Left reeling after the sudden and unexpected loss of its biggest canola seed buyer, will Canada’s export diversification and financing plan be enough to save the country’s agri industry? Drew Nicol reports.
Earlier this year, Canadian farmers became unwitting pawns in the ongoing spat between the US and China, which resulted in the sudden and unexpected severing of ties between the country’s canola exporters and their Chinese customers.
This loss of access to a multi-billion-dollar export market presents an enormous challenge for Canada. It exports 90% of all its canola products and China is currently the largest buyer of its raw canola seed, with exports worth CA$2.7bn in 2018, according to figures from the Canola Council of Canada. Overall, China accounts for approximately 40% of all Canada’s canola seed, oil and meal exports.
The trouble started in December last year when Canadian officials, acting at the behest of their US partners, arrested Meng Wanzhou, the chief financial officer of Huawei, on the grounds of national security when she landed at Vancouver Airport.
Three months later, two of Canada’s largest agri exporters, Richardson International and Viterra, had their shipments of canola seed turned away from China’s ports due to allegations of contamination, despite a lack of evidence to back up its claims. Subsequent Canadian tests carried out on the goods failed to detect any pests in the cargo, giving weight to suspicions of retaliatory behaviour from the Chinese side, which it denies. China has since revoked both firms’ licences to sell goods in the country and recent reports from the Canadian Canola Council confirm that Chinese buyers remain unwilling to buy Canadian canola seed, thereby effectively shutting down access to their market.
Initial hopes that the boycott could be resolved quickly through arbitration by the World Trade Organisation were soon dashed. Now, growers and exporters are weighing up the financial costs of losing their Chinese business and funding the search for alternative customers.
Plugging the gap
To address the immediate problems facing its vulnerable agri industry, the Canadian government instigated a major expansion to its advance payment programme (APP) in May, setting up a working group to address the needs of farmers during this period of turmoil and assist them in finding new customers for their products.
The reforms included permanently increasing annual loan limits from CA$400,000 to CA$1mn for all producers and, for canola-related advances specifically, increasing the interest-free portion from CA$100,000 to CA$500,000 for the 2019 programme year. The APP enables farmers to receive advance payment on 50% of the anticipated value of the eligible agricultural products that are either being produced or are in storage. Producers are also able to make repayments on their advances as their product is sold.
“Cash flow is very important for farmers and their main concern is working capital,” explains Brian Innes, vice-president of the Canola Council of Canada and president of the Canadian Agri-Food Trade Alliance (Cafta), a trade body that represents 90% of the country’s agri exporters. “Their needs for financing are evolving as the market changes to include new customers and the shifting demand for canola because of the Chinese situation.”
Innes says the APP expansion is an essential short-term fix to enable growers to manage their cash flow and save them from having to sell at depressed prices.
Canada’s commercial banks are also understood to be allowing some flexibility in their agri customers’ financing facilities.
A Canadian banker with knowledge of the situation, who wished to remain unnamed, tells GTR: “In the cases of affected farmers, the loans that have been extended by commercial banks will not be forgotten but there are established mechanisms within banks’ policies to recognise the market conditions. Relationships are looked at over a multi-year period and so there can be some leniency in terms of repayment.”
The banker believes financial support is readily available from the commercial sector and government and that it will go a long way to addressing the farmers’ acute working capital needs.
You reap what you sow
For Canada, the whole incident acts as the perfect case study to validate its new trade diversification strategy, which was unveiled in the 2018 Fall Economic Statement. Targeting an overall growth in exports by 50% by 2025, the plan also includes an aim of doubling Canada’s agri exports to China – which may now be unlikely. However, the overall strategy will also serve to buffer exporters against an over-reliance on a few lucrative, but unpredictable, trade partners.
As part of the plan, the Canadian government will invest CA$1.1bn over the next six years to help businesses (especially SMEs) access new markets and will focus on three key components: investing in infrastructure to support trade; providing Canadian businesses with the resources needed to execute their export plans; and enhancing trade services for Canadian exporters. Further details of how this budget will be allocated are not yet public.
Despite this much-needed assistance, Cafta’s Innes does not downplay the negative effects of losing access to China. Although he believes that the agri industry is unlikely to give up such a large consumer market altogether, he doubts farmers and exporters will simply stand idle and wait for the tensions between the two countries to be resolved.
“The first priority of the canola industry is to regain access to the Chinese market. But, it would be impossible for the industry to continue to look at China in the same way,” he says. “Inevitably, we are shifting our focus to other markets.”
In this regard, Canada’s agri industry is spoilt for choice, thanks to the government’s pursuit of free trade agreements (FTAs), which it describes as the “cornerstone” of its diversification strategy.
The value of FTAs
Trade agreements are critical for Canada’s canola sector, Innes explains. “We export 90% of what we produce, and FTAs provide tariff-free access and more predictability to resolve issues when they arrive.”
For Canada, recent achievements in this arena include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) between Canada and 10 other countries, and the Comprehensive Economic and Trade Agreement (Ceta) with the EU. The CPTPP went live in December, while Ceta entered into force provisionally in September 2017. With the addition of Japan through CPTPP and France, Germany and Italy through Ceta, Canada now has free trade access to all other G7 markets.
Its trade access to the largest G7 member, the US, as well as Mexico, has been in place since 1994 as part of the North American Free Trade Agreement (Nafta). It has recently been renegotiated and rebranded, in Canada, as the Canada-United States-Mexico Agreement (CUSMA), although it is yet to be ratified. The update mostly involves provisions for the automotive and technology sectors, although Canadian dairy farmers are expected to also benefit from increased cross-border business.
For Canadian exporters, the benefit that this tariff-free access offers is hard to overstate. Canada’s bilateral goods trade with the US has more than doubled in value since Nafta took effect, while US and Mexican investment in Canada has tripled, according to HSBC Global Research’s chief trade economist Douglas Lippoldt.
Moreover, the latest data from Statistics Canada shows that, since CPTPP entered into force, Canada’s agri-food exports to Japan are up 12%.
According to Innes, several Asian countries, such as Japan, South Korea and Malaysia, offer a significant alternative growth potential for agri goods. He also sees an uptick in canola seed going to Europe, Pakistan, Bangladesh, the US, Mexico and the UAE.
Commenting on the growth of Canada’s canola markets, Claire Citeau, executive director at Cafta, explains: “The North American market continues to be very important and absorbs 55% of our exports. But, if you ask our members where the future is, it’s in Asia.”
In 2018, Canadian Prime Minister Justin Trudeau appointed Jim Carr to the newly-created role of minister for trade diversification, with a primary goal of spearheading Canada’s global trade ambitions. As part of the strategy, Carr led an agri-focused trade mission in June to Japan, already Canada’s third-largest canola seed destination market, and South Korea, which accounted for US$116.4mn of canola exports in 2018. He will also visit several other markets highlighted as having growth potential for Canadian exports.
Beyond the obvious advantage of removing barriers to trade, Canada’s agri trade bodies also threw their weight behind these deals in order to gain equal access to markets as some of their competitors that have been quicker on the draw to sign key trade deals.
“We’ve been strongly advocating for Canada’s involvement in the CPTPP because of the importance of key markets in Asia, such as Japan, Vietnam and Malaysia. Our competitors, Mexico and Australia for the most part, had access to the very important Japanese market and we didn’t, so we really wanted a level playing field,” Citeau explains. “Our priority right now is CUSMA. It’s very important for us that we retain the stability of trade in North America that Nafta provided. Our members require the competitive access to the world’s largest markets and the timely negotiation and implementation of FTAs that our competitors are also after.”
Export Development Canada (EDC), the country’s export credit agency, reinforces this point, telling GTR that, for Canadian exporters, it is seeing growing levels of foreign competition in the primary agriculture sector, particularly grains and oilseeds, such as canola, from countries such as Ukraine and Kazakhstan. Despite pressures from foreign competition, EDC’s support of Canadian agri exports has increased consistently in recent few years. In 2018, EDC served 868 Canadian exporters in the agriculture and agri-food sector, up from 799 exporters in 2017 and 684 in 2016.
As a result, with this wide foundation of financial support and a full complement of FTAs, Canada’s canola industry is well placed to see off all forms of challenges from China or elsewhere. Moreover, if Canada’s canola industry is able to weather this current crisis and make use of its global trade networks to forge new relationships, then China’s heavy-handed approach may prove to be a cautionary tale for those seeking to use trade as a weapon in the future.