agriculture and
DESCRIPTION
Agriculture and. Agriculture et. Agri-Food Canada. Agroalimentaire Canada. BACKGROUND PAPER ON STRUCTURE OF CANADIAN AGRI-FOOD SECTOR Presentation to Policy Workshop February 15, 2001. Prepared by: M. Zafiriou and D. Smith, AAFC. OUTLINE OF BACKGROUND PAPER. I. INTRODUCTION - PowerPoint PPT PresentationTRANSCRIPT
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Agriculture andAgri-Food Canada
Agriculture etAgroalimentaire Canada
BACKGROUND PAPER ON
STRUCTURE OF CANADIAN AGRI-
FOOD SECTOR
Presentation to Policy Workshop
February 15, 2001
Prepared by: M. Zafiriou and D. Smith, AAFC
2
OUTLINE OF BACKGROUND PAPER
I. INTRODUCTIONII.ECONOMIC AND POLICY ENVIRONMENTIII. TRADE POLICY ENVIRONMENT
Agri-food Sector TradeIV.EMERGING ISSUES AFFECTING CONSUMER ATTITUDESV. AGRICULTURE SAFETY NET PROGRAMSVI. STRUCTURE OF THE AGRI-FOOD SECTOR
OverviewFarm Inputs SectorPrimary Sector
VII. FARM FINANCIAL CONDITIONS AND FARM HOUSEHOLDSVIII. CONCENTRATION AND PROFITABILITY IN THE AGRI-FOOD SECTORIX. SUMMARY
3
I. INTRODUCTION
•Before analyzing the impact NAFTA has had on the structure of the Canadian agri-food sector, it is important to have a clear understanding of the structure as it currently exists and the pressures that have led to its recent changes.
•The purpose of this report is to present background information and data describing the current structure of the Canadian agrifood sector. The report will start with a discussion of the current economic, policy and trade environment that are impacting the sector before presenting a detailed overview of the structure of the various components of the agri-food sector (I.e. farm inputs, farm level, food and beverage processing, food retailing and distribution sectors) and some of the changes that have taken place over the last two decades.
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II. ECONOMIC AND POLICY ENVIRONMENT
5
ECONOMIC AND POLICY ENVIRONMENT
•Canada, like the U.S. has experienced almost a decade of unprecedented economic growth in an environment of low inflation, productivity increases, falling unemployment rates and reasonable interest rates. •After the stagflation of the 1970’s and restrictive monetary policy that brought the North American economy to its knees in 1981, inflation was brought under control. Another recession in 1989 and 1990 resulted in further significant restructuring of the North American economies.• The creation of the knowledge economy and the rapid expansion of computer technology including the more recent spread of the internet and e-commerce contributed to this restructuring and productivity increases. At the same time North American stock markets have boomed resulting in real gains in consumers’ wealth. •Policies aimed at reducing government budgetary deficits in most provinces of Canada and the U.S were succesful during the late 1990’s and now have led to government surpluses. This has resulted in some income tax relief as governments have been able to reduce tax rates and pay down some of the government debt.
•.
6
ECONOMIC AND POLICY ENVIRONMENT -continued
•As recent as last year, deflationary fears haunted world economies. Low commodity prices, which declined from their peak in 1996, contributed to recent farm income problems. Governments responded with increased government support to farmers.
PROSPECTS•Recent increases in energy prices may contribute to inflation in the near term particularly if government policy accommodates these increases. At the same time, an economic slowdown of the American economy appears imminent.
•The Canadian economy may slump in 2001 and 2002. The extent to which this is a soft landing or a hard landing will depend to a great extent on the policies of the government and the course taken by the United States.
•Commodity prices (wheat and canola) over the short term are expected to remain weak, with some strengthening expected in 2002. Livestock prices, however, have strengthened and will boost farm incomes until next year, when crop prices rebound.
7
-3
-2
-1
0
1
2
3
4
5
6
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000* 2002**
Figure 1 : Annual % Change in Real GDP:
Figure 2: Annual % Change in Nominal GDP for Selected Markets
-5
5
15
25
35
45
55
65
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
ASIA JAPAN China EU NAFTA
•Between 1980-1999 Canada averaged an average annual increase in real GDP of roughly 2.5%
•Preliminary estimates for 2000 suggest real GDP will increase by 4.8%. Forecasts for 2001 and 2002 predict increases of 3.5% and 3.0% respectively.
•The Canadian economy is dependant on exports. As a result increases in income among Canada’s trading partners will have an impact on the demand for goods that Canada exports.
•Asia is the only country that currently has higher growth rates than North America.
•In 1999 Japan edged back into positive GDP growth but is forecast to experience more meager growth in the near future.
Real Growth in GDP, Canada and Other Countries
Source: Statistics Canada and FAO
8
Figure 3: CPI and Core Inflation in Canada
0
1
2
3
4
5
6
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000*
2001**
2002**
%
CPI Core CPI
•The Bank of Canada has a target range for inflation between 1%-3%.
•Since 1992, the core inflation has remained within this band, and has gravitated towards the midpoint of 1.5%.
•Nominal inflation spiked up in 2000 mainly due to increases in energy prices.
Source: Bank of Canada
*Core Inflation is measured by CPI excluding food and energy (1992 = 100).
CPI and Core Inflation for Canada
9
Figure 4: Commodity Price Indexes
60
70
80
90
100
110
120
130
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Excluding energy Energy Food
0
100
200
300
400
500
600
19
92
$/t
on
ne
W heat Canola
Figure 5: Wheat and Canola
•Commodity prices for food were stable throughout the 1980’s, but declined in the past few years.
•Energy prices which have remained below the 1980’s average started to
increase again in 1999-2000.
•The price of Canada’s major agricultural export commodities (wheat and canola) have declined in real terms since 1980.
•Projections show wheat prices remaining constant over the medium term with an increase expected in the price of canola.
Commodity Prices
Source: AAFC, Medium Term Baseline, October 2000.
Source: Bank of Canada
10
Figure 6: Federal and Provincial Government Deficit/Surplus as a % of GDP
-10
-8
-6
-4
-2
0
2
4
1987 1989 1991 1993 1995 1997 1999
Federal Provincial
•Both the Federal and Provincial Governments have attained budget surpluses in 1999-2000.
•This is a large turnaround from 1992 when the combined federal and provincial deficits reached 8.9% of GDP.
Federal and Provincial Government Surplus/Deficit
Source: Statistics Canada, National Accounts Basis.
11
Figure 7: Exchange Rates
0
0.5
1
1.5
2
2.5
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
US UK GERMANY JAPAN (YEN*100)
Figure 8: 91 Day Treasury Bill Rate
02
46
81012
1416
1820
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000*
2002**
US Canada
•The Benchmark currencies have, and continue to appreciate against the Canadian dollar.
•This has aided Canadian exporters.
•Interest Rates in Canada have been below those of the US for a good part of the 1990’s.
•This has contributed to the depreciation of the Canadian dollar and the continued Outflow of FDI.
Exchange Rates and Interest Rates
Source: Bank of Canada
12
Figure 9: Money Supply Growth in Canada
-2
0
2
4
6
8
10
12
14
16
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Annu
al Perc
entag
e Cha
nge
M1+ M2+
•The money supply has increased moderately over the 1990’s.
•The growth in long-term and fixed deposits has started to increase in 1999 after falling in 1998.
•M1+ and M2+ have grown an average of 6.2% and 6% annually respectively since
1987.
Source: Bank of Canada
Money Supply Growth
13
III.TRADE POLICY ENVIRONMENT
14
TRADE POLICY ENVIRONMENT
•Significant improvements have been made in recent trade policy developments. Canada has benefitted from the Canada-U.S. Free Trade Agreement signed in 1988 which lowered tariffs and removed barriers to trade between Canada and the United States, Canada’s most important trading partner. •The Dispute Settlement Mechanism which was introduced at this time has played a key role in arbitrating trade disputes before sanctions are enforced.•NAFTA further extended the trading area to include Mexico. Other free trade agreements have been signed between Canada and Chile and Canada and Israel.•The signing of the World Trade Agreement in late 1994, was perhaps the most significant development on the trade front. It introduced further trade disciplines and improved market access and attempted to bring trade subsidy wars to an end. •While new rounds of trade talks by the WTO have been hampered by political lobbying, prospects for gains from future talks are postive and will continue to progress.
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* 1) OECD-24 excludes most recent member countries: Czech Republic, Hungary, Korea, Mexico and Poland. 2) OECD-24 PSE in US$. Individual country PSE in local currency.
Source: Agricultural Policies in OECD Countries: Monitoring and Evaluation 2000.
PSE Level Index for 1999
0
20
40
60
80
100
120
140
Australia Canada EU Japan N. Zealand US OECD-24*
Index 1986-1988 = 100
Index 1999 •Canada has been actively reducing it’s PSE levels to comply with the Agreement on Agriculture.
•Only New Zealand has reduced its PSE from the 1986-88 level more than Canada.
•The US & EU have increased their PSE levels above that set out by the Agreement on Agriculture.
Producer Subsidy Equivalents, Canada and World
Figure 10
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•AGRI-FOOD SECTOR TRADE
17
Figure 11: Canada’s World Agri-Food Market Share
0
1
2
3
4
5
1980 1984 1988 1992 1996
Percentage
World Share World Share Minus Wheat
Source: FAO Database.
•Canada has retained a steady 3-4% of the World Agri-food Market.
•Canada has diversified its agri-food exports. Wheat, which comprised roughly 1/2 of Canada’s total share in the 1980’s, now accounts for about 1/5.
Canada’s Share of World Agri-food Trade
18
Figure 12: Canada's Merchandise Trade Balance
0
10
20
30
40
50
1992 1993 1994 1995 1996 1997 1998 1999
Billion $
Total merchandise Agri-food
0
5
10
15
20
25
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Bulk
Intermediate
Consumer-oriented
Total
Billions of $ Figure 13:Percentage of
Canadian Merchandise
Exports
1234567
910
8
%
0
•The Agri-food sector is a stable and positive contributor to Canada’s Merchandise trade balance.
•The composition of agri-food exports has been increasingly consumer-oriented.
•This is driven by increased consumer-oriented exports to the US.
Canada’s Merchandise Trade Balance and Agri-food Trade
Source: Statistics Canada, Merchandise Trade Database.
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Major Export Destinations in 1999
NAFTA Japan EU China Rest of the World
Agri-Food 63% 9% 6% 3% 19%
Total Trade 87% 2% 5% 1% 5%
Major Export Destinations in 1999
NAFTA Japan EU China Rest of the World
Agri-Food 63% 9% 6% 3% 19%
Total Trade 87% 2% 5% 1% 5%
Total & Agrifood Trade with NAFTA and the ROW
0
10
20
30
40
50
60
70
80
90
100
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
NA Total ROW Total NA Agri-food ROW Agri-food
% of Trade
•Canada’s trade has become increasingly dependant on the NAFTA market.
•However Canada’s Agri-food trade is not as dependant, but follows the same trend of closer integration with the US and Mexico.
•The table below shows that exports to NAFTA countries account for the vast majority of Canada’s total and Agri-food exports
Figure 14
Importance of Trade with NAFTA Countries
Source: Statistics Canada Merchandise Trade Database.
20
Figure 15:Export Intensity*
05
101520253035404550
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Percentage
Agriculture Exports/Farm Cash Receipts
Food Exports/Value of Shipments - Food Processing Industries
Beverage Exports/Value of Shipments - Beverage Processing Industries
Source: Strategis Trade Data, Statistics Canada CANSIM Matrices 9550 and 9551, Farm Income, Financial Conditions and Government Assistance Databook, March 1999.
•Because Canada has a small domestic market, it is dependent on trade.
•Growth in the agri-food sector has been boosted by increased exports.
•While the agriculture sector has always been export oriented, the increasing dependence of the food and beverage processing sector on exports has contributed to its growth and increased the share of Canadian exports that are value-added.
* exports as a share of domestic production
Canadian Agri-food Exports as a Share of Production
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Value-added Exports are Increasing
• Processed goods now account for over 50% of total agri-food exports and are expected to continue to grow in proportion.
• The Canadian Agricultural Marketing Council (CAMC) has set a target of 60% processed, 40% bulk by 2005.
• Most value-added exports are destined for the U.S.
• Non-NAFTA exports are largely primary commodities.
6048 40
4052 60
0
20
40
60
80
100
1996 1999 2005
%
Primary Processed
Figure 16: Bulk and Processed Share of Exports
Source: Statistics Canada, Merchandise Trade Database
22
IV. EMERGING ISSUES AFFECTING CONSUMERS’ ATTITUDES
23
% Figure 17: Citizens’ Concerns (Percent High Priority)
Farmers and Society
94 89 80 72 68 67 62
0
20
40
60
80
100
Health Care Education Environment Debt Food Safety Ag Issues Farm Income
Source: EKOS April 2000
0 20 40 60 80 100
63%
46%
49%
53%
31%
The health and safety of Canada's food supply
Environmental concerns related to agricultural practices
Policies that affect the future of rural communities
The future of the family farm
International trade negotiations
•Food Safety, Agricultural Issues and Farm Income are all ranked as high concern areas for Canadians.
•However, the environment and health rank even higher.
•In relation to the agri-food system, concern over the safety of the food supply overrides concern over environmental damage done by agriculture.
•This implies that Canadians, despite wanting a cleaner environment will not want such policies to compromise the safety of the food system.
Figure 18: Citizens’ Concerns Related to the Agri-food Sector
24
Environmental Indicators
• Progress is being made in water erosion as slight improvements have been seen in the share of Canadian cropland that has tolerable risk of water erosion (Figure 19 ).
• In spite of the Kyoto Agreement, agriculture continues to contribute to nitrous oxide emissions (Figure 20).
• Pressure will continue to build for agriculture to become more environmentally responsible, with Farm “Green” plans being encouraged and possibly regulated in cross compliance with other agricultural support.
• International and national agreements such as the UN Framework Convention on Climate Change, the UN Convention of Biodiversity and the Montreal Protocol (Ozone) have contributed to progress on this front.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1981 1991 1996
Figure 19: Percent of Cropland with Tolerable Risk of Water Erosion
05
10152025303540
1981 1986 1991 1996
Figure 20: Agricultural Emissions of Nitrous Oxide
Mt of cde
Source: Environmental Indicators Project.
25
V. AGRICULTURE SAFETY NET PROGRAMS
26
CANADA’S AGRICULTURAL SAFETY NET PROGRAMS
•A significant change in the manner in which agricultural support programs were administered came in 1991 with the introduction of the Farm Income Protection Act. Under this legislation, a whole farm approach was introduced, in an attempt to decouple farm income support programs from production.
•Key Principles of these programs include equity, cost-sharing, production and market neutral, trade neutral, environmentally sustainable, encouraging adaptation and adjustment with minimum overlap and duplication of purpose.
•The Net Income Stabilization Account (NISA) is one component of the safety net system which aims to stabilize farm income (eligible net sales) from agricultural production. During good years, farmers can contribute to NISA accounts, matched dollar for dollar by the government, which can then be withdrawn when income falls below a three year average or a minimum family income level.
•The second component includes Crop Insurance in which producers, provincial and federal governments contribute equally to insure production against drought and weather related disasters.
•The third component includes Companion Programs, which allow provinces some discretion to introduce programs which address provincial differences in the structure of their agriculture industry.
•Through the negotiated Safety Net Framework, federal money is allocated to the provinces based on provincial shares of national farm cash receipts.Safety net programs must be cost-shared with the provinces on a 60:40 basisi (federal: provincial).
27
AGRICULTURE PROGRAMS
RECENT CHANGES• In response to a decline in commodity prices and fears of a farm income crisis in late 1998, a new national program was introduced called the Agriculture Income Disaster Assistance (AIDA) program. This program was similar to the Alberta Farm Income Disaster Program (FIDP) and complied with WTO rules for disaster insurance. Under this program, farmers would be compensated up to 70% of their previous (three year) average gross margin if current year gross margin fell below this average. ($1.2 billion allocated beginning in 1998)
•Initially, this program was introduced as a temporary two year program, but has since been given another three years of funding under a new name, Canadian Farm Income Program (CFIP), with some refinements and potential for longer term permanence. ($1.3 billion allocated in July 2000)
28
Farm Market Income and Direct Government Support, Canada, 1989-2004
Source:Statistics Canada and Agriculture and Agri-Food Canada.
0
2
4
6
8
10
12
1980 1983 1986 1989 1992 1995 1998 2001* 2004*
Millions of $
* 2000 to 2004 are forecasts, as of October 1999.
Figure 20: Market Income and Direct Program Payments
•Aggregate net cash income hasbeen volatile since the mid 1980’s.
•Farm market income rose between 1991 and 1998 at the same time that program payments declined.
•However, with the drop in farm market incomes in 1998 and 1999, new program money will boost net cash income for farmers, particularly in 2000 and 2001.
Net Cash Income
Farm Market Income
Direct Program Payments
29
VI. STRUCTURE OF THE AGRI-FOOD SECTOR
30
•Overview
31
Agri-food System Overview
Processed Imports*$10.8 B
For 30.5 million consumersfood expenditures represented 13.1%
of total disposable income in 1999
Primary ProductionPurchased
Inputs$ 14.0 B
MarketRevenues$ 28.5 B
Non-food$ 3.0 B
Food$ 45.0 B
Beverage$ 8.0 B
Non-food$ 9.5 B
Retail Food & Liquor$ 64.5 B
Food Services$ 35.9 B
* Processed Imports/Exports include a small component of non-food products consisting mainly of manufactured tobacco
Feed$ 4.2 B
Processed Products
Processed Exports*$11.4 B
Non-processedImports$5.7 B
Non-processed Exports$10.3 B
Retail and Food Services
1999 Values
Figure 21
Source: AAFC, Portrait of the Agri-food Sector
32
Agri-food GDP growth and share
-8.0
-4.0
0.0
4.0
8.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
8.0
8.2
8.4
8.6
8.8
9.0
Agri-food system share of total GDP Total Economy Growth Agri-Food System Growth
GDP % Growth
Rate
Agri-Food % Share
Note: The Agri-Food System includes the primary agriculture sector and related service industries, food & beverage processing sector, the food & beverage distribution sector (wholesale and retail), and the foodservices sector.
Source: Statistics Canada, CANSIM Matrix 4677.
•Agri-food GDP represented 8.5% of Canadian GDP in 1999.
•The growth in real Agri-food GDP has tracked growth in the Canadian economy over the 1990’s
•Despite declining since 1990, the agri-food sector’s share of Canadian GDP has remained
fairly stable.
Growth in and Importance of Agri-Food Sector, Canada
Figure 22
33*Excludes fish processing.
Agri-food System Share of Total Employment
19991.7%
3.8%
2.8%
87%
5%
Agriculture Food & Beverage Processing*
Retail/Wholesale Food Service
Sectors outside Agri-Food System
•Food Distribution and Food Processing are the largest segments of the Agri-food chain.
•Food Service has declined from 1/4 of the Agri-food GDP in 1990 to 1/5 in 1998. Correspondingly Food Distribution has increased from 1/4 to 30%
•The shares of Agriculture and Food processing GDP have not changed over the 1990’s.
•The Agri-food system employs 1 in 7 Canadians.
•In terms of employment, Food Service is the most important sector employing 5% of all Canadians employed.
•The smallest employer in the agri-food system is processing which employs only 1.7% of Canada’s employed.
Figure 23: Relative Importance of Components of Agri-food Sector
0
10
20
30
40
50
60
70
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Billions
of 1992 $
DistributionFood ServicesFood & Beverage Processing excl. fishAgriculture & Related Services
Figure 24
Source: Statistics Canada, Labour Force Survey
Importance of Components of the Agri-food Sector
Source: Statistics Canada, GDP by Industry.
34
• Farm Inputs Sector
35
Figure 25: Relative Importance of Farm Inputs
Fertilizer7%
Pesticides4%
Seeds& Plants4%
Feed15%
Other Livestock20%
Machinery11%
General39%
Figure 26: Farm Input Price Indexes
80
90
100
110
120
130
140
150
160
1990 1991 1992 1993 1994 1995 1996 1997 1998
(198
6=10
0)
Farm Machinery Fertilizers Feed
•For the average Canadian farm, machinery, fuel, fertilizer and feed are important inputs.
•Expenses on feed, fertilizer, pesticides, fuel and machinery represented 15%,7%,4%, 2% and 11% respectively of overall operating expenses in 1998.
•The prices of feed, fertilizer and farm machinery rose significantly to 1996, but have since declined with the price of commodities.
•Higher prices for fuel, livestock and fertilizer are expected to contribute to higher farm operating expenses in the near future.
Farm Inputs: Importance and Prices
Source: Statistics Canada, Whole Farm Data Base
Source: Statistics Canada, Farm Input Price Indexes.
36
PESTICIDES
• Sales in Canada are about $C1.1 Billion ($810 Million US) representing 3% of the global market.• The industry is fairly concentrated and not particularly competitive, being made up of a small number of
large global firms. Canadian firms and branches generally undertake research to determine local conditions and gain regulatory approval.
• Canada’s higher corporate tax rates and cost of registration in relation to the US, EU and Japan are seen as barriers to the development of the Canadian industry.
• Prices are generally based on what the market in a particular region will bear.• The sector faces competition from new farming practices and biotechnology in the areas of pest and
herb resistant plants. The industry has responded by purchasing seed companies and developing products that work optimally with a specific pesticide.
• The production and distribution chains are in tight vertical relationships, allowing producers to maintain control over formulation processes.
• Additionally, the increased use of patenting has allowed firms to retain monopolies over products, reducing production.
Structure of Farm Inputs Sector
37
FARM MACHINERY
• The farm machinery industry provides large capital equipment like tractors and bailers that farmers will need.
• Canadian shipments of farm machinery stood at $2.6 billion in 1998, value-added at $1.3 billion. The market has declined however, since 1998.
• Canada is a net importer of farm machinery, importing $4.6 billion worth in 1998 compared with exports of $1.1 billion. Imports are the large, high priced items and exports are the smaller, lower-priced items.
• The industry is fairly concentrated with the top two firms (John Deere and New-Holland-Case) controlling 71% of the market.
• In Canada, small, regional, “short-line” producers are dependent upon the dealership networks of the main-line (global) operators for market access. Most short-line producers are centered in Saskatchewan and Manitoba.
• Prices are determined at headquarters, but are adjusted based on what the regional market will bear.
Structure of Farm Input Sector continued
38
FERTILIZER
• The fertilizer industry provides farmers with the nutrients to aid in the production of their crops. • Despite being a small consumer (2% of world nutrient demand) Canada is a net exporter of
fertilizers due to its 40% share of the global potash trade.• Canadian value-of-shipments increased steadily between 1990-1998 posting an average
annual increase of 12% during that time.• Firms generally try to differentiate their products in terms of good will, custom-blending, and
additional services like soil testing.• The industry is currently undergoing a process of consolidation. This raises the fear of anti-
competitive behavior; however Canadian producers have increased their capacity over the 1990’s maintaining a high supply, and the open border with the US allows prices to be set in the continental rather than local market.
• In respect to Potash, the Potash Corporation of Saskatchewan (PCS) is a global player in the potash industry and an industry price setter. Due to an agreement with the US authorities in 1988, PCS has led the industry to retain prices above a certain minimum level.
Structure of Farm Inputs Sector continued
39
FUEL
•Canada is a small consumer of the global fuel market and is a net exporter of fuel and petroleum products.
•The Industry is dominated by a shrinking number of global firms.
•Canadian farmers require a large amount of energy through inputs like pesticides and fertilizers, and through the fuel used for tractors and the heating of barns and buildings.
•Despite a multitude of retailers where fuel can be purchased, there are only a few refiners in Canada. Thus there can and is a large price variance between regions and provinces. In addition, some provinces, such as Alberta with their abundance of oil and oil revenues,subsidize fuel consumption for farmers through rebates and the tax system.
Structure of Farm Inputs Sector continued
40
• Primary Sector
41
Number and Size of Census Farms
Figure 27: Number and Size of Census Farms in Canada
250
260
270
280
290
300
310
320
330
1981 1986 1991 1996
Thousands of Farms
460
480
500
520
540
560
580
600
620
Average Farm Size in Acres*
Number of Farms Average Farm Size (Acres)
*Note: 1 acre=0.4047 hectares
Source: Statistics Canada, Historical Overview of Canadian Agriculture, Census of Agriculture 1996.
•Since 1941, there has been a steady decline in the number of farms as Canadian society has undergone a process of urbanization and industrialization.
• At the same time, consolidation has occurred and with the increase in average farm size, producers are better able to take advantage of economies of scale and scope.
0
5
10
15
20
25
30
35
1931 1941 1951 1961 1971 1981 1986 1991 1996
Figure 28: Farm Population Share•As a result, the farm population has fallen from over one third of the Canadian population in 1931 to 2% in 1996.
%
42
Large
Figure 29: Distribution of Farms by Type, 1999
Supply Managed
13%
Cattle29%
Horticulture6%
Hog3%
Other Types10%
Grains and Oilseed
39%
•Grain and oilseed farms make up the majority of farms in Canada.
•Cattle farms are also important, followed by supply managed (dairy, egg and poultry farms).
•The number of hog farms has declined over time and represented 3% of all farms by 1999.
0100002000030000400005000060000700008000090000
Da
iry
Ca
ttle
Ho
gs
Po
ultry
& E
gg
Gra
in &
Oils
ee
d
Oth
er
Fru
it & V
eg
Figure 30: Change in Distribution of Farms
19711996
Distribution of Farms by Farm Type
Source: FFS 2000.
Source: Census of Agriculture
•Since 1971, there has been an increase in the number of grain and oilseed, cattle, and fruit and vegetable farms.
43
Figure 31: Distribution of Farms by Typology 1999
Low Income7%
Lifestyle8%
Pension23%
Business-Focussed
62%
•Pension Farms are those farms whose oldest operator (FFS) was from 60 to 64 years old and receiving pension income (CPP/QPP) and all farms whose main operator is 65 years of age or older.These farms accounted for 23% of farms and produced 15% of farm sales.
•Lifestyle Farms are those farms with gross farm sales $10,000 to $49,999 and off-farm income of $50,000 and over. These farms represented 8% of farms and accounted for only 1% of sales.
•Low Income Farms are those farms with gross sales of $10,000 to $49,999 and total family income below $20,000. These farms represented 7% of farms and accounted for 1% of sales.
•Business Focussed Farms are those farms with any gross sales who do not fit into the above categories. These include small, medium, large and very large farms who are in the trying to make a go of farming as a business. They represented 62% of farms but accounted for 83% of sales.
Source: Statistics Canada, Whole Farm Database.
Distribution of Farms and Share of Sales by Farm Typology
Figure 32: Contribution to Sales by Farm Typology 1999
Business-Focussed
83%
Lifestyle1%
Pension15%
Low Income
1%
44
VII. FARM FINANCIAL CONDITIONS AND FARM HOUSEHOLDS
45
Grain Price Trends, 1980 - 2005*
0
50
100
150
200
250
300
350
1980 1985 1990 1995 2000* 2005*
Wheat Durum Corn
Source: AAFC Medium Term Baseline, October1999.
C$/tonne
Forecast is for 2001-2005
•Grain prices declined dramatically after their peaks of 1996 as world stocks increased.
•Prices appear to have bottomed outand are regaining value into 2001.
•Projections are for some slight strengthening over the medium term.
Figure 33: Grain Prices
46
Livestock Price Trends, 1971 - 2003*
0
40
80
120
160
200
1971 1975 1979 1983 1987 1991 1995 1999 2003*
Slaughter hogs (ckg dressed weight) Slaughter steer (cwt live weight)
Source: AAFC, Medium Term Baseline, October 1999 and Livestock Market Review (MISB).
$Forecast as of2001
•Livestock prices, particularly forhogs, plummeted in late 1998 in response to oversupply and reduced Asian demand.
•However, hog prices rebounded in 1999and are expected to weaken again as the•cycle turns around, with increased supplies.
•Cattle prices have strengthened since 1998 and are projected to stabilize before weakening in 2003.
Figure 34: Livestock Prices
47
90
590
1090
1590
2090
2590
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Beef Pork
Figure 36: Farm Output
0
2
4
6
8
10
12
14
16
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Special Crops All Wheat Canola
Figure 35: Area HarvestedMha
Kt
Farmers have been adjusting in the face of falling commodity prices.
•Facing decreased grain prices and higher transportation costs since the Crow Rate subsidy was terminated in 1996, Prairie farmers in particular have been substituting specialty high value crops like ginseng and mustard for traditional crops.
•The declining commodity prices and removal of the transportation subsidy have been a boon to livestock producers.
•Decreasing costs of feed and rising prices have led to increased livestock production.
•This expansion in supply is expected to continue at least over the Medium term.
Source: Statistics Canada, Whole Farm Data Base and
Medium Term Baseline, October 2000.
48
Farm Financial Conditions
(Unincorporated & Incorporated Farms)
0
5
10
15
20
25
30
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000*
* 2000 is forecast based on AAFC income forecast.
Source: Statistics Canada, Whole Farm Data Base.
Thousands of $
17,74819,052
20,522 20,727
23,56123,973
24,07023,578
23,98922,758
•Weaker grain and hog pricesin 1998 and 1999 translated into lower average net operating income for farms over this period.
•For the year 2000 and 2001, average net operating income is expected to be up because of increased government support to farmers and strengthin the cattle, hog and dairy sectors.
Figure 37: Average Net Operating Income of Farms
49
Figure 38: Average Net Worth per Farm by Province, 1999
• Average net worth for the average Canadian farm was $732,900 in 1999.
• British Columbia farms had the highest average net worth per farm (over $900,000) which reflects the high land values.
• Prince Edward Island farms also had high average net worth reflecting the large number of potato farms.
• Newfoundland farms reported the lowest average net worth at $489,300 per farm.
0 200,000 400,000 600,000 800,000 1,000,000
Canada
BC
AB
SK
MB
ON
QC
NB
NS
PEI
NF
Average per Farm ($)
489,300
895,400
764,700
651,600
714,700
838,600
626,600
551,900
841,900
917,100
732,900
Farm Financial Conditions
50
Figure 39: Average Net Worth per Farm by Farm Type, 1999
• Poultry and egg farms had the highest net worth at $1.4 million in 1999.
• Dairy farms and potato farms also showed a high net worth.
• Beef farms and fruit and vegetable farms had the lowest net worth in 1999.
0 500,000 1,000,000 1,500,000
Beef
Fruit & Vegetable
Grain and Oilseed
Greenhouse and Nursery
All Farm Types
Hog
Potato
Dairy
Poultry & Egg
Average per Farm ($)
733,000
1,413,000
1,245,000
925,000
668,000
597,000
1,285,000
585,000
687,000
Source: FFS 2000
Farm Financial Conditions
51
734,000
777,200
896,000
163,100
130,800
113,500
0 250,000 500,000 750,000 1,000,000
1995
1997
1999
Assets Liabilities
Figure 40: Average Farm Assets and Liabilities per Farm,
1995, 1997, 1999
• Average farm assets increased steadily since 1995 reaching $896,000 per farm in 1999 and increasing 15.5% since 1997.
• Average farm liabilities also climbed steadily since 1995.
• Because farm assets grew more than liabilities, average net worth per farm is also up significantly in 1999.
Average per Farm ($)
Farm Financial Conditions
Source: FFS 2000
52
Figure 41: Percent of Large Farms* with High Debt Levels by Farm Type, 1997 and
1999
• The percent of large farms reporting high debt-to-assets (over 50%) increased for all farm types except beef and potato.
• Significantly more greenhouse and nursery, grain and oilseed and hog farms reported high debt-to-asset ratios.
0 5 10 15 20 25
Beef
Dairy
Grain and Oilseed
Poultry & Egg
Fruit & Vegetable
Potato
Greenhouse &Nursery
Hog
1999
1997
Percent of Farms (%)
Farm Financial Conditions
Source: FFS 2000
53
1997 1999
Dairy 1.2 0.9
Poultry and Egg 1.5 1.5
Grain & Oilseed 1.9 4.7
Beef 4.4 3.7
Fruit & Vegetable 9.4 7.9
Potato 8.9 6.0
Greenhouse & Nursery 4.7 3.8
Hog 3.8 12.9
All Farm Types 2.7 4.2
Figure 42: Vulnerable Farms by Farm Type, 1997 and 1999
• Vulnerable farms are those farms with debt to asset ratios over .5 and negative net operating income.
• Since 1997, a dramatically larger share of large grain and oilseed and hog farms have become vulnerable.
• Large dairy farms, followed by poultry and egg farms, have the lowest percentage of farms in the vulnerable category.
* Only large farms are considered ($100,000 plus farm revenues) because of their reliance on farm income. Small farms depend to a greater extent on off-farm income
Source: FFS 2000
Farm Financial Conditions
54
* Net capital investment is gross capital investment minus capital sales.
Figure 43 : Net Capital Investment* as a Percent of Assets
by Farm Type, 1999
• Debt levels for hog and greenhouse and nursery farms may have risen in 1999 due to the heavy capital investment that has been taking place.
• Greenhouse and nursery farms followed by hog farms and potato farms reported the highest net capital investment as a percent of assets that year.
• Beef farms and grain and oilseed farms reported the lowest net capital investment as a percent of assets.
2.7
3.2
4.2
4.5
4.7
5.0
5.1
6.2
0 2 4 6 8 10
Beef
Grain & Oilseed
Dairy
Poultry & Egg
Fruit & Vegetable
Potato
Hog
Greenhouse andNursery
Canadian Average3.6%
Average per Farm (%)
Farm Financial Conditions
Source: FFS 2000
55
Small Farms Large Farms
0
20
40
60
80
100
1993 1995 1997 1999*
Net Farm Operating Income Off-Farm Income
Thousands of $
0
20
40
60
80
100
1993 1995 1997 1999*
Thousands of $
*Estimated.
Source: Statistics Canada, Whole Farm Database.
Figure 44:Average Farm Family Income for Small and Large Farms, 1993 to 2000*
Farm Households
•Farm families on small farms (revenues under $100,000) rely more on off-farm income than do families on large farms (revenues of $100,000 and over).•Less than 10% of family income comes from the farm for small families and over 50% for large farms.•In 1999 and 2000, the relative strength of the non-farm economy has resulted in higher off-farmincome for all farm families, regardless of size.
56
$30,000
$40,000
$50,000
$60,000
$70,000
1985 1991 1993 1995 1996 1997 1998
Farm Rural Non-farm Urban Non-farm Total Non-farm
Figure 45:Average Real* Income of Farm and Non-farm Families, 1996 to 1998
* 1998 constant dollars.** “Rural” families refers to families residing in areas with population under 1000 and where population density is under 400 per sq. kilometer.Source: Statistics Canada, Survey of Labour and Income Dynamics.
Farm Households
•Farm households have historically receivedlower family income than their urban non-farm counterparts, but higher than rural non-farm families.
•However, over the period 1985 to 1995, farm income improved significantly in real terms and farm family income approached that of urban non-farm families.
•Since that time, however, farm family income has not made the same gains that urban non-farm families, or rural families, for that matter, have made.
•By 1998, average farm family income was below that of both rural and urban non-farm families.
57*“Urban” families refers to families residing in towns or cities with population over 1000 and areas where population density is over 400 per sq. kilometer.
Source: Statistics Canada, Survey of Labour and Income Dynamics.
A more accurate measure of how farm families are doing compared with non-farm families is to consider the relative cost of living in rural versus urban areas. To do this we determine the relative share of families with income below a designated “low income” level. Low Income Cutoffs (LICO’s) are used.
LICO’s are based on the average cost of acquiring the basic necessities of life (food, clothing shelter) and are adjusted for family size and size of area of residence (ie. Rural, urban).
Fewer farm families have income below the Low Income Cutoff (LICO) than do urban non-farm families, but more than rural non-farm families.
Over the period 1996 to 1998, all families saw improvement in their economic well-being, as measured by this share. However, the improvement made for farm families was smaller between 1997 and 1998 than for the other families.
Figure 46:Share of Families Below the Low income Cut-off, 1996-1998
0
5
10
15
20
1985 1991 1993 1995 1996 1997 1998
Farm Rural Non-farmUrban Non-farm Total Non-farm
Farm Households
%
58
VIII. AGRI-FOOD SECTOR PERFORMANCE
59
Figure 47: Farm Sector
250260270280290300310320330
1981 1986 1991 19960
20
40
60
80
100
120
Number of Farms Total Market Receipts/Farm
Figure 48: Food Processing Sector
2.8
3
3.2
3.4
3.6
3.8
1988 1989 1990 1991 1992 1993 1994 1995 1996 19970
5
10
15
20
Food & Beverage Processing Establishments
Food & Beverage Processing Shipments/Establishment
Thousands of farmsThousands of $
Thousands of Firms Millions of $
•With the decline in the number of farms and the average farm getting larger and more efficient, average sales per farm have increased, particularly since 1991.
•Lower commodity prices and increased fuel and fertilizer costs in 1999 and 2000, may lead to slower growth in average sales. However, further consolidation is expected to continue, particularly in the grain sector.
•To become more globally competitive, the processing sector has undergone some consolidation. This has resulted in larger, more efficient plants, and an increase in shipments per establishment. The rise in the share of consumer-oriented agri-food exports also testifies to this increase in competitiveness.
Agri-food Sector Performance
60
Figure 50: FoodService
010203040506070
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
0
10
20
30
40
50
60
Establishments Average Sales
Thousands of firms$in 10,000’s
Figure 49: Food Retailing
05
10152025303540
0
0.5
1
1.5
2
2.5
Establishments Average Sales
Thousands of firms Millions of $•The Canadian food retailing sector is a mature industry with low profitability that is highly concentrated yet highly competitive. •Recent consolidation has led to increased efficiencies and a growing proportion of non-food and innovative products and services.• With only moderate growth in population expected, increased sales will come from increased value-added food items and non-food services.
•The food service sector has seen steady growth throughout the 1990’s primarily in step with general economic growth and personal disposable incomes. •At the same time average sales increased only moderately during the 1990’s after declining with the recession of 1991. Only now have sales reached the late 1989 level.•The food service sector is a highly diverse sector, catering to all tastes and income levels.
Agri-food Sector Performance continued
Source: Statistics Canada, Census of Manufacturers
•The Canadian food retailing sector is a mature industry with low profitability that is highly concentrated yet highly competitive. •Recent consolidation has led to increased efficiencies and a growing proportion of non-food and innovative products and services.
61
Figure 51: Operating Profits by Segment
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Billio
ns
of
$C
DN
Food Processing Beverage Processing
Food Retail Food service
Figure 52: Operating Profit Margin
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
%
Food Processing Food Retail Food Service
•The food processing sector increased profit margins through productivity growth and exports.
•Food retailing has mainly increased profits through consolidation and reduced input costs.
•Food Service has seen a marked increase in competition driving down prices, while a shrinking labour pool has increased labour costs.
•Operating profits have increased in the processing sector due to both increased volume and increased prices.
•For retailing the increase has come from a change from bulk goods to ready-to-eat, specialty and private label goods.
•Food service has declined due to declining prices and volumes.
Agri-food Sector Profitability
Source: Statistics Canada, Census of Manufacturers
62
Retail Concentration
• From 1991 to 1996, the top 4 grocery retailers saw their market share, as measured by the CR4 (their share of total retail sales), decline slightly from just over 50% in 1991 to 48%in 1996.
• In late 1998, in an attempt to improve efficiencies and to ward off competition from Wal-Mart, the top two chains (Loblaws and Sobey’s) acquired two other major players in the retail market (Provigo and Oshawa Group respectively.
• This resulted in an increase in concentration to over 60% and a significant improvement in operating margins.
Figure 53: Retail Food Sector Concentration
0
10
20
30
40
50
60
70
1990 1991 1992 1993 1994 1995 1996 1997 1998
%
Source: Industry Canada
63
•No hard data exists on the magnitude of vertical coordination in Canada, however there is an abundance of anecdotal and case study evidence that provides a direction for the trends.
•Generally, Canadian agri-food chains have always cooperated vertically to some extent if one includes spot markets. In the case of fresh fruit, Canada has always had a tight vertical chain because of the perishability of the product.
•Over the 1990’s there has been a tightening of the vertical linkages in the agri-food chain. The most often cited example is that of Wharburton’s bakery and Agricore for Identity- preserved wheat. In addition, the vertical relationships in the hog industry have become very tight. In addition to the extensive use of contracting, there is a growing number of farrow-to-finish operations. Overall, the hog industry is reported to have seen an efficiency gain of 11% over the 1990’s due mainly in part to the closer vertical relationships.
•As consumer preferences become more heterogeneous, there will be a further tightening of the supply chains. In part, how tight the chain becomes will depend on:
•Perishability: How long will the product remain fresh. The shorter the product life the tighter the vertical linkages as tight vertical linkages allow for quicker transport and sale.
•Government regulations: Regulations over health, safety, and sanitation may either facilitate or hinder closer vertical relationships. For instance, a regulation that would require all firms to guarantee that their products were free from BSE (which is difficult to detect) would provide an incentive to tighten up the supply chain to mitigate the risks and costs of meeting the regulations.
•Identifiable Characteristics: The harder it is to measure a specific attribute in a food product (i.e. organic or GMO free) the greater the drive for tighter vertical chains. The tight vertical chain will allow processors a measure of surety in regards to their products.
VERTICAL COORDINATION IN THE AGRI-FOOD SECTOR
64
•The agrifood sector has undergone significant structural changes over the past two decades:
•The number of farms in Canada continues to decline, while the average farm size increases. Farms, particularly the ‘business-focussed’ ones, have had to become more efficient in order to compete in world markets and stay in business.
•Smaller farms , which are less reliant on farm income, have diversified by increasing off-farm income in order to survive.
•The food and beverage processing sector has consolidated and improved efficiency thereby becoming more competitive in world markets. Increased exports of value-added or consumer-oriented agri-food items over the 1990’s testifies to this improvement.
•The food retailing sector in Canada has consolidated and become more concentrated but still remains highly competitive given the national dimension of some of the major retail players.
•Food services have only now approached sales of the late 1980’s.
•Trade Policy developments have benefited Canada since this has forced stakeholders to adjust to market conditions to be able to compete in global markets.
•Macro-economic conditions have been favourable since the economy has expanded, inflationary pressures have remained low and the depreciation of the Canadian dollar has made Canadian exports more attractive in global markets.
•Consumer interest in the environment and food safety have put pressure on the sector to adjust so that the agri-food sector can improve its image as environmentally sustainable and the provider of safe food.
•Farm income experienced downward pressures in the late 1990’s and will continue to remain weak over the Medium term. Therefore, pressure will continue for more agricultural support.
IX.SUMMARY