If only it was true. According to today’s competition mantra, as long as we’re more efficient, productive and low cost than anyone else, the future is ours, both as individual farmers and as Canadian agriculture as a whole.
Instead, it’s becoming clearer that getting competitive isn’t enough. For most of us, in fact, it won’t even be the hard part.
David Sparling is succinct. “Being competitive does not necessarily mean being profitable,” he says. Sparling bases that on the new analysis of Canada’s farm sector he’s done for the Canadian Agricultural Policy Institute, an independent, think tank established in 2004 by the federal government. CAPI is a who’s who of the Canadian agri-food industry, and it’s worth watching because it lays out directions that Ottawa tends to follow.
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For the majority of Canadian farms — especially smaller farms — being competitive won’t be anywhere near enough to keep them healthy through the coming decade, says Sparling, who is also ag biz professor at the University of Western Ontario’s Ivey School of Business, one of the top-ranked business schools in the country.
Simply put, even at high commodity prices, there isn’t enough cash margin to pay for machinery, land and management.
Survival is going to take growth, plus even more focus on how to escape the race to the bottom that sooner or later dominates every commodity market. In other words, farmers have to keep differentiating their output, and so does Canada.
These may not be words we want to hear. It’s easier not to worry about the end markets and end uses of our production. But it looks like it will also be short sighted.
The pressures won’t be restricted to small farms, although small farms do have the most to fear, especially in the near term.
“There are significant economies of scale in farming, and most small farms in Canada are not profitable,” Sparling says. “Since the vast majority of farms in Canada are small — selling less than $250,000 per year — even being highly competitive on a national basis will not fix Canada’s farm income problems. The reality is that under almost any competitive scenario, prices will be too low for small-scale farms to earn reasonable incomes from the market.”
Sparling feels until now Canada has competed primarily as a low-cost agriculture producer. Advantages including an abundance of relatively low-priced land, a climate conducive to growing high-quality crops and livestock, and good genetics have given Canadian farmers a competitive edge in the global marketplace. A low Canadian dollar has helped too, as has the willingness of governments to support farm incomes when prices dropped below cost of production.
Now, the world is different. Our dollar is strong. Government support is ebbing. Transportation is costly, and regulations tie our hands.
Are we competitive now?
How competitive are we today? It turns out this isn’t an easy question to answer. Sparling points out that farm competitiveness depends on many factors, including the size of the farm, price of inputs, amount of debt, use of capital and fixed assets, use of technology, and various aspects of management.
This difference is easily seen in the 2009 USDA report,Consequences of Higher Input Costs and Wheat Prices for US Wheat Producersby Mir Ali and Gary Vocke. The authors used USDA data to categorize wheat growers as either low-, mid-, or high-cost producers. Then they investigated their cost to grow an acre of wheat, which in 2008 ranged from an average $211 for the low-cost producers to $435 for the high-cost producers.
Ali and Vocke then found it cost $4 per bushel for low-cost producers to grow wheat compared to $5.63 per bushel for mid-cost producers. High-cost producers came in at a whopping $9.41.
Crucially, they also found low-cost producers actually got higher yields, producing an average 6.5 bushels more per acre than the high-cost group. So the high-cost producers weren’t being rewarded with higher production, as you (and they) might have expected.
It all means that in spite of the relatively high grain prices in 2008, 10 per cent of U.S. wheat growers still didn’t cover their production costs.
In such an environment, it’s hard to know how to establish whether an individual Canadian farm is competitive. If you can outperform the high-cost producers in the U.S. study, does that make you good enough? Or do you have to outperform the low-cost producers?
One serious obstacle to improving the global competitiveness of Canadian farmers may actually be that no one knows what competitiveness actually looks like. For years, farmers have been told to know their costs, and while this helps profitability in the short term, it doesn’t on its own tell us whether or not we can compete with Brazil or Russia.
A World Of Uncertainty
Ideally, we should know what it costs European, U.S., Australian, Argentinian, Pakistani, FSU, and even Chinese farmers to produce the same commodities that we produce. We’d want to know how our transportation and delivery costs compare too, and which of us can offer the best deal to the end-user.
Such information simply doesn’t exist. When I asked Gary Vocke, lead analyst for the USDA Economic Research Service’s wheat market research program, his reply was clear. “I don’t have any information about international comparisons,” Vocke said. “Nor do I know who to ask.”
The UN Food and Agricultural Organization has sales data for ag commodities around the world but doesn’t track production costs. Nor did I get answers when I queried USDA agricultural officers in the nine major wheat-producing countries outside North America.
It all means that while Canadian farmers are continually being told they must be competitive, we can have no clear idea where the goalposts are.
Can we compete on quality?
“Competitiveness isn’t just based on price,” says Sparling. “Quality, safeness, value, and reliability of delivery are all factors which may prompt a country to pay a higher price for Canadian agricultural commodities. While it is important to cut costs, we do not want to be just a low-cost seller of raw commodities. It is important to add value to those commodities here and sell a higher-value product.”
Sparling sees a number of strategies that could help Canada support its farmers. “We must build a Canadian brand for our commodities through on-time delivery of high-quality, consistent, safe production,” Sparling says, and adds, “We have a very diverse agriculture across Canada with lots of potential for growing specialty crops that we need to find markets for.”
Again, this may be advice that won’t sit well with many Canadian farmers, who hear more often about such initiatives than they see successes. Even so, Sparling believes we must forge ahead.
Some of the challenge is political. “Over half of Canadian agri-food exports go to the United States,” Sparling says. “Given the proximity of this big market we need to continue to improve access and reduce limitations on trade.”
Yet much of the challenge is basic marketing, he says. “We must figure out the Asian market. As their economies continue to grow and the people become wealthier, this area offers the most potential to grow our exports. We must develop relationships with these countries. But it takes a lot of time and effort to build these relationships.”
Who will provide the money, personnel and expertise needed to do this work?
Sparling points to commodity boards. “Commodity boards are best suited to build the supply chains and to find the new markets,” he says. “Companies are less focused on the entire value chain, so are not as effective. Governments simply cannot do the development work that needs to be done.
“Agriculture is now a global industry,” Sparling says. “To have a successful and viable agriculture industry, Canadian farmers have to compete.”CG
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Here come the Russians
It’s hard to remember now that it was only a couple decades ago that the USSR imported an average 35 mmt of grain per year. In 2009 the former Soviet Union countries (FSU) exported 50 mmt. The turnaround was 85 mmt, equal to one-third of global grain trade. And as the saying goes, you ain’t seen nothing yet.
William Liefert, senior agricultural economist with the USDA, says the free market gets much of the credit for the increase in FSU grain exports. Under the USSR, grain farmers served the highly subsidized livestock sector. Now, those subsidies have been chopped and livestock production has been cut in half, leaving grain farmers to sink or swim… and more of them are learning to swim.
“Since 2000, crop yields have also greatly improved as business enterprises outside the traditional agriculture sector have been attracted to the industry by the potential big money to be earned by exporting grain to the rest of the world,” Liefert says. “These new operators tend to be large, vertically integrated enterprises which not only grow the crops, but are also involved in processing, transportation, distribution and even export of the grains. These operators have brought investment, new technology, and superior management to FSU agriculture.”
FSU governments are also encouraging increased grain exports. Russia, Ukraine and Kazakhstan have each created state-owned grain companies to promote wheat and other grain exports. A big part of their role is to improve export infrastructure, thereby reducing the cost of exporting, and increasing their reliability.”
Now, the FSU is on track to replace the U.S. as the world’s top wheat exporter, Liefert says. He predicts Russia, Ukraine, and Kazakhstan wheat exports will jump 50 per cent by 2019, while the U.S., EU, Canada, and Argentina will all lose shares of the world wheat exports.
