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Agriculture and. Agriculture et. Agri-Food Canada. Agroalimentaire Canada. BACKGROUND PAPER ON STRUCTURE OF CANADIAN AGRI-FOOD SECTOR Presentation to Policy Workshop February 15, 2001. Prepared by: M. Zafiriou and D. Smith, AAFC. OUTLINE OF BACKGROUND PAPER. I. INTRODUCTION

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    1. Agriculture and Agriculture et Agri-Food Canada Agroalimentaire Canada BACKGROUND PAPER ON STRUCTURE OF CANADIAN AGRI-FOOD SECTOR Presentation to Policy Workshop February 15, 2001 Prepared by: M. Zafiriou and D. Smith, AAFC

    2. OUTLINE OF BACKGROUND PAPER I. INTRODUCTION II.ECONOMIC AND POLICY ENVIRONMENT III. TRADE POLICY ENVIRONMENT Agri-food Sector Trade IV.EMERGING ISSUES AFFECTING CONSUMER ATTITUDES V. AGRICULTURE SAFETY NET PROGRAMS VI. STRUCTURE OF THE AGRI-FOOD SECTOR Overview Farm Inputs Sector Primary Sector VII. FARM FINANCIAL CONDITIONS AND FARM HOUSEHOLDS VIII. CONCENTRATION AND PROFITABILITY IN THE AGRI-FOOD SECTOR IX. SUMMARY

    3. I. INTRODUCTION • Before analyzing the impact NAFTA has had on the structure of the Canadian agri-food sector, it is important to have a clear understanding of the structure as it currently exists and the pressures that have led to its recent changes. • The purpose of this report is to present background information and data describing the current structure of the Canadian agrifood sector. The report will start with a discussion of the current economic, policy and trade environment that are impacting the sector before presenting a detailed overview of the structure of the various components of the agri-food sector (I.e. farm inputs, farm level, food and beverage processing, food retailing and distribution sectors) and some of the changes that have taken place over the last two decades.

    4. II. ECONOMIC AND POLICY ENVIRONMENT

    5. ECONOMIC AND POLICY ENVIRONMENT • Canada, like the U.S. has experienced almost a decade of unprecedented economic growth in an environment of low inflation, productivity increases, falling unemployment rates and reasonable interest rates. • After the stagflation of the 1970’s and restrictive monetary policy that brought the North American economy to its knees in 1981, inflation was brought under control. Another recession in 1989 and 1990 resulted in further significant restructuring of the North American economies. • The creation of the knowledge economy and the rapid expansion of computer technology including the more recent spread of the internet and e-commerce contributed to this restructuring and productivity increases. At the same time North American stock markets have boomed resulting in real gains in consumers’ wealth. • Policies aimed at reducing government budgetary deficits in most provinces of Canada and the U.S were succesful during the late 1990’s and now have led to government surpluses. This has resulted in some income tax relief as governments have been able to reduce tax rates and pay down some of the government debt. • .

    6. ECONOMIC AND POLICY ENVIRONMENT-continued • As recent as last year, deflationary fears haunted world economies. Low commodity prices, which declined from their peak in 1996, contributed to recent farm income problems. Governments responded with increased government support to farmers. PROSPECTS • Recent increases in energy prices may contribute to inflation in the near term particularly if government policy accommodates these increases. At the same time, an economic slowdown of the American economy appears imminent. • The Canadian economy may slump in 2001 and 2002. The extent to which this is a soft landing or a hard landing will depend to a great extent on the policies of the government and the course taken by the United States. • Commodity prices (wheat and canola) over the short term are expected to remain weak, with some strengthening expected in 2002. Livestock prices, however, have strengthened and will boost farm incomes until next year, when crop prices rebound.

    7. Real Growth in GDP, Canada and Other Countries • Between 1980-1999 Canada averaged an average annual increase in real GDP of roughly 2.5% • Preliminary estimates for 2000 suggest real GDP will increase by 4.8%. Forecasts for 2001 and 2002 predict increases of 3.5% and 3.0% respectively. • The Canadian economy is dependant on exports. As a result increases in income among Canada’s trading partners will have an impact on the demand for goods that Canada exports. • Asia is the only country that currently has higher growth rates than North America. • In 1999 Japan edged back into positive GDP growth but is forecast to experience more meager growth in the near future. Source: Statistics Canada and FAO

    8. CPI and Core Inflation for Canada • The Bank of Canada has a target range for inflation between 1%-3%. • Since 1992, the core inflation has remained within this band, and has gravitated towards the midpoint of 1.5%. • Nominal inflation spiked up in 2000 mainly due to increases in energy prices. *Core Inflation is measured by CPI excluding food and energy (1992 = 100). Source: Bank of Canada

    9. Commodity Prices • Commodity prices for food were stable throughout the 1980’s, but declined in the past few years. • Energy prices which have remained below the 1980’s average started to increase again in 1999-2000. Source: Bank of Canada • The price of Canada’s major agricultural export commodities (wheat and canola) have declined in real terms since 1980. • Projections show wheat prices remaining constant over the medium term with an increase expected in the price of canola. Source: AAFC, Medium Term Baseline, October 2000.

    10. Federal and Provincial Government Surplus/Deficit • Both the Federal and Provincial Governments have attained budget surpluses in 1999-2000. • This is a large turnaround from 1992 when the combined federal and provincial deficits reached 8.9% of GDP. Source: Statistics Canada, National Accounts Basis.

    11. Exchange Rates and Interest Rates • The Benchmark currencies have, and continue to appreciate against the Canadian dollar. • This has aided Canadian exporters. • Interest Rates in Canada have been below those of the US for a good part of the 1990’s. • This has contributed to the depreciation of the Canadian dollar and the continued Outflow of FDI. Source: Bank of Canada

    12. Money Supply Growth • The money supply has increased moderately over the 1990’s. • The growth in long-term and fixed deposits has started to increase in 1999 after falling in 1998. • M1+ and M2+ have grown an average of 6.2% and 6% annually respectively since 1987. Source: Bank of Canada

    13. III.TRADE POLICY ENVIRONMENT

    14. TRADE POLICY ENVIRONMENT • Significant improvements have been made in recent trade policy developments. Canada has benefitted from the Canada-U.S. Free Trade Agreement signed in 1988 which lowered tariffs and removed barriers to trade between Canada and the United States, Canada’s most important trading partner. • The Dispute Settlement Mechanism which was introduced at this time has played a key role in arbitrating trade disputes before sanctions are enforced. • NAFTA further extended the trading area to include Mexico. Other free trade agreements have been signed between Canada and Chile and Canada and Israel. • The signing of the World Trade Agreement in late 1994, was perhaps the most significant development on the trade front. It introduced further trade disciplines and improved market access and attempted to bring trade subsidy wars to an end. • While new rounds of trade talks by the WTO have been hampered by political lobbying, prospects for gains from future talks are postive and will continue to progress.

    15. Index 1986-1988 = 100 Index 1999 Producer Subsidy Equivalents, Canada and World Figure 10 • Canada has been actively reducing it’s PSE levels to comply with the Agreement on Agriculture. • Only New Zealand has reduced its PSE from the 1986-88 level more than Canada. • The US & EU have increased their PSE levels above that set out by the Agreement on Agriculture. * 1) OECD-24 excludes most recent member countries: Czech Republic, Hungary, Korea, Mexico and Poland. 2) OECD-24 PSE in US$. Individual country PSE in local currency. Source: Agricultural Policies in OECD Countries: Monitoring and Evaluation 2000.

    16. AGRI-FOOD SECTOR TRADE

    17. Canada’s Share of World Agri-food Trade Figure 11: Canada’s World Agri-Food Market Share • Canada has retained a steady 3-4% of the World Agri-food Market. • Canada has diversified its agri-food exports. Wheat, which comprised roughly 1/2 of Canada’s total share in the 1980’s, now accounts for about 1/5. Source: FAO Database.

    18. % Billions of $ Figure 13:Percentage of Canadian Merchandise Exports 10 Total 9 8 7 6 5 4 3 2 1 0 Canada’s Merchandise Trade Balance and Agri-food Trade • The Agri-food sector is a stable and positive contributor to Canada’s Merchandise trade balance. • The composition of agri-food exports has been increasingly consumer-oriented. • This is driven by increased consumer-oriented exports to the US. Source: Statistics Canada, Merchandise Trade Database.

    19. Importance of Trade with NAFTA Countries % of Trade Figure 14 • Canada’s trade has become increasingly dependant on the NAFTA market. • However Canada’s Agri-food trade is not as dependant, but follows the same trend of closer integration with the US and Mexico. • The table below shows that exports to NAFTA countries account for the vast majority of Canada’s total and Agri-food exports Source: Statistics Canada Merchandise Trade Database. Major Export Destinations in 1999 NAFTA Japan EU ChinaRest of the World Agri-Food 63% 9% 6% 3% 19% Total Trade 87% 2% 5% 1% 5%

    20. Canadian Agri-food Exports as a Share of Production Figure 15:Export Intensity* • Because Canada has a small domestic market, it is dependent on trade. • Growth in the agri-food sector has been boosted by increased exports. • While the agriculture sector has always been export oriented, the increasing dependence of the food and beverage processing sector on exports has contributed to its growth and increased the share of Canadian exports that are value-added. * exports as a share of domestic production Source: Strategis Trade Data, Statistics Canada CANSIM Matrices 9550 and 9551, Farm Income, Financial Conditions and Government Assistance Databook, March 1999.

    21. Value-added Exports are Increasing Figure 16: Bulk and Processed Share of Exports • Processed goods now account for over 50% of total agri-food exports and are expected to continue to grow in proportion. • The Canadian Agricultural Marketing Council (CAMC) has set a target of 60% processed, 40% bulk by 2005. • Most value-added exports are destined for the U.S. • Non-NAFTA exports are largely primary commodities. Source: Statistics Canada, Merchandise Trade Database

    22. IV. EMERGING ISSUES AFFECTING CONSUMERS’ ATTITUDES

    23. Farmers and Society % Figure 17: Citizens’ Concerns (Percent High Priority) • Food Safety, Agricultural Issues and Farm Income are all ranked as high concern areas for Canadians. • However, the environment and health rank even higher. • In relation to the agri-food system, concern over the safety of the food supply overrides concern over environmental damage done by agriculture. • This implies that Canadians, despite wanting a cleaner environment will not want such policies to compromise the safety of the food system. Figure 18: Citizens’ Concerns Related to the Agri-food Sector Source: EKOS April 2000

    24. Environmental Indicators • Progress is being made in water erosion as slight improvements have been seen in the share of Canadian cropland that has tolerable risk of water erosion (Figure 19 ). • In spite of the Kyoto Agreement, agriculture continues to contribute to nitrous oxide emissions (Figure 20). • Pressure will continue to build for agriculture to become more environmentally responsible, with Farm “Green” plans being encouraged and possibly regulated in cross compliance with other agricultural support. • International and national agreements such as the UN Framework Convention on Climate Change, the UN Convention of Biodiversity and the Montreal Protocol (Ozone) have contributed to progress on this front. Figure 19: Percent of Cropland with Tolerable Risk of Water Erosion Figure 20: Agricultural Emissions of Nitrous Oxide Mt of cde Source: Environmental Indicators Project.

    25. V. AGRICULTURE SAFETY NET PROGRAMS

    26. CANADA’S AGRICULTURAL SAFETY NET PROGRAMS • A significant change in the manner in which agricultural support programs were administered came in 1991 with the introduction of the Farm Income Protection Act. Under this legislation, a whole farm approach was introduced, in an attempt to decouple farm income support programs from production. • Key Principles of these programs include equity, cost-sharing, production and market neutral, trade neutral, environmentally sustainable, encouraging adaptation and adjustment with minimum overlap and duplication of purpose. • The Net Income Stabilization Account (NISA) is one component of the safety net system which aims to stabilize farm income (eligible net sales) from agricultural production. During good years, farmers can contribute to NISA accounts, matched dollar for dollar by the government, which can then be withdrawn when income falls below a three year average or a minimum family income level. • The second component includes Crop Insurance in which producers, provincial and federal governments contribute equally to insure production against drought and weather related disasters. • The third component includes Companion Programs, which allow provinces some discretion to introduce programs which address provincial differences in the structure of their agriculture industry. • Through the negotiated Safety Net Framework, federal money is allocated to the provinces based on provincial shares of national farm cash receipts.Safety net programs must be cost-shared with the provinces on a 60:40 basisi (federal: provincial).

    27. AGRICULTURE PROGRAMS RECENT CHANGES • In response to a decline in commodity prices and fears of a farm income crisis in late 1998, a new national program was introduced called the Agriculture Income Disaster Assistance (AIDA) program. This program was similar to the Alberta Farm Income Disaster Program (FIDP) and complied with WTO rules for disaster insurance. Under this program, farmers would be compensated up to 70% of their previous (three year) average gross margin if current year gross margin fell below this average. ($1.2 billion allocated beginning in 1998) • Initially, this program was introduced as a temporary two year program, but has since been given another three years of funding under a new name, Canadian Farm Income Program (CFIP), with some refinements and potential for longer term permanence. ($1.3 billion allocated in July 2000)

    28. Farm Market Income and Direct Government Support, Canada, 1989-2004 Figure 20: Market Income and Direct Program Payments Millions of $ • Aggregate net cash income has • been volatile since the mid 1980’s. • Farm market income rose between 1991 and 1998 at the same time that program payments declined. • However, with the drop in farm market incomes in 1998 and 1999, new program money will boost net cash income for farmers, particularly in 2000 and 2001. Net Cash Income Direct Program Payments Farm Market Income * 2000 to 2004 are forecasts, as of October 1999. Source:Statistics Canada and Agriculture and Agri-Food Canada.

    29. VI. STRUCTURE OF THE AGRI-FOOD SECTOR

    30. Overview

    31. Non-processed Imports $5.7 B Processed Imports* $10.8 B Non-processed Exports $10.3 B Processed Exports* $11.4 B For 30.5 million consumers food expenditures represented 13.1% of total disposable income in 1999 Agri-food System Overview Figure 21 Primary Production Market Revenues $ 28.5 B Purchased Inputs $ 14.0 B Processed Products Non-food $ 3.0 B Food $ 45.0 B Beverage $ 8.0 B Feed $ 4.2 B Retail and Food Services Non-food $ 9.5 B Retail Food & Liquor $ 64.5 B Food Services $ 35.9 B 1999 Values * Processed Imports/Exports include a small component of non-food products consisting mainly of manufactured tobacco Source: AAFC, Portrait of the Agri-food Sector

    32. GDP % Growth Rate Agri-Food % Share Growth in and Importance of Agri-Food Sector, Canada Figure 22 • Agri-food GDP represented 8.5% of Canadian GDP in 1999. • The growth in real Agri-food GDP has tracked growth in the Canadian economy over the 1990’s • Despite declining since 1990, the agri-food sector’s share of Canadian GDP has remained fairly stable. Note: The Agri-Food System includes the primary agriculture sector and related service industries, food & beverage processing sector, the food & beverage distribution sector (wholesale and retail), and the foodservices sector. Source: Statistics Canada, CANSIM Matrix 4677.

    33. Agri-food System Share of Total Employment 1999 *Excludes fish processing. Importance of Components of the Agri-food Sector • Food Distribution and Food Processing are the largest segments of the Agri-food chain. • Food Service has declined from 1/4 of the Agri-food GDP in 1990 to 1/5 in 1998. Correspondingly Food Distribution has increased from 1/4 to 30% • The shares of Agriculture and Food processing GDP have not changed over the 1990’s. Source: Statistics Canada, GDP by Industry. Figure 24 • The Agri-food system employs 1 in 7 Canadians. • In terms of employment, Food Service is the most important sector employing 5% of all Canadians employed. • The smallest employer in the agri-food system is processing which employs only 1.7% of Canada’s employed. Source: Statistics Canada, Labour Force Survey

    34. Farm Inputs Sector

    35. Farm Inputs: Importance and Prices • For the average Canadian farm, machinery, fuel, fertilizer and feed are important inputs. • Expenses on feed, fertilizer, pesticides, fuel and machinery represented 15%,7%,4%, 2% and 11% respectively of overall operating expenses in 1998. Source:Statistics Canada, Whole Farm Data Base • The prices of feed, fertilizer and farm machinery rose significantly to 1996, but have since declined with the price of commodities. • Higher prices for fuel, livestock and fertilizer are expected to contribute to higher farm operating expenses in the near future. Source: Statistics Canada, Farm Input Price Indexes.

    36. Structure of Farm Inputs Sector PESTICIDES • Sales in Canada are about $C1.1 Billion ($810 Million US) representing 3% of the global market. • The industry is fairly concentrated and not particularly competitive, being made up of a small number of large global firms. Canadian firms and branches generally undertake research to determine local conditions and gain regulatory approval. • Canada’s higher corporate tax rates and cost of registration in relation to the US, EU and Japan are seen as barriers to the development of the Canadian industry. • Prices are generally based on what the market in a particular region will bear. • The sector faces competition from new farming practices and biotechnology in the areas of pest and herb resistant plants. The industry has responded by purchasing seed companies and developing products that work optimally with a specific pesticide. • The production and distribution chains are in tight vertical relationships, allowing producers to maintain control over formulation processes. • Additionally, the increased use of patenting has allowed firms to retain monopolies over products, reducing production.

    37. Structure of Farm Input Sector continued FARM MACHINERY • The farm machinery industry provides large capital equipment like tractors and bailers that farmers will need. • Canadian shipments of farm machinery stood at $2.6 billion in 1998, value-added at $1.3 billion. The market has declined however, since 1998. • Canada is a net importer of farm machinery, importing $4.6 billion worth in 1998 compared with exports of $1.1 billion. Imports are the large, high priced items and exports are the smaller, lower-priced items. • The industry is fairly concentrated with the top two firms (John Deere and New-Holland-Case) controlling 71% of the market. • In Canada, small, regional, “short-line” producers are dependent upon the dealership networks of the main-line (global) operators for market access. Most short-line producers are centered in Saskatchewan and Manitoba. • Prices are determined at headquarters, but are adjusted based on what the regional market will bear.

    38. Structure of Farm Inputs Sector continued FERTILIZER • The fertilizer industry provides farmers with the nutrients to aid in the production of their crops. • Despite being a small consumer (2% of world nutrient demand) Canada is a net exporter of fertilizers due to its 40% share of the global potash trade. • Canadian value-of-shipments increased steadily between 1990-1998 posting an average annual increase of 12% during that time. • Firms generally try to differentiate their products in terms of good will, custom-blending, and additional services like soil testing. • The industry is currently undergoing a process of consolidation. This raises the fear of anti-competitive behavior; however Canadian producers have increased their capacity over the 1990’s maintaining a high supply, and the open border with the US allows prices to be set in the continental rather than local market. • In respect to Potash, the Potash Corporation of Saskatchewan (PCS) is a global player in the potash industry and an industry price setter. Due to an agreement with the US authorities in 1988, PCS has led the industry to retain prices above a certain minimum level.

    39. Structure of Farm Inputs Sector continued • FUEL • Canada is a small consumer of the global fuel market and is a net exporter of fuel and petroleum products. • The Industry is dominated by a shrinking number of global firms. • Canadian farmers require a large amount of energy through inputs like pesticides and fertilizers, and through the fuel used for tractors and the heating of barns and buildings. • Despite a multitude of retailers where fuel can be purchased, there are only a few refiners in Canada. Thus there can and is a large price variance between regions and provinces. In addition, some provinces, such as Alberta with their abundance of oil and oil revenues,subsidize fuel consumption for farmers through rebates and the tax system.

    40. Primary Sector

    41. Number and Size of Census Farms • Since 1941, there has been a steady decline in the number of farms as Canadian society has undergone a process of urbanization and industrialization. • At the same time, consolidation has occurred and with the increase in average farm size, producers are better able to take advantage of economies of scale and scope. % • As a result, the farm population has fallen from over one third of the Canadian population in 1931 to 2% in 1996. *Note: 1 acre=0.4047 hectares Source: Statistics Canada, Historical Overview of Canadian Agriculture, Census of Agriculture 1996.

    42. Distribution of Farms by Farm Type • Grain and oilseed farms make up the majority of farms in Canada. • Cattle farms are also important, followed by supply managed (dairy, egg and poultry farms). • The number of hog farms has declined over time and represented 3% of all farms by 1999. Large Source: FFS 2000. • Since 1971, there has been an increase in the number of grain and oilseed, cattle, and fruit and vegetable farms. Source: Census of Agriculture

    43. Distribution of Farms and Share of Sales by Farm Typology • Pension Farms are those farms whose oldest operator (FFS) was from 60 to 64 years old and receiving pension income (CPP/QPP) and all farms whose main operator is 65 years of age or older.These farms accounted for 23% of farms and produced 15% of farm sales. • Lifestyle Farms are those farms with gross farm sales $10,000 to $49,999 and off-farm income of $50,000 and over. These farms represented 8% of farms and accounted for only 1% of sales. • Low Income Farms are those farms with gross sales of $10,000 to $49,999 and total family income below $20,000. These farms represented 7% of farms and accounted for 1% of sales. • Business Focussed Farms are those farms with any gross sales who do not fit into the above categories. These include small, medium, large and very large farms who are in the trying to make a go of farming as a business. They represented 62% of farms but accounted for 83% of sales. Source: Statistics Canada, Whole Farm Database.

    44. VII. FARM FINANCIAL CONDITIONS AND FARM HOUSEHOLDS

    45. Grain Price Trends, 1980 - 2005* C$/tonne Figure 33: Grain Prices • Grain prices declined dramatically • after their peaks of 1996 as world stocks • increased. • Prices appear to have bottomed out • and are regaining value into 2001. • Projections are for some slight • strengthening over the medium term. Forecast is for 2001-2005 Source: AAFC Medium Term Baseline, October1999.

    46. Livestock Price Trends, 1971 - 2003* Figure 34: Livestock Prices $ Forecast as of 2001 • Livestock prices, particularly for • hogs, plummeted in late 1998 in • response to oversupply and reduced • Asian demand. • However, hog prices rebounded in 1999 • and are expected to weaken again as the • cycle turns around, with increased supplies. • Cattle prices have strengthened since • 1998 and are projected to stabilize before • weakening in 2003. Source: AAFC, Medium Term Baseline, October 1999 and Livestock Market Review (MISB).

    47. Farmers have been adjusting in the face of falling commodity prices. Mha Figure 35: Area Harvested • Facing decreased grain prices and higher transportation costs since the Crow Rate subsidy was terminated in 1996, Prairie farmers in particular have been substituting specialty high value crops like ginseng and mustard for traditional crops. • The declining commodity prices and removal of the transportation subsidy have been a boon to livestock producers. • Decreasing costs of feed and rising prices have led to increased livestock production. • This expansion in supply is expected to continue at least over the Medium term. Kt Figure 36: Farm Output Source: Statistics Canada, Whole Farm Data Base and Medium Term Baseline, October 2000.

    48. Farm Financial Conditions Figure 37: Average Net Operating Income of Farms Thousands of $ (Unincorporated & Incorporated Farms) • Weaker grain and hog prices • in 1998 and 1999 translated into • lower average net operating income • for farms over this period. • For the year 2000 and 2001, average • net operating income is expected to be • up because of increased government • support to farmers and strength • in the cattle, hog and dairy sectors. 23,973 22,758 23,561 24,070 23,989 23,578 20,727 20,522 19,052 17,748 * 2000 is forecast based on AAFC income forecast. Source: Statistics Canada, Whole Farm Data Base.

    49. Farm Financial Conditions Figure 38: Average Net Worth per Farm by Province, 1999 489,300 • Average net worth for the average Canadian farm was $732,900 in 1999. • British Columbia farms had the highest average net worth per farm (over $900,000) which reflects the high land values. • Prince Edward Island farms also had high average net worth reflecting the large number of potato farms. • Newfoundland farms reported the lowest average net worth at $489,300 per farm. 895,400 764,700 651,600 714,700 838,600 626,600 551,900 841,900 917,100 732,900 Average per Farm ($)

    50. Farm Financial Conditions Figure 39: Average Net Worth per Farm by Farm Type, 1999 1,413,000 1,285,000 • Poultry and egg farms had the highest net worth at $1.4 million in 1999. • Dairy farms and potato farms also showed a high net worth. • Beef farms and fruit and vegetable farms had the lowest net worth in 1999. 1,245,000 925,000 733,000 687,000 668,000 597,000 585,000 Source: FFS 2000