ECON 319 Department of Economics Briefing Note #1

Java Python ECON 319

Department of Economics

Briefing Note #1

Task:

1. You are a senior economist in the Department of Foreign Affairs, Trade and Development (also known as Global Affairs Canada) and have been asked to brief the Minister of Global Affairs on the current depressed state of canola farmers in Canada. You want to provide the Minister with key considerations for Canada’s position on the trade restriction imposed by China and whether there are trade policy options that Canada can undertake in the future to avoid such a situation.

2. Your briefing note is “For Information Only”; however, ensure that it has a well-developed “Key Considerations” section.

3. Along with your task outline in point  1.  above,  develop  your  briefing note  “Issue”  after reading the article below.

Why one of Alberta's biggest canola farmers turned his back on the Cinderella crop

https://business.financialpost.com/commodities/agriculture/why-one-of-albertas-biggest-canola- farmers-turned-his-back-on-the-cinderella-crop

by Naomi Powell, Financial Post January 3, 2020

Canadian canola growers have dealt with falling demand, rising inventories and lower prices amid the trade dispute with China.

'This might be the new normal': Canadian canola farmers are getting used to life without China Canadian canola harvest expected to drop 4.8%, the smallest crop in four years

Diane Francis: It's time to play hardball with Chinese aggression

The Financial Post takes a look at 11 people and companies we’ll be watching closely in the new year.

No crop held a position of greater importance on Kevin Serfas’ Alberta grain farm in the fall of 2017 than canola. In those days, the signature Canadian crop — once known as “black gold” for its dark seed and unmatched profitability or the “Cinderella crop” for its quick ascent to prominence — covered half of his sprawling 60,000-acre operation near the hamlet of Turin, just outside Lethbridge.

It was a major commitment to say the least, sizeable enough to earn Serfas distinction as one of the province’s largest canola farmers.

“For a lot of years, it was the highest-value crop most guys could grow,” he said. “It had the best returns on it time and time again. Farmers really counted on it. I really counted on it.”

It wasn’t insignificant then that Serfas turned his back on canola this year, especially since he’s vice-chair of Alberta Canola and a director on the Canola Council of Canada.

Canola, soybeans and potatoes left in fields after weather and trade war deliver 'brutal' year for farming Why it’s so hard for Canadian farmers to quit growing canola — even amid blockades from China No other sector in our economy is getting slammed as hard as farmers in the global trade war There were several reasons he decided to plant barley instead. For one thing, Canola has the highest “input cost” of all the crops on his farm, meaning the seed is expensive and the plants are high maintenance. For instance, they might have to be sprayed multiple times for weeds.

What’s more, a few consecutive seasons of dry weather have resulted in one disappointing harvest after another. Since canola requires more moisture to grow than barley, lentils or wheat, and with the possibility looming for yet another dry year ahead, the risk of betting the farm’s annual budget on it outweighed the potential reward.

Yet what finally closed the books on canola for Serfas was China. China sank the price and made it just not worth it.

In March, China, which once purchased 40 per cent of all Canadian canola exports, abruptly abandoned Canada’s crop, citing pest concerns.

The boycott became a flashpoint in an already deteriorating diplomatic relationship between Ottawa and Beijing that began with the arrest of Huawei Technologies Co.’s chief financial officer Meng Wanzhou in Vancouver on a U.S. extradition request.

China demanded her release and when Ottawa refused to intervene, the trade measure on canola and the Chinese detentions of Canadian citizens Michael Kovrig and Michael Spavor were widely viewed as retaliation.

Canola prices, already lacklustre due to weather conditions, plunged to $430 a tonne, down from $700 in the best years. They have since moderated to $455 a tonne, but Serfas said enough was enough.

“The China thing was a last nail in the coffin or whatever you want to call it,” he said. “When you lose

the value we lost almost overnight back in March, well, canola is still part of the crop rotation and we still have to grow it, but that took the shine off it. China sank the price and made it just not worth it.”

The recent misfortunes besetting canola have broken a long-held rule of thumb for farmers across Western Canada ECON 319 Department of Economics Briefing Note #1 : you might not make much on your other crops, but canola will almost always turn a profit.

Given Southern Alberta’s climate, there’s usually only enough rain to support a limited rotation of crops: generally canola, wheat, barley and lentils.

A global glut of wheat means farmers might only break even on that commodity. Lentils have done little for the bottom line after India, one of the largest importers of Canadian pulses, began hiking tariffs in 2017 amid an abundance of domestic supply. And though barley will make some money, it’s rarely as much as canola.

“Canola’s always been a premium crop for farmers,” said Ken Ball, senior commodities futures analyst at PI Financial Corp. in Winnipeg. “That certainly hasn’t been the case this year.”

Though Canada has started selling more canola to Europe and other markets, none of those opportunities have been enough to offset the loss of China’s massive demand. Farmers are left sitting on a record oversupply of more than four million tonnes of unsold canola.

Heavy snow and rain during harvest on the Canadian Prairies – including this canola field east of Cremona, Alta., left several million acres of canola buried until spring, the latest blow in a miserable year that may compound farmer problems into 2020. Mike Drew/Postmedia Network On top of that issue, the volume and quality of the harvest across all crops has been poor due to bad weather.

“It’s not just canola, but other commodities too,” Ball said. “Farmers have really struggled with the weather.”

For example, a harvest that should have brought in 45 bushels per acre of canola this year for Serfas resulted in just 10 bushels. Other crops fared no better.

“It’s been awful to be honest, most of the crops were a writeoff because of rain,” he said. “We’re doing   the same amount of work as ever and getting so much less. Everybody is looking for the next canola, but it’s been 20 years and it hasn’t happened. Now nothing is really making a whole lot of money.”

As a result, Serfas this year scaled back on canola in favour of barley. The advantages were clear. Barley is sold mainly as feed for cattle, and Serfas didn’t have to go far to find a customer since his farm is located in the centre of “feedlot alley.”

We’re doing the same amount of work as ever and getting so much less

The area north of Lethbridge and south of Calgary happens to be the world’s fourth-largest cattle-feeding jurisdiction in the world, trailing just Texas, Nebraska and Kansas. Nearly 70 per cent of the 1,967,000 cattle fed in Canada last year were in Alberta, where the mild climate and proximity to processing facilities have attracted more than 150 feedlots, according to the Alberta Cattle Feeders’ Association.

“Most of the cattle that are fed in Canada are fed right here,” Serfas said. “We’re right at market and    we’ve been able to grow barley and not have a whole lot of freight added to it. It’s worked really quite well for us.”

Shifting his attention to barley held another important draw for Serfas: it reduced his dependence on trade with volatile foreign markets.

“That had a lot to do with it,” he said. “I’ve never spent more time looking at what’s going on in the world and where the next hiccup will be or the next train wreck in world relations.”

Not all farmers are taking the same approach. The number of farm acres planted with canola fell six per cent to 21.35 million acres in 2019, though that figure is expected to rise by two per cent next year, said Neil Townsend, a senior analyst at FarmLink Marketing Solutions.

“It’s early days on making 2020 decisions and right now it doesn’t look like there will be a drastic change,” he said. “Wheat prices and quality have been unnerving and farmers’ fallback is canola. There are no home runs out there right now.”

Serfas said he hasn’t given up on canola entirely. Most of this year’s barley crop may be sheltered from the various ongoing trade wars, but the demands of crop rotation and the realities of Canadian agriculture will see him drift back to canola again.

“We can’t eat our way through what we produce, so we’re heavily dependent on export markets,” he said. “That’s why we rely on trade agreements and fair trade. It’s just that everything has been in a tither here for the past year.”

He points to the uncertainty created as negotiations continued on a replacement for the North American Free Trade Agreement, and then the start of the Comprehensive Economic and Trade Agreement with Europe and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

“All of those (agreements) are extremely important and while they were being negotiated, we didn’t know whether we’d have those barrier-free export markets,” Serfas said, adding the trade wars have affected his bottom line. “Hammered it. It’s made the bankers nervous, it’s made my accountants nervous, it’s made me nervous