‘WE’RE IN A NEW REALITY’
How tariffs — and they’re not U.S. ones — are already hurting one Canadian company
If Murad Al-Katib’s experience with duties is any indication, Canadian business owners should prepare for the worst as U.S. tariffs on steel, aluminum and, potentially, autos take effect.
On Dec. 21, 2017, India slapped 30 per cent tariffs on chickpea and lentil imports and that’s had a significant impact on Al-Katib’s company, Regina-based AGT Food and Ingredients Inc. Though AGT sells both pulses as well as other foods to more than 120 countries, India is one of its prime markets.
Since the tariff announcement, AGT’s stock price has fallen by 28 per cent to about $14, while adjusted EBITA dropped by $4 million in Q1 from the same period a year earlier. Its stock price is also down 64.7 per cent from its $42.05 high in May 2016. (After further increases, duties are now at 33 per cent on lentils and 66 per cent on chickpeas.)
“It’s been an extremely challenging year for us,” Al-Katib said in an interview at the EY World Entrepreneur of the Year Awards in Monaco in June. “The geopolitical environment is changing, protectionist sentiment in the world rising, plus there’s food inflation and food security, and agriculture is one of the most political businesses in the world.”
Al-Katib doesn’t think this can last forever — India’s population is growing faster than its pulse production, he said — but he believes all sorts of companies will soon have to deal with tariffs as protectionist attitudes take hold around the world and they could see their businesses struggle like he has.
India’s government imposed tariffs on agricultural products, among other goods, for the same reason that U.S. President Donald Trump is slapping 25 and 10 per cent duties on steel and aluminum imports, respectively: Prime Minister Narendra Modi wants to prop up the domestic pulse industry ahead of a 2019 election.
“They’ve basically just stopped the (pulse) trade around the world,” Al-Katib said. “They’re doing it to protect their domestic farmers and to increase local prices before next year’s elections. The sector’s been going through a bit of a structural transition and that’s been a real challenge.”’
Indeed, the global pulse industry has been rocked by India’s tariffs. India imported 87 per cent fewer lentils year over year in April, according to data from Pulse Canada and Global Trade Tracker, and chickpea imports plummeted to 93 metric tonnes (MT) in April from 194,931 MT in November.
Canada continues to be the biggest exporter of lentils to India, but the amount it sends there has dramatically fallen. In April 2017, Canada sent 57,596 MT of lentils to India, but only 8,720 MT in April this year. Tariffs were a big reason why AGT’s Asia and Pacific Rim year-over-year revenues fell by 42 per cent in Q1.
However, Al-Katib isn’t about to throw in the towel. If anything, India’s tariffs have motivated him to find ways to become more efficient and to seek out new opportunities, which is the right approach to take in this situation, said Dave Zimmel, a Calgary-based business consultant.
Firms that may be affected by tariffs will need to rethink how they do business, he said. The first place to start: Look at margins and costs.
Zimmel said companies should consider what margins the business can live with and then find ways to reduce costs, whether through cutting headcount or pressing partners to reduce their own fees. Businesses may also need to invest more in technologies that can help them do more with less.
“We’re in a new reality, which means people have to look at input costs,” he said. “Companies have to sharpen their pencils and ask their partners to look at their price structures. Look right down the income statement.”
Al-Katib agrees that finding efficiencies are vital, and he’s trying to keep increasing scale, whether that’s through “building scale, buying scale or partnering for scale.”
AGT has been trying to do all three. In January 2017, in anticipation of India’s tariffs, Al-Katib met with Prem Watsa, the legendary Canadian investor and chief executive of Fairfax Financial Holdings Ltd., to see if he might want to invest in his business. Watsa did that August, agreeing to a 99-year partnership and a $190-million in- vestment into the business.
The money gives AGT capital to “continue building out our strategy,” Al-Katib said. It also gives the company an opportunity to buy other operations that may not be as well capitalized. “In the time of constraint, sometimes opportunity rears its head. This is all part of being anticipatory.”
AGT is also continuing to diversify its product lineup. Well before any tariff talk, the company began packaging foods such as pasta, rice, Mediterranean fare and canned goods. This part of the business continues to do well — year-overyear revenues increased by 12 per cent in Q1 and it accounted for 63.2 per cent of the company ’s adjusted EBITDA — and it’s saving the company from even more damage.
“We’re quite thankful that we’ve got a food ingredient and packaged foods business that’s not dependent at all on India and the traditional pulse markets,” he said. “It’s really carrying earnings for the company.”
AGT is also trying to increase sales in other markets, such as Turkey, China and Europe. Exporters in general, Al-Katib said, must look at markets outside the U.S. and, for him, India. He said the Canada-European Union Comprehensive Economic and Trade Agreement should help increase trade with Europe and allow businesses to become less reliant on the U.S.
There is another opportunity that Al-Katib is particularly excited about and it involves railways.
AGT owns 700 kilometres of rail in Saskatchewan, which it uses to move its products and other agricultural staples around the province. It is teaming up with Fairfax Financial and a group of Manitoba First Nations to try to buy a rail line in Churchill, Man., that was washed out by floods last spring.
Owning this line will, Al-Katib hopes, allow other companies to one day transport all sorts of goods through the Arctic to countries around the world. “This is Canada’s deep-sea access in the north,” he said. “The northern passage will become a reality one day.”
Fortunately for AGT, a new North American Free Trade Agreement (or its dismantling) will not have a big impact — it already has a plant in North Dakota that it uses to sell crops to Americans and others — but companies need to start adjusting to a more protectionist world.
Al-Katib thinks supply managed industries, such as dairy farming, will have to make concessions during the NAFTA trade talks, while the U.S., Canada and Mexico may need to engage in bilateral talks for a deal to get done.
But AGT’s head is still a big believer in global trade. He’s optimistic that the current trade impasse between Canada and the U.S. will get resolved, but said how companies deal with other protectionist countries may also have to change.
In AGT’s case, he wants to start producing crops in India. If he’s there and creating more domestic opportunities, he won’t be subject to tariffs.
Ultimately, though, those worried about tariffs need to stay focused and stick to their plan. That is not easy when stock prices plummet and investors get antsy, but people need food even more than they need cars or other products made with steel and aluminum.
And the need for inexpensive crops such as lentils and chickpeas isn’t going away given the growing global population and increasing demand for food.
“I have my entire life invested in the company and I’m shoulder to shoulder with investors, so, sure, you get down a bit on it, but these are things out of your control,” AlKatib said. “But you should recognize that if you have a strategy and conviction in that strategy and you have the financial resources to execute your strategy, then you can’t get complacent.”
The geopolitical environment is changing, protectionist sentiment in the world rising, plus there’s food inflation and food security.