the environment are more difficult, there’s no doubt about it. But there is resiliency, too. We also see that resiliency looking at farm asset values – which are generally a good barometer of the state of the farm economy – and farmland values have gone up significantly to match that income growth. In the last couple of years, we’ve seen this rate of growth significantly decline. Expect around three per cent growth in 2019. That’s significantly lower than the recent years’ rate of growth. And yet – I don’t want to say it’s positive – but its an outcome that is better than the overall environment.

But trade barriers are just one factor among a large number of other drivers that impact the underlying farm economics and the economic situation that retailers are in.Jason Newton

JN: I agree, ultimately industry morale is tightly tied to farm incomes. To the extent that increased trade restrictions negatively impact incomes, they will negatively impact morale. But trade barriers are just one factor among a large number of other drivers that impact the underlying farm economics and the economic situation that retailers are in. There are a lot more factors to consider – this is just one. But this does add more uncertainty and increases the importance of planning to account for potential changes in cropping decisions and input costs as a result.

The Communicator: What action is being taken by government or non-government organizations to resolve these trade disputes? And then, what further action needs to be taken, and how can ag retailers provide some influence into what’s going on?

MR: Each trade dispute you refer to is unique and requires country-specific or issue-specific strategies. For example, Pulse Canada is actively working with the Government of Canada to find a science-based solution to India’s fumigation requirements. We have the demonstrated ability to consistently meet India’s phytosanitary requirements without fumigating product. The government of Canada and Pulse Canada hosted a delegation of Indian technical officials in the fall of 2018 to review our systems-based approach to ensuring that our product meets the requirements of the end use countries. Now following the election in India, we’re seeing a willingness from India to re-engage and strive toward a science-based solution – as was committed to back in February 2018, when both our prime minister and the Indian prime minister put out a joint statement agreeing to find a resolution to this issue.

It’s important to understand the context in India right now. They have a strong mandate to double their farmers’ income by 2020. Part of that will be achieved, in their mind, by achieving self-sufficiency in pulse production; that’s been a real driver for a lot of these restrictive measures they’ve employed. This situation is not really something that the government of Canada can address bilaterally with India. So, we’ve joined up with other pulse exporting countries from the developing world and North America through the Global Pulse Confederation to partner with various government agencies in India to ensure that as they strive to meet these domestic policy goals like doubling farmers’ income and increasing self-sufficiency, they do it in a predictable and transparent manner. Those are a couple of examples of how Pulse Canada and the Canadian government have worked on these issues.

So, how can ag retailers participate and influence some of these actions? What comes to mind for me is the importance of meeting regulatory requirements of our export markets. As we know, pesticide use and residues are coming under more scrutiny globally and we see more of our trading partners utilize their own standards to set acceptable limits rather than following one internationally-recognized standard. Residue testing is more sensitive in our key markets, and there are just more people testing for residues to ensure the grain meets the acceptable limits in their country. Sometimes the acceptable limits in their country are different than the acceptable limits here in Canada. That’s why we’re involved with the Canola Council and Cereals Canada on the Keep it Clean! campaign to ensure that growers understand the marketing risks with crop protection products we use here in Canada. We really think retailers are the best positioned value chain member to communicate the message of Keep it Clean! regarding best management practices and ensuring that our product meets end user requirements.

JN: The unique thing in Canada is a lot of the trade restrictions we face are non-tariff trade barriers, so the government has taken a science-based approach to addressing these issues. But some of these situations are connected to bigger issues, especially the situation with China and canola, which has some linkage to the U.S.-China trade dispute. That limits the Canadian government’s leverage in terms of addressing some of those problems. In terms of how retailers can participate in the process and influence actions, Nutrien has been advocating on behalf of our customers to ensure that reopening these markets remains a priority for the federal and provincial governments. To Mac’s point, in terms of agronomic management, I think retailers, in some cases, have the tools to monitor the practices that growers are using. That is certainly something we’re working on going forward – monitoring sustainable growing practices and providing that information to downstream consumers.

JPG: When I saw this question, I thought of pulses, so I defer to Mac. But another thing I thought of was some of the conversations I had with your colleagues, Mac, about trying to make the case to India that, as an import-dependent country, it’s not necessarily in India’s best advantage to place those trade barriers from a food security standpoint. There’s a case to made, too that when you disrupt markets with trade barriers, notwithstanding the objectives that the Indian government would have – for example, lifting farm incomes – which are very relevant to them for sure – but they have to also think about the long-term consequences. And I don’t think this will happen, but let’s say worst case scenario that we do see pulse acres shift in some meaningful way, I don’t think that’s in the best interests of India as import-dependent country. So, I think making that case from an industry standpoint can be successful.

The Communicator: What do you think the lasting effect of these barriers will be in 2020 and beyond? And are there any additional risks, currently not on the mainstream radar, that you think our readers should be aware of?

JPG: I’m going to address the second part of the question: what should be on the radar? Something that I'm quite curious about right now is how exactly this U.S.-China dispute is going to be resolved. I think it has significant implications for us in Canada. When it comes to U.S.-China relations, we all know that in the span of a tweet, things can change rapidly. But it looks as if China and the U.S are implementing some sort of managed trade, which is something that we've seen in the past. Think back to the U.S. and Japan and their relationship; they were trying to manage trade – instead of having the proper market signals, to importers and exporters, producers and consumers, and buyers. A country like Canada is a lot to gain in an environment like this, because we provide a quality, high-value, safe product that has a strong reputation, deservedly so.

If we move away from market-driven signals to something based off an agreement between the U.S. and China that says, "Well, you have to purchase X million tons for me. And you have to do this and that," then that's where I am quite curious about what the implications would be for us. I won’t get into discussing history here, but I think there are some lessons learned in the past that we can look at in terms of managed trade. If China and the U.S. have a relationship going forward that is a volume commitment of purchases made by China for U.S. ag products, what does that mean for Canada as a large exporter of our commodities? What kind of an agreement will we see between the U.S. and China, and what will be the implications for a third party like us in a major trade dispute between two giants in the global ag market? I have a lot of questions and this is on my immediate radar.

JN: I think the biggest risk we face is that the longer these trade barriers are in place, the more concrete the alternative trading arrangements will become. Customers and suppliers are building new relationships in the supply chain, they’re adjusting. And so, there is some risk that the longer these barriers are in place, the less likely it is that the old normal will return. I think that's something important to keep in mind. The industry will continue to make adjustments over time, and not all of the adjustments will offset the damage, but some may help to alleviate it. Examples would be, changing supply chain sources for inputs, adding more domestic processing or crushing capacity within Canada or finding new customers, as Mac mentioned earlier. So, I think some of these changes, depending on how long the trade restrictions are in place, may become more permanent.

In terms of other additional tariffs or trade barriers, I don't have any line of sight. And I really hate to speculate on this, but I think if you look at agriculture and what could cause the most damage, if you saw me looking to make a point from a trade restriction, I’d say wheat, apart from durum, has not been targeted as of yet. Because it's at times the highest acreage crop in Canada, it may be a potentially a bigger risk if that's a crop that's targeted going forward.

MR: One thing that sticks out for Canada – a country that's relatively small, but export dependent – is that it really needs to depend on rules-based trade. Something I think will be an issue, and something that's going to need to have a continued effort towards resolving, is the WTO and the impending futility of the WTO dispute settlement process. With the U.S. blocking the appointment of appellate body judges, it will have the potential to make future WTO panel rulings nonbinding if a ruling is appealed to a non-functional appellate body. So, for a country that depends on rules-based trade, this – you could call it a crisis being faced at the WTO right now – is something that's going to be of concern to Canada.

The other thing goes back to the pesticide residues issue, and just innovation in general. Right now, we tend to look at these market access barriers from a regulatory standpoint. Canadian developers understand there has to be regulatory acceptance of innovation in key export markets before the commercialized here in Canada, because we are so export dependent. They do a great job of that. But, I think we're going to also have to start considering this from a consumer acceptance standpoint, as well. We're seeing scenarios where consumer acceptance can seemingly have an effect on actual regulatory policy as well which is really unnerving and has the potential to stifle innovation threaten our ability to export to certain markets. So, as we bring new technology on board, in addition to having regulatory approval in the markets, we need to find a way to ensure that we have consumer approval as well.

Editor’s Note: This discussion has been edited for length and clarity.

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