Canada’s battle to renegotiate a free trade deal with the U.S. appears to be over, but global trade wars rage on — and that means producers can expect volatile markets for some time to come.
But in the long run, it should all work out fine, says a new analysis by Farm Credit Canada on how volatility has affected the country’s top five ag exports.
“We’re well positioned to remain a top exporter of ag commodities and perhaps even gain some market share over time,” said J.P. Gervais, FCC’s chief agricultural economist.
Trade tensions and market volatility pretty much defined 2018, and created whipsaw-fast changes in markets, he said. For example, the FCC report notes, after China slapped tariffs on U.S. soybeans, the price paid to American farmers dropped from US$10.40 per bushel to US$8.42 in a matter of four months. Despite that sickening price plunge, exports also dropped sharply, leaving a mountain of unsold U.S. soybeans.
But longer term, the picture — especially from a Canadian viewpoint — looks much different. FCC economists explored the relationship between periods of volatility and export performance for five key Canadian commodities (canola, wheat, pork, beef, and soybeans) going back to 1988.
“Over time, as volatility diminishes, Canadian prices revert to levels more in line with their averages and growth in Canadian exports flourishes,” the report states. “Each of the five commodities selected for this report has experienced growth over the 30-year period. Some have grown faster in the last five years than they’ve ever grown.”
“Generally speaking, we’ve had a larger shift in Canadian exports over time as a response to higher volatility for soybean, pork, and beef,” added Gervais. “It has been a larger shift — but not necessarily a negative shift. Volatility cuts both ways. There are challenges, and benefits in some cases.”
The U.S.-China trade war — along with the tense renegotiation of NAFTA — created a ripple effect in Canadian commodity prices that changed the selling habits of Canadian exporters and the buying habits of their customers, said Gervais. Some countries chose to buy more Canadian commodities during those up-and-down price jumps, but overall, “volatility has dampened these exports,” said Gervais.
“Long term, I’m absolutely positive that demand remains very strong for what we sell, but short term, I think volatility is likely to create a little bit of a decline in performance,” he said. “I think we’re well positioned to navigate that. We just have to be mindful that we could have a short-term cooling off in the market.”
Nevertheless, the world still wants Canadian commodities, he said. Canada remains the fifth-largest exporter of agricultural commodities, and last year, exports of raw commodities and food products totalled US$46.2 billion (a 5.7 per cent increase over the previous year).
Volatility and exports
Most people think of volatility as being a negative thing in the marketplace, but that’s not always the case, said Gervais.
“Businesses don’t like uncertainty. It’s hard to plan ahead when you have volatility,” he said.
“So that can produce a hesitation among buyers and see them cutting back their purchases. But it can also lead buyers to actually hedge against higher prices. They feel that prices are more likely to move up from a buying standpoint, and that can lead them to actually buy more.”
For soybeans, both Spain and China have ramped up their buying in response to price volatility over that 30-year period — China by 3.7 per cent, and Spain by 18.3 per cent. It’s a similar story with Canadian beef, though not as pronounced. When beef prices swung widely, Hong Kong imports of Canadian beef increased by 11.8 per cent.
For Canadian pork, however, the opposite is true.
Canada’s pork exports can drop as little as 2.9 per cent (in the U.S.) to as much as 30.4 per cent (in South Korea) when prices are volatile, the FCC study found.
But there’s a smaller impact on canola and wheat exports, likely due to Canada’s market share for those crops, it said. Finding alternative wheat and canola supplies would be a challenge for buyers, so the swings tend to be more muted.
“It creates opportunities in some ways, but in other cases — like pork — the negative impact of volatility in creating uncertainty for producers and buyers is more of a factor,” said Gervais.
So what should the Canadian ag sector be doing in these uncertain times?
“When we have trade tensions creating volatility, it needs to be part of the business strategy to have some risk management in place to make sure that we can maintain those relationships with buyers in different countries and continue to grow our exports,” said Gervais.
And farmers need to do what they can to be prepared, he added.
“From a marketing standpoint, there’s a large incentive to have a risk management plan, and there’s more of an incentive now than in the past,” he said.
“These trade tensions do have an impact on the bottom line of producers.”