Economy: Consumption slowdown, inflation downtrend and interest rate implications

A second consecutive year of weak growth is in the cards as the impacts of earlier interest rate increases are felt more acutely throughout the Canadian economy in 2024. Consumption spending, which accounts for nearly 60 per cent of GDP, should see a marked deceleration as households struggle under the weight of record high debt servicing (Figure 1), elevated shelter costs and a more challenging labour market.

The economic slowdown will reinforce the downtrend in inflation, causing long bond yields, and ultimately longer-term rates on fixed rate loans, to drop further in 2024. In contrast, short yields should be anchored by the Bank of Canada’s decision to keep its overnight rate unchanged for another few months. But once the central bank is convinced that the inflation downtrend is sustainable, which we’re expecting to happen around mid-year, look for it to start cutting its overnight rate to boost a flagging economy.

Crops: Canola crushing set a first quarter record

Canada’s canola crushers set a record in the first quarter of the 2023/24 marketing year as new capacity came online (Figure 2). Canadian canola crush expansion was initially slated to add 4.5 million metric tonnes in 2024 however, rising construction costs, higher interest rates, and tight canola supplies the last several years have led to delays in projects. Increased canola crush may help swing acres to the crop, although the soybean to corn futures ratio will still be the global bellwether to understand trends in seeded acres. U.S. producers will have incentives to plant more soybeans at the expense of corn acres if the ratio stays at today’s level.

Cattle: North American cattle herd continues to shrink

The North American beef herd is going to be smaller on January 1, 2024, compared to a year earlier. Even strong prices have not been able to stem herd reductions as producers have dealt with droughts in 2 out of the last 3 summers, with heifers and cows accounting for 51 per cent of slaughter in 2023 (Figure 3). Provided 2024 provides bountiful rain for hay and pasture, rebuilding the herd will be a multiyear process as when looking back through time the high prices during 2015 and 2016 only resulted in herds staying flat.

Hogs: Canadian slaughter capacity in 2024

The USDA is expecting Canadian pork production to decline a further -1.2 per cent in 2024 as the world faces a current oversupply of pork. Producers around the world continue to be pressured on margins leading to herd reductions, including the world’s largest producer, China. Canadian producers are going to face tight margins until at least the summer although there has been increased demand for pork domestically as consumers are shifting consumption patterns to lower priced protein options.

Dairy: Lower feed costs to provide boost to profitability

With input costs stabilizing, dairy margins in 2024 should improve compared to the last few years with current estimates comparable to margins in 2019. Feed availability and pricing – which have been extremely volatile in the last three years – will be the ultimate determinant of profitability. A bountiful U.S. crop in 2023 sent corn futures tumbling to a three-year low. With corn being the market-maker in other feed grain markets, this put downward pressure on feed wheat and feed barley costs as well, even in western Canada where drought limited production. A +/- 10 per cent change in purchased feed costs can swing overall profitability by +/- 40 per cent. To get a sense where the price of corn is headed in 2024, producers will want to keep an eye on corn production estimates from South America and on prospective plantings of corn in the US this upcoming growing season.

Crop inputs: Fertilizer affordability to improve

Declining crop prices and elevated farm input prices notably fertilizer have been on the minds of Canadian farmers. Our fertilizer affordability index is a top chart to monitor. The ratio between fertilizer and crop prices is an indication for fertilizer affordability, calculated by the price of fertilizer divided by the crop price. It highlights the relationship between fertilizer prices and crop prices, or simply inputs and outputs.

Our fertilizer affordability index based upon the major crop rotations has improved for both canola-wheat and corn-soybeans due to weaker global fertilizer prices relative to crop prices. The lower the ratio, the more affordable fertilizer becomes relative to the crop. Overall, the fertilizer affordability trends indicate optimistic 2024-25 crop profitability. Nitrogen has shown improved affordability across most major crop commodities. Spring wheat and canola prices have held up the most relative to nitrogen prices contrasted to corn. The ratio of commodity prices relative to the price of phosphate is also expected to improve despite more upside potential for global phosphate prices in 2024. We will continue to monitor fertilizer affordability as spring planting approaches.

Farm equipment: High borrowing costs expected to weigh on sales

The farm equipment industry has faced supply chain issues for several years which impacted delivery of equipment from manufacturers. Reduced deliveries coupled with strong demand for farm equipment reduced inventory levels of both new and used farm equipment in 2022 and into 2023.

Supply chain issues are largely behind us and deliveries from manufacturers continue to arrive. As such, inventory levels are expected to increase in 2024. Rising inventory levels of new equipment will spill over to the used equipment market.

Inflationary pressures on new equipment prices along with higher borrowing costs are expected to slow farm equipment sales. Elevated interest rates have resulted in more caution as producers delay purchase decisions until interest rates stabilize or fall. Operations place a large focus on the cost per acre of equipment in relation to overall total costs on the farm.

–Written by Farm Credit Canada (FCC) senior economists Leigh Anderson, Graeme Crosbie and Justin Shepherd.

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“If you don’t think the economy is going to be in a substantial slowdown or recession, the prices are undervalued. If you do think we are going into a global slowdown, the prices have probably more room to fall,” Flynn explained.

“I lean more towards the fact that the market is overdone. We’re going to bottom out shortly,” he added, noting that he expects world supplies to tighten in 2024.

Until then, Flynn said the oil market was suffering from “high anxiety” due to the amount of volatility. One case in point was Saudi Arabia cutting its price for oil on Jan. 8, which saw values for Brent and West Texas Intermediate crude oils get hit hard.

In the same breath, he pointed to the risk to supplies that’s added some cost to oil. Namely the attacks on commercial shipping in the Red Sea being carried out by Iran-supported Houthi rebels in Yemen.

“But the reality is we haven’t seen any major oil disruptions. We haven’t lost too many barrels of oil because of this. Admittedly, [shipments] have been delayed around the Red Sea has added to the cost.

Flynn said there were widespread expectations the price of oil would have jumped with the start of the Gaza war and fears the conflict would spread throughout the Middle East. But such has not occurred so far.

He also pointed to the annual “rebalancing of the commodity index funds” with Bloomberg commodity index and the S&P Goldman Sachs index.

“When they rebalanced those indexes, they had to sell some oil. That put further downward pressure on prices,” Flynn said.

He said the hedge funds built a near-record short position in crude oil, which weighed on values.

“They’re betting on a recession. They keep selling in every rally in oil. They are doom and gloom, and they keep pushing the market lower,” Flynn commented.

“On the flip side of that, if they’re wrong, you can see a major reversal in price,” he added, noting colder temperatures will push up the demand for diesel and natural gas.

— Glen Hallick reports for MarketsFarm from Winnipeg. 

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A new report — dubbed a “landmark study” by the Potato Growers of Alberta — revealed the sector drove a total contribution of $2.87 billion to Canada’s economy in 2022.

It also notes the nationwide creation of 9,390 full-time-equivalent jobs, $662 million in employment income, a $1.3 billion contribution to GDP and $87 million in tax revenue to federal and provincial governments.

“We know that our industry has grown a lot in recent years but we had no accurate assessment of its overall impact on our economy,” said James Bareman, chair of the Potato Growers, in a webinar Tuesday.

“The industry could not have grown to this scale without the goodwill and collaboration of all parties involved: growers, processors, packers, the service sector, the scientific community and governments.”

The Alberta Potato Industry – Growing Success in 2022 was completed by Serecon and Nichols Applied Management — both Edmonton-based consultants with experience in developing economic impact assessments in the ag sphere.

The firms used world-standard industry methodology — further scrutinized and approved by an independent third-party university economist — to conduct the study.

“We wanted to ensure the study was accurate and the methodology was beyond reproach,” Potato Growers executive director Terence Hochstein wrote in a release.

“That’s why we went to great lengths to ensure it was conducted in a manner that would pass rigorous external scrutiny.”

Alberta is home to two broad regions of potato growers, Darren Haarsma of Serecon said: seed and table potatoes north of Calgary and processed potato products (chips, hash browns, et cetera) in the south.

Both subsectors are doing well, he said.

“Since 2017, there’s been marked increase in acres in Alberta across all types of production,” said Haarsma.

“A noteworthy point about the Alberta industry that makes it unique in comparison to other provinces is that the average production — thanks in large part to the extensive irrigation in Alberta — is about 30 per cent higher than the rest of Canada’s average.”

— Jeff Melchior is a reporter for Alberta Farmer in Edmonton.

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Is it for the nutritional content of the fish it sustains? The economic benefit of the local livelihoods it supports? Or does the river have its own value which humans cannot measure?

Such questions may seem removed from the issues the world faces, from deepening climate change and environment loss to food and energy crises fuelled by war and pandemic.

But a world body of scientists unveiled a four-year study on Monday whose central conclusion was that humanity’s failure to go beyond narrow economic valuations of natural resources was ruining the planet.

“Biodiversity is being lost and nature’s contributions to people are being degraded faster now than at any other point in human history,” said Ana María Hernández Salgar, chair of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES).

“This is largely because our current approach to political and economic decisions does not sufficiently account for the diversity of nature’s values,” she said of conclusions based on 13,000 references drawn from sources ranging from scientific papers to consultations with Indigenous groups.

Flora and fauna have for millennia been given tradable values according to the amount of food, shelter and satisfaction of other human needs which they yield.

Under the newer discipline of green accounting, various types of environmental levies, carbon offset schemes and other policies have sought to price in both the value of natural resources to the economy and the cost of polluting them.

While some argue that assigning a money value to natural resources will push governments, companies and consumers to look after them, others believe that putting a price tag on something with inestimable value will have the very opposite effect.

The focus of the report by IPBES — the body that covers biodiversity as the IPCC does climate change — is to highlight the vast array of ways in which different people value nature and how frequently those value judgments can clash in practice.

Rukka Sombolinggi, head of the Indigenous Peoples Alliance of the Archipelago (AMAN) in Indonesia, welcomed the report.

“No effort to conserve biodiversity will succeed without supporting our values and our world view,” she said, stressing the need for indigenous peoples to be recognized as the best guardians of their own ancestral territories.

GDP focus ‘not sustainable’

Ringfencing the biodiversity of a forest might exclude local populations that depend on it for their livelihoods; on the other hand, a development project may create jobs but lead to species loss and destroy heritage sites of cultural value.

While some valuations might be possible to express in monetary terms — for example, the forest’s value as a carbon sink used in an offset scheme — other measures, such as its spiritual value to those who live there, will not be.

“Economic valuation is necessary but it is not sufficient,” report co-chair Unai Pascual said. “We have to balance all the different types of values that exist out there.”

The IPBES report — signed off on Saturday by 139 member countries including Canada, the U.S., China, India and Russia — offers a toolkit to help policy-makers navigate trade-offs in domestic policy and in international negotiations such as this year’s talks on a new global biodiversity pact.

Beyond classifying different types of values and presenting various valuation methods, the guidelines recognise non-standard economic thought as having useable insights, such as that of the de-growth movement with its emphasis on cutting consumption.

“What is clear is that the business-as-usual model where we are focused on developing GDP (gross domestic product) is not sustainable,” said Mike Christie, another co-chair, adding that how authorities use the toolkit was ultimately up to them.

While past attempts to resolve nature conflicts have often failed to balance competing priorities or ignored some voices — typically the low-income or indigenous ones — there have been some notable successes.

The IPBES study cited a stand-off between conservationists and farmers in northern Honshu, Japan, over the use of winter-flooded paddies: negotiations finally led to a “multi-use” compromise creating both a wetland conservation site there in 2005 and a premium market for its sustainably produced rice.

Russia’s invasion of Ukraine has created the scope for arguably more pressing trade-offs to be negotiated.

Nations seeking to wean themselves from Russian energy will risk compromising climate change commitments if they end up expanding local fossil fuels; yet a rapid expansion of wind farm capacity could raise nature conservation concerns.

“There might be impacts on different types of values,” said Pascual. “It’s a complex problem which has many trade-offs.”

— Mark John is Reuters’ European economics editor in London, England.

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Indeed, almost every school of economic thought, from John Maynard Keynes’ demand-driven economics on the left to Arthur Laffer’s supply-side economics on the right, is crowded with disciples defending their leader’s theories and just often, if subtly, attacking their theological foes.

One such fist fight broke out in, of all places, the Feb. 28 editorial pages of the New York Times. In it, writer and editor David Dayen undressed one of the most famous economists of the last 40 years, Lawrence Summers, for his role in building one of the most efficiency-centred, imbalanced, and fragile economies in history.

“For decades, economists like Mr. Summers advanced policies like globalization, deregulation, and markets that valued efficiency over competition,” says Dayen. “They promised that these trends would deliver lower prices. And they did, for a time. But they also left the system vulnerable.”

Vulnerable to what we see today — broken global supply chains impossibly slow to repair; a domestic economy that, somehow, is both quickly growing and mired in inflation; and a consumer culture so treasured that we gladly trade regulation and competition for lower prices and higher economic growth.

It’s the manifestation of Nobel Prize-winning economist Milton Friedman’s “marketized economy,” explains Dayen. “(T)he sole social responsibility of business is to increase profits. Cut regulations, cut taxes and allow companies to structure markets, people like Friedman maintained, and watch the economy take off.”

In short, markets are most important and government — regulation, taxes, antitrust — are far less important.

That’s been a solidly bipartisan tenet for 50 years, and it’s been happening worldwide, no matter if the government is Democratic, Republican, Conservative, Liberal or Labour.

And most of this was accomplished by the early 2000s to lay the foundation for globalization — ever-bigger free trade deals; the rapid rise of unregulated financial derivative markets; easy access to cheap, plentiful labour; and sophisticated, just-in-time supply chain management.

A Summers’ acolyte, Dayen reports, once likened it to how Walmart initially impacted the U.S. economy: The giant retailer might not have been good for local communities or local job markets, but there “is little dispute” Walmart’s cutthroat business model helped the other 120 million Americans not employed in local retail.

As such, “The trade-off was clear: sacrifice resiliency, wage security, and community for the promise of a $5 pack of tube socks.”

We may not like the comparison but we know it’s spot on because, by golly, a pack of tube socks for $5 — even if the socks were made by children working 70 hours a week in a pollution-riddled sweatshop — is still an easy, smart buy, right?

Until this year, when those socks — like our long-ordered television, new dishwasher, or tractor part – were trapped somewhere in a global supply chain with too few manufacturers, too few shipping companies, too few ports, too few railroads, too few truck drivers, too few retailers, and too few solutions on how to fix the whole bloody mess.

Farmers and ranchers know the feeling. Two years ago a global pandemic, predicted though it was, fouled the food system because no one thought it could happen so no one had any plans for when it did happen.

And when it did happen, what was our first instinctive reaction? Give market giants like exporters and meat packers even more market power; power it will take decades, if ever, to get back.

Today, war is ripping through integrated markets from Odessa to Omaha. No tax cuts, fewer environmental rules, more deregulation or less antitrust enforcement will lower crude oil prices or cut U.S. potash costs.

But none of this should be news because, as Dayen reminds us, “Broken systems raise costs far faster than resilient ones.”

The Farm & Food File is published weekly in newspapers throughout the U.S. and Canada.

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But the current business cycle downturn looks very different. In terms of its scale and sudden onset, there is no parallel since the end of the Second World War.

The initial shock from the coronavirus outbreak and the shutdown of much of the transportation and business system is both large and sudden.

There are no government statistics yet on the scale of the current downturn, but taking the oil industry as a proxy for economic demand, consumption appears to have fallen by around 10 million barrels per day, or 10 per cent, within the space of a single month.

The first-round shock to the system is enormous even before any second- and third-round impact on business and consumer spending.

In 1945, demobilization and the conversion from wartime to peacetime production caused industrial output to drop by 30 to 35 per cent progressively over 12 months.

In the 1974-75 recession, U.S. industrial output fell by around 15 per cent over roughly 20 months, according to data from the U.S. Federal Reserve.

In 2008-09, U.S. industrial output declined by almost 20 per cent from its pre-recession peak, but the decline was stretched over a period of roughly 18 months.

All these magnitudes and durations are approximate because peaks and troughs in industrial production do not correspond precisely with the official business cycle dates, which take into account other factors as well.

But the current downturn could easily prove the steepest since 1945. In scale and sudden onset, it looks more like the dynamics of the 1930s Depression or the violent business busts of the late 19th and early 20th centuries.

Recessions can be a lot like epidemics in that a small initial disturbance — the infection of a single patient or failure of a single business/sector — grows exponentially as it is transmitted through the rest of the system.

In recent years, economists have drawn on research from epidemiology to understand how a single bank or business failure can set off a cascading failure as it spreads across the economy.

The initial infection or business failure may be relatively inconsequential; it is the network of connections by which it is transmitted across the population or the economy that turns an isolated problem into a pandemic or recession.

In the case of the economy, recessions are transmitted through real changes in the flow of spending and income, namely sales, orders, employment, wages and debt payments.

But transmission can be accelerated by changes in the stories individuals and businesses construct about the immediate future and the impact on their decision-making.

Economist John Maynard Keynes called them “animal spirits” (General Theory of Employment, Interest and Money, 1936). For Robert Shiller, they are “narratives” or “stories” (Narrative Economics, 2017).

By whatever name we call them, narratives have the power to amplify and accelerate the transmission of recessionary or expansionary forces through the economy because they can become self-fulfilling.

In most cases, it is the shape and structure of the network, and its behaviour when shocked, rather than the scale of the original disturbance, which determines the magnitude of the eventual epidemic or recession.

Some major shocks have failed to produce recessions or only mild ones. Some minor shocks, singly or in combination, have resulted in major business downturns.

Stock market crashes. Real estate bubbles. Bank failures. Credit contractions. Poor harvests. Sharp sudden changes in oil prices. Policy errors. All have been blamed singly or in combination for triggering recessions.

Awkwardly, these same disturbances have sometimes occurred without being followed by a downturn, illustrating the difficulty of modelling and forecasting a highly networked economy.

It is the lack of a simple, obvious, proportional relationship between the cause of a downturn and its eventual size and duration that is the main reason why business cycles have proved so hard to explain, model and predict.

And in most cases, it is the second- and third-round effects of a business downturn on wages, investment, confidence and lending that are the most important in determining the length and depth of the slump.

The more tightly coupled the system is, the more leverage is applied, and the smaller the shock absorbers, the more severely an initial disturbance is likely to cascade across the network.

With the current shock, the policy response from central banks and finance ministries is the fastest on record, which could help reduce second- and third-round effects and prevent the crisis worsening.

In the same way social distancing is designed to reduce or eliminate the person-to-person transmission of an epidemic, monetary and fiscal policy can reduce or prevent second-round effects of an economic shock.

Policy responses aim to reduce the level of immediate financial interdependency across the economy, creating shock absorbers or firebreaks to prevent cascading failures.

As with health policies intended to control the spread of an epidemic, the faster and more comprehensive the monetary and fiscal response, the greater the probability of controlling the eventual recession.

Coronavirus and the measures introduced to suppress the epidemic have created an economic shutdown that has no precedent for 90 years.

Now central banks and governments will have to find similarly unprecedented measures to support the economy until normal business and transportation activities can resume.

John Kemp is a Reuters analyst. The views expressed here are his own.

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In the debate that emerged from the abysmal railway performance through the winter of 2013-14, axing the MRE has increasingly been portrayed as a quid pro quo for better service.

The MRE was introduced in 2000 to replace the arbitrary rate cap imposed when the government axed the Crow Benefit. It was never intended to be a long-term policy, but rather part of a five-year transition to a more commercialized (read deregulated) pricing environment.

It’s designed to protect shippers while allowing the railways to set individual rates for shipping western grain, while requiring them to stay within a total revenue limit based on all movements.

But is it good public policy or is it standing in the way of railways’ investment in modernizing the system or unduly hurting their revenues?

Even Murad Al-Katib, the grain sector lead adviser to the Canadian Transportation Act review secretariat, hinted at a grain transportation forum in Saskatoon last week that if it comes down to a discussion between freight rates and service, it’s service that shippers care the most about.

“I cannot recall one non-revenue entitlement sector talking about how their rates were their biggest concern — rates did not come up on my committee,” Al-Katib said. “Service is really the issue everyone is talking about.”

Mary Jane Bennett, representing the Frontier Centre for Public Policy, told that same conference the railways are being choked by regulation under the MRE.

“Rates under the revenue cap are below market so you are getting a good deal for the grain; it is at 25 per cent less than other commodities. But that low rate comes with a problem and conditions are being created not unlike that of the 1950s and ’60s when grain commitments to the USSR and China could not be honoured. Yet despite the crisis… the people around this room say keep the revenue cap, tinker with it a bit, introduce running rights, which is basically state-ordered taking of rail’s private property and conduct intrusive review of railway costs — all so farmers can get a cheaper rate.”

Bennett cited the 2013-14 winter as the end result of too much regulation, rather than not enough.

Service is indeed key to getting western grain to markets and there is little argument that it has been lacking of late.

But a newly released report by a subcommittee of the Crop Logistics Working Group says the MRE debate should be decoupled from the question of service.

“It is well established that there is no relationship between the cost of freight and the provision of service in the rail market,” the committee report says.

The MRE does not cap how much grain the railways can move, nor does it cap how much they earn. It merely caps the average rate they can charge per tonne, adjusted for railway inflation and the distance travelled. In other words, the more grain the railways move, the more they can earn.

The report noted commodities that don’t fall under the MRE criteria do not receive better service or lower rates.

In the grain sector, where the railways have a monopoly position at 88 per cent of the delivery points, “there is no practical or competitive alternative for grain transport, so the business and volumes will always be there and will move subject to the operational planning of the railway, not the commercial timing of the shipper.”

The subcommittee review found it was never anticipated that railway revenues would meet or exceed the MRE as is routinely the case. Rather, it was thought that overall rates would decrease due to competition — which has never materialized.

It would appear railway earnings from hauling grain are as close to the maximum as possible without going over, which would result in penalties paid to the Western Grain Research Foundation.

The railways have done quite well as a result of the MRE, rather than it being a drag on earnings. The evidence would suggest that in the absence of any competition, railway service is driven by shareholders’ priorities rather than shippers’.

So on one hand, the MRE is working; it protects producers from being gouged in a non-competitive market. But on the other, it also ensures the railways earn more hauling grain than they would if they had to compete for it.

But while the MRE has little impact on service, the lack of competition does.

It’s unlikely a solution will be found to the non-competitive nature of Canadian rail network any time soon. Even greater interswitching and open running rights offer limited gains. That leaves regulatory intervention as the best means of assuring reasonable service at a reasonable cost.

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Responding to questions at an unrelated event in Winnipeg last week, Agriculture and Agri-Food Minister Gerry Ritz said Canada has put forward strong proposals regarding supply management when it comes to TPP negotiations. On July 21, the U.S. government publicly criticized Canada in an open letter, saying it was, “unwilling to seriously engage in market access discussions regarding dairy.”

“We consider the proposals we’ve put forward balanced in scope and we want to make sure those who export have the ability to export,” Ritz said. “And under the supply-managed system we recognized the value that it brings to the Canadian economy, we make all these arguments at the negotiating table, we don’t do it in public, nor does any other country for that matter.”

The exception to that rule may be the United States, which has put continuing pressure on Canada regarding supply management, particularly around the country’s dairy industry.

“Certainly we don’t tip our hand in public, they may think that’s a good way to negotiate; I don’t,” said Ritz.

The minister did say that Canada is paying close attention to products the U.S. regards as sensitive, such as sugar. He also noted that U.S. subsidies have not a free pass during talks.

“We point out the realities of what other governments do under the guise of helping,” said Ritz, referring to the U.S. Farm Bill.

But some of the U.S. farm programs have been grandfathered in by the World Trade Association, making them difficult to address directly.

Despite the hurdles ahead, Ritz was optimistic that Canada would be party to the agreement.

“There are a number of countries that want us at the table, including Japan,” he said. “I was a little concerned when I saw their trade minister say there’s two countries that may not make it into the end game, I don’t think Canada is one of them… the Mexicans like us at the table, the Japanese like us at the table, as do a lot of the other countries.”

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(MASC) says its spot loss hail insurance program is similar to what private hail insurance companies offer.

But at least one Manitoba farmer disputes that and says he knows several other farmers whose crops were recently damaged by hail who feel the same.

The farmer, who asked not to be named, said he signed up for MASC’s hail insurance because coverage was automatic so he didn’t have to remember to buy it and because MASC told him it would settle as quickly as private insurance companies. But this farmer says MASC is deferring settlement instead of cutting him a cheque.

Similar?

MASC’s hail insurance is similar to what other companies offer, said David Van Deynze, MASC’s manager of claim services. Unlike AgriInsurance, which MASC administers on behalf of the federal and Manitoba governments, its hail insurance program is not government subsidized and fully commercial.

“You get paid as quickly as we can process it based on the percentage loss of up to $200 an acre for most crops,” Van Deynze said.

It’s clear cut when a crop has been completely destroyed. However, sometimes MASC defers settlements until it can accurately estimate the percentage loss, he added. It depends on the stage the crop was at, how much damage occurred and the type of crop.

There’s good data available to estimate the yield impact on most crops when damaged early in the season or after seed has set, he said. When crops are hailed in between, especially canola, making an accurate estimate is harder.

“That’s when we tend to wait until late summer or early fall when the crop sets seed,” Van Deynze said.

“When you get hail at the midpoint of plant growth sometimes they recover really good and other times not as well,” he said. “It can depend on the growing conditions after the hail.

Accurate

“We’d prefer to be accurate. We don’t want to shortchange the producer and we also don’t want to overpay the producer. We think we can be more accurate by deferring that assessment until later in the year so we can see actually how much seed the crop did set.”

Sometimes MASC will settle a hail claim, which is based on the percentage of damage, but want the farmer not to destroy the crop until it can more accurately estimate the yield loss for purposes of the AgriInsurance program, Van Deynze said.

AgriInsurance insures crop yields for the entire farm, not each field as is the case with hail insurance. Even if farmers aren’t in a claim position their yields are recorded by crop insurance and used to establish insurance coverage. Once MASC appraises a damaged crop the farmer can opt to keep or destroy the damaged crop.

“Once we have our number they are free to do whatever they want, Van Deynze said. “It’s up to them to make the decision that’s best for their farm.”

Cover crops

Often farmers want to work down damaged crops before MASC has estimated the yield loss.

“No farmer likes to drive by a crappy-looking crop every day,” Van Deynze said.

And farmers don’t want to spend money on weed and disease control on a crop that isn’t likely to pay.

Some farmers say they want to work up damaged crops to preserve the nutrients they’ve applied. In fact keeping the crop until fall is the best way to protect those nutrients, says John Heard, soil fertility specialist with Manitoba Agriculture, Food and Rural Development.

“I’d go as far as to say farmers who rip up their crops now should have to seed a cover crop to protect their nutrients,” he said in a recent interview.

Farmers dissatisfied with an MASC adjuster’s assessment can request a second assessment. If they don’t like either they can take it before an independent appeal tribunal, Van Deynze, said. The second assessment is independent with the second adjuster unaware the crop has been assessed.

Appeal process

If the case goes to the three-member appeal tribunal both the farmer and MASC make their case. The tribunal’s ruling is final.

“We do thousands and thousands of claims (of all types, including hail) and we probably do less than 10 of these (appeals) a year,” Van Deynze said.

As of July 8, MASC had received 820 hail claims. There was a smattering of hail reported last weekend.

Most claims as of July 13 came from two storms — one in the Roseisle, Miami, Thornhill, Morden, Winkler, Pilot Mound, Swan Lake, and Touraud areas June 27 and the other north of Portage la Prairie and in the Brookdale, Deloraine and Waskada areas July 4. There were also claims from several storms near Virden this summer.

On average, MASC gets about 2,000 hail claims a year.

“If we have no more hail for the rest of the year it would be considered a light year, but the scary part is we’re only July 8 so a lot can change between now and October,” Van Deynze said.

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Unfortunately, this masks important strategic choices with implications for the dairy industry and, by extension, Canada’s agri-food sector as a whole.

Canada’s internal debate keeps the country on a defensive footing. It is time to get offensive by focusing on other countries’ agricultural subsidies — which are to date, largely out of sight, out of mind and entirely detrimental to our long-term competitiveness.

All eyes are now focused on the timelines to conclude the Trans-Pacific Partnership (TPP). But, we need to look at the long game and the evolution of Canada’s trade agenda.

Whither Canadian dairy?

Canada’s dairy sector is being seriously squeezed and faces a growing trade deficit. We’re importing large volumes of various milk proteins (known as concentrates and isolates) and our dairy exports are restricted. This is hardly a growth formula for one of Canada’s largest agri-food sectors but more importantly is a significant threat to the current system.

Imports from the U.S. of such proteins are up some 300 per cent since 2010. This import pressure is likely to continue once the Canada-EU trade deal (CETA) comes into force and possibly also under the TPP.

This trend prompts the commentators from Agri-Food Economic Systems to state: “in the face of growing imports, increasing exports will be necessary in order to avoid shrinkage in the Canadian dairy industry.”

Dairy proteins are important to food processors in order to develop innovative and healthy products, such as yogurts and high-protein beverages.

Canada’s supply management system keeps the price of milk products above “the world price.” This makes lower-cost imports very attractive to food processors.

Lower-priced and uncontrolled imports of protein concentrates and isolates displace Canada’s skim milk powder which results in growing surpluses domestically, some of which are diverted into lower-value animal feed.

Simply labelling supply management as “protectionist” (and thus deserving dismantlement) misses a critical point.

Export conundrum

Canada can’t unilaterally expand its dairy exports. Proponents of change largely ignore how we can actually export more dairy products, even if that is desired within the sector.

Under Canada’s free trade agreement with the U.S., milk protein concentrates and isolate imports are allowed into Canada “tariff free” (and it’s reciprocal). The problem is that Canada’s export potential is restricted based on Canada’s 1995 World Trade Organization (WTO) commitment. The export limits were confirmed in the results of the challenge by New Zealand and the U.S., on skim milk powder, cheese and other products.

Technically speaking, Canada can export milk products under supply management provided that there is no subsidy on dairy product exports. However, the current structure of our production and pricing arrangements was found to create an export subsidy on dairy products. Canada can only export dairy products up to the limits allowed for in Canada’s WTO commitments.

While we debate the need for reform within our dairy sector, our competitors’ tactics are designed to keep us on our heels by critiquing the milk supply management system. This is distracting us from assessing just what it would take to export.

Competitor subsidies

Meanwhile, our competitors produce and export milk products by utilizing a complex array of direct and indirect subsidies. We argue that the so-called world price for milk is, therefore, not a true reflection of the real cost of producing these products — and our competitors are taking full advantage of it.

Foreign subsidies are immediately relevant to the dairy issue. But, we need to bring to light the destructive effect of agricultural subsidies particularly in the U.S. and Europe as a whole.

Legitimate support is given to agriculture here and abroad, such as to compensate for crop failures and for research. However, widespread use of subsidies in certain countries creates unfair competition.

Subsidies can encourage deleterious behaviour. Dairy production in the American southwest is successful in part because it draws down on the region’s aquifers — a “natural capital” benefit that is not factored into the price.

Such practices create a hidden market failure and it’s a global phenomenon. They can encourage (at little cost) a broad array of environmental impacts from polluting surface and groundwater, such as what has befallen many European Union (EU) rivers, to degrading soils and putting biodiversity at risk.

For its part, Canada’s dairy supply management has not created significant surpluses at the expense of ecosystems. Our country’s wealth of water and land confers certain comparative advantages (if we manage them correctly).

The other issue is about understanding how international subsidies constantly place Canada’s agri-food sector at a disadvantage.

Opening a new front

We need to consider the merits of opening up a new front — on environmental and resource sustainability — as a basis to help take the offensive.

Extended drought is reshaping the U.S. and Australian dairy industries. Soil quality and availability for expansion of the dairy industry in New Zealand may limit future growth there.

Canada’s water and soil resources are not facing similar pressures, although there are some pressures in certain regions of ours.

Improving sustainable production is not going unnoticed. Global supply chains are now procuring many products, such as palm oil, fish and coffee, only from sustainable sources.

But, is there a role for Canada’s agri-food sector as a whole to better leverage the sustainability card?

Becoming a global advocate for the elimination of foreign government-subsidized agricultural practices (including their environmental impacts), may be in our national interest. This would be a big step beyond driving down tariffs or increasing market access.

Doing away with subsidized production and raising the environmental bar even slightly for our competitors would be a calculated strategic move. It may eliminate some highly inefficient competitors and those requiring massive investment to meet even the most minimal sustainable requirement. However, prices would better reflect real costs which would bode well for our agri-food trade.

Traceability

Taking a proactive stance on sustainability requires, in part, putting more sophisticated information systems in place to track and trace the origin of food and the impacts of its production steps.

While Canada is a food safety leader, its performance on farm-to-fork traceability is uneven. We would need to be a leader in traceability to demonstrate our sustainability footprint on a comparative basis.

Our next trade agenda could assume a three-pronged approach. Unravelling these indirect subsidies and demonstrating Canada’s comparative advantages on sustainability performance could become key planks in our future global trade strategy, benefiting the agri-food sector as a whole.

And, with the clock ticking for our dairy sector in mind, taking concerted action on dairy export rules may allow Canada to be more competitive on dairy than is commonly appreciated.

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