The global trade dispute between a protectionist United States and many of its trading partners, including Canada, the European Union and China has Ontario farmers struggling to deal with an unknown outlook.
There have been little hiccups on trade in the past, but since the Canada-U.S. Free Trade Agreement, which morphed into the North American Free Trade Agreement, the rules around trade have mostly been predictable.
But recent U.S. tariffs on many of its imported goods and reciprocal tariffs against U.S. goods put in place by other countries have clouded the situation.
Why it matters: Markets waited before reacting to the trade flap between the United States and its main trading partners, but led by soybeans, major crop indices have plummeted over the past two weeks, wiping out billions in potential revenue for farmers.
What it means for farmers depends on how long the tariffs last.
“The whole reason for trade agreements is to provide certainty to everyone involved,” said Barry Senft, Chief Executive Officer of Grain Farmers of Ontario. “From the farmer’s perspective, they are able to market their crop without any issue other than price. When you put artificial barriers in place, it distorts those trade agreements and that is what is happening now.”
Few people fully understand how the tariffs will affect global trade and pricing because such an escalation is without modern precedent. As a result, its effects on Ontario farmers remains a significant question.
How did we get here?
In March, U.S. President Donald Trump threatened to apply tariffs to steel and aluminum imported into the U.S. He initially backed off on applying the tariffs to Canadian and European imports, but eventually imposed them, at levels of 10 per cent on aluminum and 25 per cent on steel.
Canada and other countries threatened American imports could be subject to retaliatory tariffs. Products on the list for retaliation in Canada’s case, have continually evolved, but came into effect July 1.
Items range from steel products at 25 per cent to many others at 10 per cent, including pesticides in packages of less than 1.36 kilograms, yogurt, pizza, maple syrup, shaving products, dish detergents and processed spent fowl.
The list doesn’t include soybeans or other meats, for which prices are determined on the broader North American market, and should have little effect on most farm inputs, other than the purchase of steel.
Trump responded to the Canadian tariffs by suggesting he would apply tariffs to cars imported from Canada, a threat he has also made to European countries.
The Canadian tariffs could have the most impact on farmers who import equipment and some supplies from the U.S. However, the long-term implications for supply and competitiveness remain unclear.
Chinese and Mexican tariffs on U.S. goods may actually have a larger effect on Canadian farmers because those tariffs have resulted in declines in U.S. crop markets, which provide the base for pricing of those commodities in Canada.
Hog prices have trended higher, as they often do into summer barbecue season, despite the Mexican tariffs on pork.
As well, the Canadian government has moved to a new phase by announcing measures to help steel and aluminum manufacturers weather the storm brought on by the U.S. tariffs.
American Agriculture Secretary Sonny Purdue alluded to U.S. action similar to this several times in recent weeks by saying “American farmers are patriots and will not have to bear the brunt of China’s retaliation.”
What will it mean for farmers?
“The short answer to this is everybody loses,” said Al Mussell, research lead at Agri-Food Economic Systems.
“We’ve got a very integrated system, particularly Canada and the U.S., and to some extent Mexico, in agriculture and food and there are some products we produce really well here.”
Ken McEwan, director of Ridgetown College, University of Guelph, monitors crop input prices in Canada and the U.S. He said Canada’s tariff list contains few items that will affect farmers directly. That’s likely by design. There’s a 10 per cent tariff on insecticides, fungicides and herbicides with packaging smaller than 1.36 kg, but that will affect few, if any, products used on a larger farm scale.
But McEwan said he is worried about the longer-term implications.
“What will this do to our competitiveness as we operate in a North American context? Fertilizer, machinery and commodities move freely across the international border,” he said.
The larger tariffs are on steel and aluminum and over the longer term, that will affect prices of everything from tractors to hog penning.
Ontario already has a $5.5 billion trade deficit in agriculture products, said McEwan. And tariffs don’t disappear quickly. American countervail duties on Canadian hogs took years to get rid of, and country-of-origin labelling in the U.S. significantly altered the fortunes of some Canadian suppliers of beef cattle and hogs to the U.S.
“Once these tariffs and duties get in place, sometimes they are difficult to remove,” he said.
Paul Fallis, sales and marketing manager for Canarm AgSystems, said agriculture manufacturers will have little choice, but to pass on the tariff as a surcharge. The type of product will determine the surcharge. Rails for under hog barn floors with little manufacturing will have a higher surcharge than highly manufactured goods like a hog feeder, said Fallis. He added that the tariffs will make a lot of work for their staff.
Canarm manufactures in Arthur, Ont., but also in China and has warehouses and a subsidiary that manufactures livestock equipment in the U.S. A product such as stainless steel that has standardized grades around the world and which is easier to compare, will be easier to source from somewhere other than the U.S., compared to raw products used for manufacturing. Canarm has been importing all its stainless steel from the U.S.
“You look at a hog, or poultry or dairy barn, there’s a lot of stainless steel going in there,” he said.
One of the largest concerns for farmers is how the Ontario basis for major crops will react over time.
Some users will be happy to take the cheaper crops, such as soybeans, but some also need to assure supply.
“There’s demand for Canadian soybeans and supply and demand should dictate there’s some strength in Canadian soybeans,” said Senft. “That’s going to be the real question: Will the basis adjust from the Chicago markets and will it fill in some of the gap from the price setting in the U.S.?”
Gary Stordy, director of government relations and corporate affairs with the Canadian Pork Council, said the tariffs create more uncertainly in the marketplace and farmers will most likely end up bearing the costs.
Most Canadian hog farmers are paid on a pricing system based on the price of hogs in the U.S. He said many in the hog industry expect that pork will continue to move to Mexico and processors and distributors will swallow the tariff by forcing price reductions down to the farmer level. When the American price of hogs drops, it will also drop in Canada.
Inflation is also a nagging concern. The U.S. Federal Reserve was already expected to raise interest rates, which puts inflationary pressure on the economy, going through this year, but the tariffs, passed down to consumers will mean goods will also increase.
Fallis pointed out that if the U.S. already has record low unemployment, and more restrictions are being placed on foreign workers, there could be an inflationary pressure on the cost of labour in the U.S. too.
Could there be opportunities?
Mexico placed a 20 per cent tariff on American pork, while opening up some new tariff-free imports to encourage other countries to fill in the gap.
“There may be opportunity to increase a bit,” said Stordy, although he wasn’t overly optimistic. Canadian pork could be more competitive because it isn’t subjected to the 20 per cent tariff, but it will take a long time to change the integrated pork system between the U.S. and Mexico. Most of the meat exported to Mexico from the U.S. is fresh and then further processed locally to fit the market.
As the U.S. is put at a disadvantage by tariffs applied by the Chinese on soybeans, there could be room for more soybean sales from Canada, although Mussell questioned whether we have the capacity to sell significantly more soybeans or pork to China in the short term.
Making trade more complicated
Those interviewed for this article pointed out several other unanswered questions.
- If soybeans are imported into Canada and rebagged or processed, what is the level of “substantial transformation” needed for them to then be re-exported to China? asked Mussell. These sorts of questions will have to be answered on all goods that have tariffs.
- How long will the tariffs last? Companies have billions of dollars invested in the current systems of production, trade and processing. When the barrier is artificial and not permanent, like a tariff, companies are reluctant to significantly change in the short term. But the longer the tariffs are in place, the more chance the system will conform to that reality.
- Will Trump be restricted in his use of Section 232, the authority he’s using to restrict trade on national security grounds? A group of U.S. senators are challenging his use of that provision.