Canada Agriculture Industry - Essay Example

Running Head: Canada Agriculture Industry QUESTION 1 How significant is the agricultural industry in the overall Canadian economy? The agriculture system comprises the farm input-supply industries, farming, food processing, wholesaling and retailing, restaurants, and institutional caterers and the food-related activities of such auxiliary industries as transportation, packaging, and construction is Canada's largest industrial sector. Its central components together give about one-tenth of the gross domestic product and employ 1.7 million people (17.0 percent of the work force). Food processing is Canada's third largest manufacturing industry and, unlike other types of manufacturing, it is dispersed across the country in fraction to population. Therefore, the development of farming and food manufacturing figures significantly in the industrial development strategy of every province. Relations between the farm sector and the non-farm sector are composite and of growing importance. In 1985, farm production inputs acquired from the nonfarm sector and payments for borrowed capital signified 78 percent of total farm operating expenditures, with interest costs alone accounting for 13.5 percent of total expenditures. This rising assimilation of the farm and industrial sectors has reduced the role and importance of established agricultural policies. The agri-food complex is at present influenced as much by macroeconomic factors, such as growth, inflation, and interest rates, as it is by agricultural policies per se (Finkle, P., and W. H. Furtan. 1988). By thirty to forty percent of agricultural output currently exported, and with comparatively low border protection for all merchandise except milk, poultry, and eggs, farming in Canada is also internationalized and incorporated into the world food economy. As a result, the view for Canadian agriculture is mainly dependent on supply and demand conditions in the world markets for grains, oilseeds, and red meats, and on other countries' farm policies, food trade arrangements, and trade activities. This contact to world market conditions provides the affirmed justification for many of Canada's agricultural commodity programs, which are intended to provide producers with some protection from cyclical and intermittent market instabilities and from the policy-induced distortions reassigned from world markets. What are the issues affecting the agricultural industry? Canada has proposed that a broad agricultural package be accepted in principle at an early date (phase one); that comprehensive national plans for implementing the overall cut in the negotiating measure contracted to in the first phase be presented and agreed on (phase two); and that subsequent acceptance these plans be implemented over a five-year period (phase three). Further cuts in trade deformations, and their eventual elimination, would be contracted to in subsequent negotiations. The all-important first phase would require reaching an agreement on the measures to be integrated in the trade distortion yardstick, on the base period against which to quantify reductions, and on the depth of cut and the length of the phase-in period. GATT's articles and codes, comprising a stronger code banning the use of procedural regulations to provide protection, would be rewritten by the end of 1990, while the negotiations conclude. Three features of Canada's proposal on negotiating agriculture are of particular interest. First, Canadian authorities are categorical that only those elements of national agricultural policies that essentially distort trade should be integrated in the negotiations. Programs that do not affect production and consumption, or that do not falsely change the competitive position of one nation's producers relative to producers elsewhere, are of no concern in negotiations on trade. Subsequently, reflecting this certainty and the related view that the producer grant equivalent is a poor proxy for the trade effects of national agricultural programs, Canada is recommending that a simple single measure be developed of the trade effects of admittance barriers and subsidies. This approach would prevent the require for countries to change elements of their agricultural policies that have no cause on their trading partners and encourage the wider use of such trade-neutral instruments in national farm policies. Third, Canada has suggested that in devious the index of trade distortion, credit be given to those countries that efficiently limit the output which is entitled for support. The prime intent of this is obviously to establish that Canada's supply management programs are not trade deforming. Three different approaches to measuring competitiveness are presented: a factor model which identifies critical success areas and compares the performance of different economies in each area; an assessment of trade performance, based on the indicators of output and efforts at improving inputs; and assessment of productivity using cost-based indicators. The three methods are not mutually exclusive; they present three (but complementary) perspectives on the same phenomenon - Canada’s global competitiveness. (David Barrows and John A. Cotsomitis, “Canada’s Global Competitiveness”, pp. 3 – 33). However, the proposal could also be construed as endorsing the decoupling of income support from production, even where there is no direct supply control. It also distinguished that countries like the United States will have to be given negotiating credits for the estate reduction and stock management elements of their grain programs. Within the framework of Canada's proposals, it is probable to identify the contributions that Canada might be called on to make. The main areas where adjustments might be made consist of • National dairy policy, which entails a high degree of subsidization of domestic production, restraining import regimes for dairy products and dairy analogues and substitutes, and the discarding of surplus milk products on world markets; • The quantitative import restrictions on poultry meats and eggs that reserve the bulk of the Canadian market for these products for domestic producers; • The tariffs that offer effective protection to the horticultural, tobacco, and food processing industries; • The transport subsidies to grains and oilseeds and their products that act as subsidies to exports; • The wine procurement, pricing, and domestic content policies and regulations of provincial liquor monopolies that discriminate against foreign suppliers. (Grains 2000). in addition, some of Canada's (and its provinces') technical regulations (for instance, health and sanitary standards, packaging and labeling requirements) and input subsidies (such as capital grants and fuel rebates) might be at issue in negotiating reductions in the degree of trade deformation caused by Canada's farm and food policies. What ideology would support the government providing assistance to the farmers? During the seventies rising farm incomes and low (and, for a time, negative) real interest rates led to considerable capital appreciation and new investment in agriculture. Between 1976 and 1981, new capital expenditures ranged between $2.7 billion and $4.7 billion per year and farm debt doubled. In numerous cases investments were based on expectations of rising real commodity prices, and borrowers and lenders used land and buildings that had doubled in value over the same time period as collateral. However, the global recession that began in 1981, nominal interest rates in excess of 20 percent, and the abating of commodity prices resulted in a brutal deflation of agricultural land values and rigorous cash flow problems for farmers holding too much debt. This was especially true for those producers who had expanded, or entered agriculture, in the late 1970s. As interest rates rose and commodity prices fell, asset values declined and producers found their equity being eroded. In constant 1987 dollars, Canadian farmers' equity in their farms soared from $63 billion in 1970 to a peak of $157 billion in 1980; by 1985 it had shrunk to $101 billion. (Martin, L. J., and K. D. Meilke. 1986). The permutation of reduced cash flows, high interest rates, and falling equity led to sharp increases in farm financial difficulties. Problems started in the red meat sector and then extended to all types of farms. By the mid1980s, the most serious financial problems were found in the specialized grain farms of western Canada. These farmers practiced a combination of asset devaluation and reduced incomes because grain prices fell to levels that, in real terms, were lower than in the 1930s. Also, farmers' expectations concerning future economic conditions in agriculture became extremely pessimistic. Agriculture Canada (1987a) estimated that in 1987 12.5 percent of Canada's farm borrowers were in financial difficulty. Of these, 20.4 percent (3.3 percent of the total) were in debt and another one-third (4.0 percent of all borrowers) were anticipated to be insolvent within the next two years. Another 5.2 percent of farm borrowers were classified as financially vulnerable in that they were experiencing short-run financial difficulty, but they were expected to be capable to continue their farms as viable operations. The financial difficulties in the agricultural sector have pretentious private lenders and the principal public farm lending agency, the Farm Credit Corporation (a crown corporation). By July 1987 the private banks had become the country's largest landholders, and 8.5 percent of their total loans to agriculture were not being serviced. By the end of the 1986-1987 fiscal years, 29.5 percent of the Farm Credit Corporation's loans (14,723 accounts) were in arrears for $344 million, and the corporation was technically bankrupt with a negative net worth of $125 million (Farm Credit Corporation, 1987). In 1988 the federal government had to provide a massive infusion of new capital ($400 million) to enable the corporation to continue to fulfill its traditional role as a major farm lender. Twenty-three percent of Canada's farmers had no debt in 1987 and 68 percent had more than 75 percent equity in their businesses and had little difficulty in meeting their debt-service obligations. Nonetheless, both federal and provincial governments were compelled to respond to the income problems and financial stress in agriculture in the 1980s with a variety of programs. These integrated foreclosure moratoriums, financial counseling, interest rate subsidies, third-party debt review boards, debt restructuring, new debt instruments (for example. commodity-based, shared-appreciation mortgages and variable term and rate mortgages), and programs to help farm families leave agriculture (for instance, the federal Canada Rural Transition Program and Ontario's Farmers in Transition Program). Moreover, programs to give economic safety nets to farm businesses took on new significance. Existing federal and provincial stabilization programs have been extended, tripartite stabilization programs have been introduced, and, most important, the Special Canada Grains Program was introduced in 1986 and repeated in 1987 to provide relief for grain growers under siege from both global grain market imbalances and the increasing use of export subsidies by the United States and the European Economic Community (Economic Council of Canada. 1988). QUESTION 2 Compare and contrast how the General Agreement on Tariffs and Trade and the World Trade Organization has affected the agricultural industries in the developed and developing world. With some exceptions, tariffs are not a significant protective instrument for Canadian agriculture. Many agricultural products enter duty-free; other tariffs have been bound and reduced in consecutive rounds of GATT negotiations. Even before the recent agreement on the creation of a free trade area, the United States and Canada had gone a long way to bind, harmonize, and reduce tariffs and remove tariff quotas on agricultural products that are traded mainly in the continental market. The most momentous special tariff that remains is the one cent per pound duty that favors imports of sugar from Australia (Roningen, V., J. Sullivan, and J. Wainio. 1987). The tariff is, however, the principal instrument used to support the Canadian horicultural industry. Tariff calendars prevail for many fruits and vegetables, and for some of these the tariffs were increased as recently as 1979 (Organization for Economic Cooperation and Development, 1988). Tariffs also offer significant effective protection to tobacco growers and the food processing industry. Since the United States is the major supplier of horticultural products and processed foods, much of the protection provided by tariffs will be eliminated by 1999 under the Canada-U.S. Trade Agreement. In the late 1970s beef imports into Canada were limited by voluntary restraint agreements with major suppliers. Under the Meat Import Act of 1981 they can be subject to formal licensing and quantitative restrictions. As these restrictions are, not accompanied by national supply control, they do not conform to article XI of the GATT. However, they were originally imposed under the safeguards provisions of the GATT (article XIX) to shelter Canadian producers from the backwash of diverted supplies that result when other countries restrict access to their markets. In practice, the import quota provisions have been used only once--in 1985--when they were applied to beef from the European Economic Community. In general, Canada's Meat Import Act has been used in a nonrestrictive manner. Furthermore, if beef import quotas were ever applied, they would be subject to the (rising) minimum access compulsion assumed by Canada in the Tokyo Round of GATT negotiations. (Roningen, V., and P. M. Dixit. 1989) Imports of farm and food products into Canada are also impeded--although not necessarily with a protective intent--by a host of nontariff barriers. These technical regulations include packaging and labeling requirements, estimation and documentation procedures, and health and phytosanitary regulations. The latter are becoming more restrictive as Canada's livestock populations, plant materials, and food supply become increasingly "clean." (Dixit, P., V. Roningen, J. Sullivan, and J. Wainio. 1987).This in itself is posing a growing obstacle to the attainment of a more open trading system, particularly in live animals and livestock products, and an increasingly important source of conflict with trading partners. QUESTION 3 Identify an interest group which represents the interests of Canadian farmers. Outline the interest group’s position that Canada should take at the World Trade Organization. Show how the interest group fits the framework of an interest group outlined in Stanbury and Moore’s article entitled “Role of Interest Groups in Influencing Public Policy in Canada”. It is apparent that Canada is ready to make changes in its agricultural policies and programs and in its trade arrangements for farm and food products. Policymakers are well aware of the expense, the failures, the rigidities, and the perversities of existing farm support programs and are predisposed toward creating a more competitive, self-reliant, and market-oriented industry. They distinguish Canada's great and growing dependence on assured and improved access to world markets and the huge and ultimately unendurable costs for Canada of the present disarray caused by contending national agricultural support programs and undisciplined trade practices. The only way for Canada to obtain relief from others' subsidy and trade practices and to secure the rewards of its comparative advantage in agriculture is to promote fundamental reforms in national agricultural policies and in global food trade arrangements. Canada appears willing to make a contribution proportionate with both its stake and abilities. Indeed, given its technologically advanced and well structured agrifood system, with its highly developed infrastructure and cadre of competent managers and entrepreneurs, the adjustments required of Canada in accepting greater competition will be less wrenching than those required of most other countries. Not surprisingly perhaps, Canadian authorities have been more vigorous in promoting liberal concepts abroad than at home. To date, during the negotiating phase, there has been little public discussion of the nature and scale of the adjustments that changes in current programs would entail, or of the adjustment assistance programs that might be needed to compensate the losers from policy change and to offset transition costs. No dialogue has yet been commenced on the crucial question, "What's in and what's out?" regarding the kinds of agricultural programs that should be internationally acceptable and those considered trade distorting. This omission is important, for it makes farmers fearful that all public programs for agriculture will be withdrawn and the industry abandoned (which is not the intention), which, in turn, makes farmers hostile defenders of the status quo.It would be nationally and internationally helpful, therefore, if a list could be accumulated of nationally beneficial and internationally acceptable farm programs for countries with modern agricultural sectors. Such a step would help national governments to allay the fears of their apprehensive farmer constituents (Jurkowski, Diane and Eaton, George, 2003). Internationally, it would serve the immediate purpose of defining what should be integrated in any quantitative measure of policy induced trade distortions. Candidate elements of an acceptable policy set include • The provision of such public goods as research and development, grades and standards, health and safety inspection, market news and statistics, and physical infrastructure; • Programs that are intended at the development of markets, resources, and communities; • Assistance to producers' marketing organizations that develop the operational and pricing efficiency of markets and right for disparities in bargaining power; • Resource conservation and retirement programs; • Domestic and foreign food aid programs; • Adjustment assistance programs; • decoupled income supports, including disaster relief payments and decoupled income supplements. Most Canadians would agree that, from both national and international perspectives, suitably circumscribed farm safety net programs should be added to this list. More controversially, industry leaders would assert that trade neutral (or helpful) supply management programs must be internationally endorsed too. The fate of these two instruments of Canadian agricultural policy will be determined in the multilateral negotiations on agricultural policy and trade reform. As multilateral agreement proposed global investment treaty, written by the International Chamber of Commerce and near ratification in 1997 by the OECD in Paris, when civil society groups in Canada got a hold of the draft text and leaked it to the world. (Maude Barlow, “Global Showdown: The Future of Democracy in the Era of Economic Globalization”, pp. 389 – 402). REFERENCES David Barrows and John A. Cotsomitis, “Canada’s Global Competitiveness”, pp. 3 – 33. Maude Barlow, “Global Showdown: The Future of Democracy in the Era of Economic Globalization”, pp. 389 – 402. Agriculture Canada. 1987a. Farm Financial Assessment Report. Farm Development Policy Directorate, Ottawa, August. Farm Credit Corporation. 1984. 1984 Farm Survey. Research Division, Ottawa. Jurkowski, Diane and Eaton, George Between Public and Private: Readings and Cases on Canada's Mixed Economy (HD 3616.C23B48 2003) Roningen, V., and P. M. Dixit. 1989. Economic Implications of Agricultural Policy Reform in Industrial Market Economies. Staff Report AGES 89-36, Agriculture and Trade Analysis Division, Economic Research Service, U.S. Department of Agriculture. Washington, D.C. August. Roningen, V., J. Sullivan, and J. Wainio. 1987. "The Impact of the Removal of Support to Agriculture in Developed Countries." Paper presented at the meeting of the American Agricultural Economics Association, East Lansing, Michigan, August. Organization for Economic Cooperation and Development. 1988. Monitoring and Outlook of Agricultural Policies, Markets and Trade ( Paris). Martin, L. J., and K. D. Meilke. 1986. "Trade Implications of Canadian Stabilization Programs: Reality and Perception," Programs: Reality and Perception," in M. Cluff and H. B. Huff, eds., Modeling Livestock Stabilization. Economics Branch, Agriculture Canada. Ottawa. Grains 2000. The Road Not Taken: An Opportunity for the Canadian Grains and Meat Industry. Report to the National Grains Bureau, Winnipeg. Dixit, P., V. Roningen, J. Sullivan, and J. Wainio. 1987. "Impact of Removal of Support to Agriculture in Developed Countries." Unpublished paper, International Trade Division, Economic Research Service, U.S. Department of Agriculture, Washington, D.C. Finkle, P., and W. H. Furtan. 1988. "Net Farm Income Insurance: a New Direction in Farm Policy." Read More