EcDev Journal

Trade and investment in Canada's Agri-Food Sector

Posted on Thursday December 17, 1998

by Gordon McGregor (1998 Issue)

THE FUTURE GROWTH OF CANADA'S multi-billion agri-food sector must come from substantially increased exports as the domestic market, while still very important as a base, no longer provides sufficient demand. The needed growth in exports must involve significant growth in value-added crops, processed products and food services. This has clear implications for regional economic development and investment, particularly if an export goal of $40 billion by 2005 is accepted by the industry.

Eight priority markets, from a national perspective, have been identified as providing most of the expected growth in exports: the United States, Japan, the European Union, China/Hong Kong, South Korea, Taiwan, Mexico and Brazil.

These markets accounted for almost 85 percent of the value of Canadian agri-food exports over the past four years. Five countries within these markets (U.S., Japan, U.K., France and Germany) account for over half of total global investment flows and nearly 90 percent of Foreign Direct Investment stock in Canada.

The eight priority markets accounted for an average $13.9 billion in agri-food exports over the last four years and are targeted to increase to $28 billion by the year 2005, almost double the four-year average. At the same time, high-value exports (intermediate and consumer-oriented products) are targeted to account for 77 percent of the total, versus 66 percent over the 1993-96 period.

Bulk commodities accounted for about $5 billion on average in agri-food exports over the past four years. While substantial potential for commodity exports exists, supply constraints will limit Canada''s growth in export volumes. Commodity exports are therefore expected to grow modestly in value over the coming period to around $7.3 billion in 2005.

Cumulatively, Canada's share of agri-food imports to these eight markets is about five percent (including intra-EU trade). This compares with the three percent share of world agri-food trade that Canada has captured in the past few years.

Canada''s overall market share in each of these markets is targeted to rise. This reflects our ability to capture some of the expected growth in overall agri-food imports into these markets over the coming period. However, it is anticipated that actual growth in any market will differ from these targets, as export success in one market may draw firms and limited Canadian product supply from other markets which otherwise would be their destination.

Free Trade with the U.S., the implementation of NAFTA and the WTO, globalization and slow but steady moves towards fewer technical barriers to trade have greatly stimulated the growth of the export-oriented agri-food industries.

With few tariff barriers in place, international trade is increasingly influenced by requirements to meet product quality standards, stringent health and safety regulations and national labeling requirements.

These pressures are imposed by governments and by leading global companies determined to ensure food products meet health and safety requirements and to protect corporate brand reputations. Together these forces drive investments in new facilities and production technologies capable of providing safe, high-quality products at competitive prices.

Canada is considered by many observers as one of the few countries in the world where agricultural production can be expanded significantly in the opening decades of the next century.

The Canadian industry can also add considerable value to its total output as it moves up from commodities to more valuable products. This trend is clearly emerging in western Canada as a result of elimination of subsidies to the grain transportation system. It is now simply too expensive to ship certain bulk grains. There also is considerable investment in food processing in the west as industry responds to new opportunities particularly for exporting to the U.S. and Asia.

Some major world trends that influence the growth options for the Canadian industry include:

  • International trade in value-added products is outpacing traditional trade in commodities;
  • Continued growth of importance of global companies and global brands;
  • Pressure to deliver shareholder value, which implies continued rationalization of MNEs;
  • Global marketing and global brands options for smaller companies such as private label, co-packing, marketing alliances;
  • Growing importance of health and safety as well as quality standards based on the use of objective technologies such as HACCP and ISO 9000;
  • Need for enhanced management of supply chain by industry (identity preserved products, segregation genetically modified products, etc.);
  • Pressures to increase regulatory harmonization worldwide;
  • Effect of the growing acceptance of distribution management technologies and management systems such as Electronic Data Interchange, Efficient Consumer Response, and Just-In-Time logistics.

While these trends influence the evolution of the industry in many specific ways, taken together, they tend to force change as producers and agri-business companies react to the market pressures driven primarily by these trends.

These changes involve investments in automation and informatics technologies as well as newer, better and larger facilities to take advantage of economies of scale.

Companies faced with significant changes may choose to relocate their facilities, often preferring to acquire or build plants in smaller towns on the peripheries of major cities. Location decisions are influenced by the growing realization that north-south trade rather than east-west trade will increasingly dominate the North American market.

In 1993 industry and government in Canada set a target for growing agri-food exports to $20 billion by the year 2000. In fact, this goal was essentially reached by the end of 1996.

Various industry groups are now trying to set a new goal, perhaps the doubling of exports by the year 2005. Such efforts to set export growth targets require a clear understanding of just what industry sub-sectors have the potential to contribute significantly to reaching such an ambitious target and which do not.

It is obvious that such a goal can no longer be reached simply by producing more commodities. Reaching such a target requires a major increase in Canada's ability to manufacture value-added food products. This ability depends on whether or not business conditions in Canada favour investment beyond the levels and strategic focus that have characterized the industry in recent years. In this regard, there is a need to achieve a better public understanding of the investment implications of doubling the sector's exports and of the role played by governments in bringing about a favourable business climate.

Much has been done already to cultivate a business climate that is more conducive to strategic investment in the agri-food sector. The key business indicators say that Canada is the preferred place in which to invest right now; and these positive indicators are based on significant structural change, change that is going to last.

Canada's great performance is not just a flash in the pan. Having made significant progress on this front, the Government of Canada is increasingly active in the promotion of specific opportunities to investors at home and abroad.

The role of governments in promoting Canada as a destination for investment in all sectors is changing rapidly as awareness of the tight coupling between trade and investment grows. Current federal efforts are focusing through generic image-raising activities, the provision of national bench marking information such as the recent KPMG report entitled The Competitive Alternative: A Comparison of Business Costs in Canada, Europe and the United States, increased liaison with major site selection companies and a renewed emphasis on developing high level relationships with major international investors.

The agri-food sector is considered to be a priority sector for promotional efforts in large part due to its potential to grow through major increases in its volume and its value of exports.

Investment promotion activities are not conducted in isolation. Partnership building with the provinces, traditionally very active in investment attraction activities, is increasingly important.

The federal and provincial governments are currently working to develop clear and complementary roles for their activities on behalf of the agri-food sector.

This cooperative approach is driven in part by a growing recognition that the future expansion of the agri-food sector will be very important to rural development in particular.

Canada''s rural areas are a natural site option for agri-food companies considering new facilities, particularly if proximity to raw materials is a major locational factor. The current investment wave in hog barns and pork processing facilities in western Canada is an excellent example of the revitalization of an industry and of rural communities.

Of course, expansion of the sector is not simply linked to the availability of raw materials. In the high value-added industries, generally those producing branded packages foods and beverages, links to supplier networks and product development companies providing technologies, ingredients, packaging and marketing services are of crucial importance. Such networks are usually found in or close to major urban centres and are increasingly important to the rapid growth of firms whose business is based on differentiating their products in the highly-competitive branded food and beverage industry.

The investments needed to drive the expected expansion of the industry will undoubtedly arise in large part from within the industry. However, there is increased interest in the sector from investors in Asia, a development which is linked to the growing importance of Asian countries as markets for the output of the industry.

Trade liberalization in agricultural products is also expected to lead to increased interest in financing the growth of agri-food companies through public share offerings as companies grow through expansions and, more frequently, through acquisitions.

The Canadian industry has recently witnessed a series of major deals involving dairy and meat companies which are driven by the need to attract capital from major investment funds.

This heightened interest in the sector is likely to continue if export led growth maintains its recent performance. The implications for economic development are exciting and well worth a second look.


GORDON McGREGOR is Executive Coordinator, Marketing Industry Services Branch, at Agriculture Canada, Ottawa.