Part of an ongoing series that looks at changes one year after the global trade wars ignited.
On a recent Thursday morning in Davidson, Sask., Rob Stone was steering his black half-ton GM pickup down the Ross Road toward town.
Behind him, the 7,500-acre farm his family has worked for four generations. Up ahead, beyond a truck hood mottled with golf-ball-sized dents caused by a recent hailstorm, the local Cargill Inc. and Richardson International Ltd. grain elevators.
And running through Stone’s head, a ticker tape of odds: Will markets be up or down? Will lentil prices stay low? What price will the grain buyer give him for his canola?
“Your general driving-down-the-road things that farmers think about,” Stone, 43, said.
Prices, demand and the grasshoppers and flea beetles that munched crop foliage during the dry conditions that plagued the Prairies this spring are all things that Stone’s father, Jim, who farmed the property from the late 1960s to the present, grappled with.
Yet the younger Stone’s mind is weighed down with additional burdens: the trade wars and diplomatic tit-for-tats that have driven wild swings in global agricultural flows, crashed prices and generally made everything from seed selection to machine investment more of a gamble than they’ve ever been.
“Some days, you want to take the phone and just shut it off,” Stone said. “Maybe living in the dark wouldn’t be so bad.”
No other sector has been caught in the global trade crossfire quite like Canadian agriculture. Commodities, including soybeans, canola and pork, have been hit either directly by trade restrictions or have had to endure the economic ripple effects of trade wars between other nations.
For farmers, it’s meant deep uncertainty, disrupted supply chains and battered bottom lines.
A farmer drives past a canola field in full bloom in Alberta in late July.
Net farm incomes — the difference between farm revenues and operating expenses — fell by nearly 21 per cent last year, one of the largest year-over-year decreases ever recorded in Canada. Business investment also slumped, with sales of combines and farm tractors dropping 19 per cent and 27 per cent, respectively.
“In the past, it was assumed that more and open trade was better and now suddenly we’re in an environment where it’s the opposite: it’s block first, ask questions later,” said John Dreidger, senior marketing analyst at Winnipeg-based Farmlink Marketing Solutions.
“Farming is a naturally uncertain business. No one knows what the weather is going to be and that’s a risk we’re comfortable with. The problem with geopolitical risk is we become pawns in a bigger game. It strips away the normal market dynamics and makes it hard to choose a way forward.”
For example, China’s ban on Canadian meat imports has reverberated so thoroughly and swiftly through Richard Davies’ pork operation that it’s too onerous and overwhelming to explain detail by detail.
Instead, Davies, senior vice-president of sales and marketing at Canada’s largest pork producer, Olymel LP, explained the impact on one product: pig heads.
Pig heads used to be no trouble. Olymel was shipping roughly 125,000 of them, whole and frozen, to China every week. But that was before the sudden blanket suspension on Canadian meat imports — one of an escalating series of trade punishments doled out to this country’s meat packers — instituted after Chinese authorities reported traces of a forbidden feed additive in pork products with forged Canadian documents.
The announcement in late June led to a flurry of conference calls between Olymel’s senior management and the man who runs their Beijing office: What had he heard? Why was this happening? And when would it come into effect?
The final question was crucial, because Olymel — which fills 100 shipping containers for China per week — already had pig parts on the ocean. If China wasn’t going to accept them, Olymel would have to redirect the shipments to different markets, if they could even find markets interested in products such as heads, trotters and innards, all packaged to Chinese specifications with labels in Cantonese.
Pigs on a farm in Quebec.
Olymel caught a break: the shipments were accepted. But as the company’s network of cut-and-kill plants continued pumping out pork products at the same rate, it had an urgent need to find new markets.
It wasn’t easy. No other country seems to value whole pig heads, in any major quantity, the way the Chinese market does and simply halting operations at the cut-and-kill plants would destabilize a system carefully designed to raise up to 167,000 hogs per week, each to a specific weight.
“The cycle doesn’t stop because some shipments have stopped,” Davies said. “You just can’t hit the brakes.”
Hitting the brakes means keeping the hogs alive longer than planned. The result is that they’ll keep growing, literally eating into an already thin profit margin, said Don Buckingham, president of the Canadian Agri-Food Policy Institute.
Plus, he said, hog barns are organized around the stages of a hog’s life. The hogs move from one area to the next as they grow. Hold them for too long in the final stage, and you get a backlog in the barn.
You can’t freeze all the meat either.
“That’s a lot of meat,” Davies said. “You just can’t hold on to hope and stack your freezer until things come back. We don’t have unlimited freezing capacity here.”
Olymel was forced to consider an imperfect solution: chopping the heads up into parts, such as ears, snouts and cheeks.
“Snouts can go into a limited amount of markets. It could be Asian destinations, it could be Caribbean destinations, it could be, to a certain degree, even domestic destinations, but it’s still limited as far as markets that can take the snouts,” Davies said. “The ears can go to Asia as well. They can go domestically, typically for pet food items.”
The trouble is, more butchering takes time and labour, which he said could drop his price per head by as much as 50 per cent. And in some cases, if a kill-and-cut plant doesn’t have the staff to spare, it might only be able to remove the ears, with the rest sent to rendering.
The problem with geopolitical risk is we become pawns in a bigger game. It strips away the normal market dynamics and makes it hard to choose a way forward
John Dreidger, senior marketing analyst, Farmlink Marketing Solutions
Furthermore, Olymel would be forced to go through the same rigmarole — the clambering for new markets, the extra cutting and the lopsided negotiating — many times over, pork product by pork product, Davies said. That’s because Olymel has grown to depend on China as a major market, to the point where the sales team wasn’t concentrating hard on finding other, smaller markets for the same products.
“The big problem is not the fact that we have to find a Plan B, it’s just how quickly we need to find a Plan B,” he said. “You’re scrambling to do this at the last minute. And, obviously, the other potential buyers know that you’re scrambling. Then you’re basically putting yourself in a very weak position.”
A cruelty of the trade wars is that they have come during a year that should have been particularly lucrative for many Canadian farmers, especially for grain producers such as Stone.
Farmers rely on catching price rallies due to crop issues, particularly in the massive U.S. market. But for the past three years, U.S. farmers have avoided such concerns, producing “staggeringly large” crops of record sizes that have driven prices down, said Ken Ball, a senior commodities futures analyst at PI Financial Corp. in Winnipeg.
But this year, Midwest flooding delayed soybean crops by three to five weeks and 10 to 12 million acres weren’t planted at all, he said, which should have resulted in higher prices and a chance for Canadian farmers to pick off a market rally.
Water pools in rain-soaked farm fields on May 29, 2019 near Gardner, Illinois.
Instead, a Chinese retaliatory tariff of 25 per cent on U.S. soybeans locked farmers south of the border out of their largest market and left them carrying more than a record one billion bushels of unsold beans, three times what’s normally considered a comfortable level.
Soybean prices plunged from US$10.70 a bushel last year to USS$7.80 in May — the lowest level since 2008 — before recovering to US$8.75 a bushel.
“The carryover in supply created by the trade situation has dampened everything,” Ball said. “It’s a real shame, because we could have seen some great prices locked in for Canadian farmers. That to me is the major impact of these trade wars: lost opportunity.”
Carsten Bredin, vice-president of grain merchandising for Richardson International, said the trade tit-for-tats have resulted in the most extreme swings in trade flows he’s experienced in his 30-year career.
This time last year, Chinese demand for Canadian grains was so strong that there weren’t enough 30,000-tonne Panamax ships to carry it all from the company’s export elevators at the Hamilton-Oshawa Port Authority, through the St. Lawrence River and on to China.
For the first time, Bredin was forced to hire an additional series of smaller 25,000-tonne ocean-going vessels. That freight option was “more expensive, but was the only one available,” given the enormous demand, he said. “We weren’t the only ones who did that. Anyone shipping out of Ontario was doing the same thing. It was very good for Canada.”
That to me is the major impact of these trade wars: lost opportunity
Ken Ball, senior commodities futures analyst, PI Financial Corp.
The good times wouldn’t last. Purchases of Canadian soybeans fell off a cliff in the first week of October just as farmers were heading into the fields to harvest the crop.
By March, China had stripped Richardson International’s and Viterra Inc.’s canola export permits, citing pest concerns. Soon after, it halted all purchases of the Canadian crop in what many viewed as retaliation for the arrest of Huawei chief financial officer Meng Wanzhou in Vancouver.
Today, the grain elevator in Hamilton is at a standstill and companies such as Richardson International have been left to hunt for buyers in alternate markets like Bangladesh, though none have been enough to replace China’s enormous demand. Canola futures, which had been at $12 a bushel last spring — the highest in five years — fell to a low of $9.75 at the end of April before ticking up to a current $10.20.
“This is really the first time we’ve seen political influence of this magnitude,” Bredin said. “I can’t think of anything political in our history that has affected grain flows like this. It’s very large in size.”
Though agriculture has always been on the front lines of trade disputes, rarely has it been targeted with as much zeal as in the current battles between the U.S. and its trading partners, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, a non-profit think tank in Washington, D.C.
Agriculture was a flashpoint in the often-fraught negotiations to revamp the North American Free Trade Agreement (NAFTA), as U.S. President Donald Trump zeroed in on Canada’s system of dairy supply management and accused the country of treating American farmers “very poorly for a very long period of time.”
Agriculture is also emerging as an early stumbling block in upcoming trade talks between the U.S. and the European Union, since the latter refuses to include agricultural market access, a key demand made by the U.S., in the negotiations.
And it has been a central battleground of the current U.S.-China trade war, with Beijing issuing an extraordinary order last week to halt all purchases of U.S. agriculture products.
“That edict was very severe and I don’t think we’ve seen anything like it in the post-War period,” Hufbauer said. “This is a very, very unusual time.”
One of the reasons agriculture is so frequently in the crosshairs of trade disputes is that, unlike most industrial sectors, prices are broadly sensitive to changes in supply and demand, Hufbauer noted.
For example, a drop in demand for pork in China affects the price of pork in Mexico, too. Similarly, the interconnectedness of uses and markets means a drop in soybean prices immediately impacts the prices of other oilseeds such as canola.
This is a very, very unusual time
Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics
“It gives a magnified effect in terms of the amount of pain delivered when purchases are cut back,” Hufbauer said. “It’s an easy hit to your enemy. And if a country has stockpiled to an extent, it can also insulate some of its own domestic consumers from the pain.”
Despite its relatively limited importance to the overall economy — agriculture accounts for 1.4 per cent of Canadian gross domestic product and a little less than three per cent of U.S. GDP — the sector is particularly politically sensitive, in part because of the space it occupies in the public imagination.
“The historical memory of the importance of the family farm is massive,” said Robert Wolfe, professor emeritus at Queen’s University in Kingston, Ont., who has studied and written about trade policy for decades. “People have no idea what goes on at the family farm today, but they can easily be sold ideas about it. And the lobbying power of the agricultural sector is immense.”
Sentimental ideas about farming, as well as concerns about food security and rural employment are also why agriculture remains one of the most protected sectors globally, said Peter Ungphakorn, a journalist and former World Trade Organization secretariat official.
Agriculture, at the behest of U.S. Congress, was left out of the post-Second World War push to lower tariffs in many industries, and wasn’t addressed in any real way until the Uruguay round, the multilateral negotiation that began in 1986 and, ultimately, formed the World Trade Organization.
Everyone’s protecting agriculture
Peter Ungphakorn, journalist and former World Trade Organization secretariat official
Though import quotas and bans were eventually converted to tariffs — an early step toward liberalization — progress has been slow ever since, although some standalone agreements have been forged.
“Everyone’s protecting agriculture,” Ungphakorn said, including the U.S., where producers of sugar, cotton and other commodities enjoy high levels of protection that safeguard pricing. “Even though the U.S. was advancing a high degree of liberalization in the Uruguay round, everyone knew domestic politics in the U.S. wouldn’t allow it.”
Back at the Richardson International grain elevator, Stone lands a price of $9.60 a bushel for his fall canola — barely enough to turn a profit. His wheat crop is unlikely to get more than a break-even price and he has been sitting on 1,000 tonnes of lentils in hopes that the market will recover.
He takes the canola offer, if only to maintain cash flow and keep things moving at Stone Farms.
“It’s a compromise, but it’s the best I can do,” he said. “We have no illusions about having a fantastic outcome this year. If nothing else goes wrong, we might make our costs or have a bit of a loss.”
Despite the upheaval, Stone remains upbeat.
“I’m an optimist,” he said. “You have to be in this business.”
Financial Post
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