Why the U.S.-China trade war could be a boon for Canada’s agriculture sector
New opportunities could emerge out of the current trade turmoil engulfing Canadian agricultural producers, even as volatile price swings “dampen” exports in the short term, according to a new report by Farm Credit Canada, a major lender to the farming sector.
Continued global growth, Canada’s ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and efforts by China to reduce its dependence on American suppliers all bode well for Canada’s agriculture sector, said Farm Credit chief economist J.P. Gervais. “Long term I’m absolutely positive that demand remains very strong for what we sell,” Gervais said in a conference call to discuss his firm’s annual report. “But I think shortterm volatility is likely to create a bit of a decline in performance.”
The United States and China have exchanged $360 billion in tit-fortat tariffs so far, with Chinese duties targeting specific U.S. commodities including soybeans and pork. Mexico has also imposed tariffs on American pork and other commodities in retaliation for U.S. tariffs on steel and aluminum imports.
As the web of duties divert traditional trade flows, Canadian producers have been caught in the crossfire. Indeed, Canadian hog and soybean prices — which are tied to a U.S. benchmark — have fallen in tandem with those in the U.S.
In an attempt to gauge how ongoing disruption might impact future export patterns, Gervais studied how periods of high price volatility impacted the export performance of five specific commodities — beef, pork, soybeans, canola and wheat — over the past 30 years. In general, exports of beef, pork and soy were more sensitive to price volatility than canola and wheat.
But price swings prompted different behaviours from different countries, with some choosing to sit on the sidelines, while others increased purchases. In the case of beef, for instance, a doubling of price volatility led to an average 20-per-cent decline in Canadian exports to Mexico and Japan and an 11.8-per-cent increase in exports to Hong Kong.
For soybeans, exports to Japan and the U.S. fell off while shipments to China rose by 3.7 per cent and to Spain by 18.3 per cent.
“Spain seems to be doing some of the same things right now,” Gervais said, while cautioning not enough data from 2018 was available to determine a pattern.
Meanwhile, the trade war between China and the U.S. could hold some opportunities for Canadian producers to step in as suppliers to the Asian economic powerhouse. “The longer this trade spat between China and the U.S. lasts, the more likely are you to see some long-term effects,” he said. “If we see an agreement between the U.S. and China in that late fall or early winter, the markets won’t be too rattled long-term. But if this bleeds into 2019, I do think there’s going to be some lasting impacts … that could be positive for Canada.”
China is looking to reduce its dependence on the U.S. as supplier and has increased its purchases from Canada significantly, he added. “I have no doubt they are serious about lowering their reliance on the United States,” he said. “I do think that’s an opportunity for us.”
Canada’s recent ratification of the CPTPP is another bright point for farmers, he added, noting that one of the most significant advantages of the deal for Canada is that the U.S. is not in it. One of U.S. President Donald Trump’s first actions after taking office was to pull the country out of the free trade deal.
“The U.S. is our largest destination when it comes to exports of food but it’s also our largest competitor,” he said. “That’s going to provide an edge to Canadian exporters, absolutely.”