When China put the brakes on Canadian canola seed imports in March, it was something of a wake-up call for the agriculture and food industry.
Some 40 percent of Canadian canola products (seed, oil and meal) headed to China last year, at a value of $4.4-billion, according to the Canola Council of Canada. So Beijing’s suspension of import licenses for the canola seed of two major producers has put a spotlight on Canada’s high vulnerability to unexpected bilateral trade disruptions.
Canada’s broader agriculture and food industry is, in fact, highly dependent on just two markets. The United States and China alone accounted for more than 60 percent of the sector’s exports in 2017, according to the Canadian Agri-Food Trade Alliance.
And at a time when politically driven trade uncertainty is emanating from the U.S. as well as China, Canada’s dependence on these two markets comes into even sharper relief. Thankfully, opportunities abound for agricultural exporters to diversify – if they approach new markets in the right way.
The Comprehensive Economic and Trade Agreement (CETA), which eliminate tariffs on almost all trade between Canada and the European Union, represents a major opportunity to sell into a market of 512 million people.
“The CETA agreement is not yet as well-known as some of our other trade agreements, but we as an organization talk to our clients about it, and do encourage them to consider diversifying to other markets beyond the U.S. and China,” says Pete Molenaar, Senior Vice-President and Head of Commercial Banking – Western Region for HSBC Bank Canada.
“The U.S. has traditionally been the country to export to given our close proximity and relative similarities in doing business, and China as well with their strong demand for our agricultural products. However, with these [new] trade agreements in place, they can really help our clients diversify, but it will take some time.” While many are actively seeking out new markets, some companies only tend to diversify when forced to by external factors, Mr. Molenaar adds.
China’s action on canola seed is a prime example of such a factor. And the CETA agreement appears to be helping exporters target Europe instead.
“Our industry is under no illusion that things will return to normal with China,” says Brian Innes, a spokesman for the canola industry as well as President of the Canadian Agri-Food Trade Alliance (CAFTA). “We are focusing on diversifying our markets to customers who appreciate the quality we provide.”
Mr. Innes says that demand in the E.U. is currently very strong for canola products, and that Canadian producers are set to significantly expand exports there over coming months.
The E.U.’s tough regulatory environment on pesticides and other crop protection technologies has seen domestic canola production drop substantially – which, combined with the new tariff-free market, offers promising opportunities for Canadian canola, as well as other agri-food exports such as beef.
Only $2.9-billion out of $57.7-billion in total Canadian agri-food exports went to Europe in 2017, according to CAFTA. CETA started to come into force late that year.
Simon Somogyi, Arell Chair in the Business of Food and Associate Professor, University of Guelph, agrees that CETA provides new opportunities for Canadian companies, but cautions: “Europe is a highly mature and competitive market. CETA will help you get more product in, but you’re competing on price – not on value.”
Asia beyond China is another growing opportunity for Canadian agri-food exports. It’s another market being opened by a free-trade agreement – the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), of which Canada is a signatory.
Mr. Innes points to CPTTP members Vietnam and Japan as significant growing markets, as well as other Asian nations such as Indonesia, Philippines and South Korea. Prof. Simonyi says there’s enormous opportunity in these markets, as well as in Malaysia, India and Pakistan, due to the growing number of middle-class consumers who have an affinity for Canadian-branded food products.
HSBC’s Mr. Molenaar agrees. “CETA and CPTPP are definite opportunities. Being so reliant on the U.S. for so many years, the biggest advantage and opportunity for us in the future will be to diversify away from that and create more markets for ourselves. But we have to make that happen,” he says.
Prof. Somogyi says Canadian agri-food companies should follow the lead of Australia and New Zealand, and look at ways of creating more value-added food products. That would mean moving away from being a seller of bulk commodities to becoming producers of branded products that are processed and made in Canada, and benefit from the high-quality, premium association with being a Canadian brand.
As agri-food companies diversify and explore new markets around the world, it’s key to have the right mix of support to help.
“There are a lot of situations that companies may find they need support and to help them navigate the local market. That’s where we, as a global bank, can really help them by leveraging our colleagues and network in those markets, to make introductions and provide insights into the local market,” Mr. Molenaar says.
Margarine: a USMCA win
Most exporters breathed a sigh of relief when the new USMCA trade agreement was signed with the U.S. and Mexico – mainly because it preserves NAFTA’s zero tariffs on most goods. But there’s another small but significant success story.
Once the three signatories ratify the agreement, Canadian margarine will no longer be subject to tariffs. Up until now, Canada has only exported about $8-million in margarine annually to the U.S., whose total margarine market is worth about $800-million, according to Brian Innes of the Canola Council of Canada.
Under NAFTA, margarine was still subject to tariffs because the canola-based product also contains palm oil, which Canada has to import from Asia. The USMCA drops that provision and potentially opens the door to increased sales.
This is good news for oil seed producers such as Richardson International, one of two companies targeted by China in the recent canola seed ban. It produces three types of margarine, and is expecting to ramp up production once USMCA comes into effect.
“When your product becomes more competitively priced in those markets, it becomes a question of market demand. At least you’re not starting from a disadvantage from a pricing perspective,” says Jean-Marc Ruest, Richardson International’s Vice-President of Corporate Affairs and General Counsel.
Advertising feature produced by Globe Content Studio and sponsored by HSBC Bank Canada. The Globe’s editorial department was not involved.