Growers who ensure that Canadians have food on the table should be present at policymakers’ table.
Over the past two years, Canadians have faced increasing food prices driven by a myriad of factors. On an average annual basis, the Consumer Price Index rose 3.9% in 2023 and 6.8% in 2022, while prices from food purchased from stores went up by 7.8% in 2023 and 9.8% in 2022 (StatsCan, 2023).
In response to growing public concern over escalating food prices, the Government of Canada recently put together a Grocery Task Force to oversee industry practices and stabilize food prices. While this initiative has largely focused on distributors and retailers, Professor Romel Mostafa, Director of Ivey Business School’s Lawrence National Centre for Policy & Management, noted that the concerns of the primary agriculture industry, which is critical to ensuring our food security, must also receive sufficient policy attention.
Addressing a group of Canadian agriculture executives at Syngenta’s Leadership At Its Best (LAIB) program, Professor Mostafa examined specific factors that have shaped the broader economy and their influence on the primary agriculture sector, as well as explored the major challenges and policy concerns of the industry.
In Canada, the agriculture and agri-food system generates approximately 7.0% of its Gross Domestic Product (GDP) and accounts for 1 in every 9 jobs (Government of Canada, 2022). The sector is daunted by several challenges, including an aging farmer population, labour force gaps, climate adaptation, and high capital costs. Moreover, over the last one year while most commodity prices have fallen, cost structures have remained elevated, leaving farmers with tight margins.
Above: Group photo of participants from Syngenta’s Leadership At Its Best (LAIB) program.
Understanding “How We Got Here”
Since the pandemic first arrived in 2020, Canada’s economy has been rocked by both supply and demand side shocks.
On the supply side, lockdowns and restrictions imposed to contain the spread of the virus disrupted supply chains globally. Labour shortages also quickly emerged, decreasing production capacities. As a result, there was a decreased supply of certain commodities, driving up their prices.
On the demand side, during the onslaught of the pandemic the central bank dropped interest rates substantially to fight off potential deflation, while government support programs, such as wage subsidies and extended employment insurances, were rolled out.
“But we could only spend through a few channels… We could not spend on sit-down restaurants, malls, hotels, or on trips abroad;” said Mostafa, “this set in motion initially a K-shaped [economic] recovery, where the sectors such as technology and home improvements grew, representing the upper part of K, and the sit-down restaurants, hotels and malls—the so called high-touch sectors—withered, representing the bottom part of K.”
Yet, Mostafa noted that as the economy opened up, the bottom part of the K bounced back, whereas many industries at the top of the K went through retrenchment after an exuberant period of growth. “The economy began to rebalance, leading to a diamond shaped recovery.”
However, Russia’s invasion of Ukraine in 2022 added new dynamics. In the agriculture sector shortages in supply of grain and nitrogen-based fertilizers and fears of energy security drove the prices of grain, fertilizer, and oil up. On one hand, as the broader economy opened up, there was pent-up demand fueled by substantial liquidity, and on the other hand, cost of basic commodities and energy went up.
“This created a perfect storm for high inflation” explains Mostafa, observing that, CPI rose to 8.1% by June 2022. To fight the high inflation, the Bank of Canada—like other Western central banks, arguably late —hiked interest rates to dampen the demand side pressures, hoping that supply will catch up.
While CPI inflation in Canada has fallen to 2.9% in January 2024, we pay much more for most items since COVID-19. And considering wage growths, consumers’ purchasing power has decreased—farmers are no exception to that. However, “What’s encouraging,” observes Mostafa, “is that we are not seeing the wage-price spirals, and year over year price increases have been moving along a declining trend.”
Challenges Faced by the Industry
The prices of commodities such as wheat, corn, soybean, and canola have come down substantially and are expected to continue declining. On the other hand, prices of inputs such as fertilizer and feed remain elevated despite having declined since their peaks. Growing labour costs along with recurring labour force gaps continue impacting farmers and producers. With tight margins and high borrowing costs, farmers are finding it particularly challenging to finance working capital and invest in new machinery.
There are other issues affecting the industry as well. Climate change is causing increasingly extreme weather, altering seasonal patterns, and amplifying variability, which will require the farming sector to invest in new tools to adapt and manage climate risks.
Succession planning is also top of mind for farmers. According to a report by RBC, in 2033, a substantial number of farm operations—about 40% of total operators—are expected to retire, heralding one of the most significant labor and leadership transitions in the nation's history for the agricultural sector.
The growth of Canada's agriculture sector is closely linked to its prospects for exporting. China is Canada’s second largest export market, importing $7.8 billion worth of Canadian agriculture and agri-food products in 2021. With Canada-China geopolitical tensions lingering and Chinese GDP growth remaining soft, our agriculture sector faces uncertainty and risk in the future of its exports.
Looking Ahead
With the near-term slow-growth forecast of the Canadian economy, Mostafa asserts that it is imperative now to focus on building Canada’s long-term growth potential by addressing the challenges we have in growing labour force and productivity growth. In closing the labour market gap, he observes, “We need to do a better job in matching the demand of skills with the skills we can tap through temporary foreign workers and immigration. I think this is quite intuitive, but let’s be frank, Canada hasn’t been very effective in managing this process.”
In terms of productivity growth, most sectors in Canada trail their US counterparts. “The magic of productivity growth lies in the fact that you grow more output with the same number of inputs, which in turns keeps inflation in check. In an environment where labour shortage looms large, productivity gains are even more important as that can allow for paying higher wages without increasing prices,” explains Mostafa, adding “we must work towards removing sector-specific barriers that hold back productivity growth. Unfortunately, this is an issue that has not received as much attention in policy circles as I would like to see.”
In exchanging views with the leaders from the primary agriculture sector, Mostafa notes, “Clearly, food inflation remains elevated; the end consumers are paying a lot more now than before, but prices of most commodities have substantially fallen. So, value is being extracted from those in the middle, and wage growth alone cannot account for the difference.”
In addressing food affordability crisis, Mostafa argues that policymakers should not stop with the work of the Grocery Task Force. They must also weigh in on issues that affect our growers’ competitiveness, such as the importance of keeping their energy fees low, growing access to temporary foreign workers to keep labour costs from spiraling, eliminating interprovincial barriers, and exploring increased railway inter-switching. Additionally, there is an urgent need for policy focus on ensuring market access for our agricultural products through renewed and vigorous negotiations and diplomacy, particularly in key Indo-Pacific countries.
As Canada tackles the crisis of food affordability, policymakers must put adequate emphasis on supporting the competitiveness of Canada’s primary commodity growers. After all, food affordability is inextricably linked to the competitiveness of this sector.