Which Canadian sectors will lead economic growth in 2017? It is tempting to identify advanced technologies or high-end services as leaders, but some traditional sectors are among the strongest economic sectors. In general, the agri-food sector is positioned to be a solid Canadian economic performer in the years ahead.
The agri-food sector is extremely broad. It includes primary producers in crops and animal production, food manufacturers and key suppliers to the primary sector ranging from fertilizer to logistical services.
The sector has two fundamental factors in its favour.
First, overall agri-food output is remarkably stable. Unlike housing, autos and travel, all of which are sensitive to the business cycle, there is seldom a boom or a deep recession in food demand. Even during the worst economic recessions, such as 2009, consumers still need to eat and continue to purchase food products. Consumers may be sensitive to prices and may change the basket of food items they buy – for instance, meat consumption in North America is declining – but overall food demand seldom declines by much or for long. Not surprisingly, the food-manufacturing industry is projected to grow by 2.4 per cent in 2017, slightly better than the Canadian economy as a whole. Producer prices are also expected to recover modestly.
Second, the rise of the middle class in China and other emerging markets means steadily growing global demand for calories and protein. Thanks to rising real incomes and more discretionary spending, demand for food in emerging markets is projected to grow by up to 5 per cent annually over the next decade. Vegetable oils, dairy products, meat and other proteins are among the foods in high demand.
While these two factors provide both stability and growth opportunities, the industry has done much on its own to boost its own fortunes. Productivity performance is one particularly important area in which the Canadian agri-food industry is a leader. Thanks to factors such as farm consolidation, increasing mechanization, improved fertilizers and higher yields, the agri-food sector has achieved productivity growth of around 4 per cent annually in recent years. Some of the reason is a result of farm consolidation – the number of farms in Canada has shrunk by 27 per cent over the 20 years prior to 2013. Openness to international trade and investment has also spurred many food sub-sectors to boost their productivity. Global value chains in food production provide related business growth opportunities, such as research and development on food quality, safety and nutrition, supply-chain management and the provision of key inputs.
Food is a global growth industry, and many Canadian agri-food producers and suppliers are taking full advantage of the opportunities. Oil seeds (such as canola) and pulses (such as lentils) in particular enjoy strong global demand from emerging markets in Asia. Canadian exports of canola and canola oil recently surpassed wheat exports. Accordingly, there has been a shift in land under cultivation away from traditional crops, such as cereal grains, toward oil seeds and pulses. In addition to rising Asian demand, the recent free-trade deal with the European Union reduces barriers to that attractive market of 500 million consumers.
However, segments of the agri-food business – dairy, eggs and poultry – remain closed to international trade opportunities. Under the supply-management systems that govern these industries, domestic producers exercise influence over pricing decisions in Canada thanks to quotas and extremely high external tariffs. As the Conference Board of Canada has demonstrated on numerous occasions, high and rising prices for consumers have contributed to stagnant domestic dairy demand. The high cost of acquiring production quota has created barriers to entry for young farmers. Moreover, the supply-managed sectors are shut out of the huge opportunities for sales growth in Asia. Canada currently has a microscopic share of the world market in traded dairy products – a fraction of 1 per cent. In contrast, Canada has about 10 per cent of global trade in oil seeds and almost 14 per cent of the market in wheat.
The dairy industry has so far successfully resisted the push and pull of global forces. With the North American free-trade agreement up for renegotiation under the Trump administration, the resistance strategy may not be tenable. The Conference Board has provided options for dairy supply-management reform that we believe would benefit Canadian consumers and producers alike. The Conference Board's plan would see farm production quotas bought out at their book value (an estimated $3.6-billion to $4.7-billion in 2014) – paid for in the short term by a consumer levy on dairy products – and international trade negotiations would need to gain access for Canadian dairy projects in other markets.
Our neighbours to the south may force a rethink of our supply-management policy, on their schedule. Dairy and other supply-managed commodities risk losing ground in declining domestic markets while being shut out of growing global markets. As other industries in the agri-food sector have shown, Canadian producers can be world leaders and strong contributors to overall growth.
Glen Hodgson is senior fellow at the Conference Board of Canada.
Want to interact with other informed Canadians and Globe journalists? Join our exclusive Globe and Mail subscribers Facebook group