MFRE Faculty Spotlight is a series of posts highlighting the work of the Master of Food and Resource Economics faculty team members, a group of accomplished professors specializing in topics in the Food and Resource Economics sector, including agricultural commodity markets, environmental economics and policy, food security, trade policy, and natural resource management. This week we shine the spotlight on Dr. Richard Barichello’s paper on the effects of COVID-19 in Canadian agricultural trade.
COVID-19 has affected human life in many aspects. Trade around the world is no exception. The World Trade Organization (WTO) estimates a worldwide trade decline between 13% and 32%. We have observed how this crisis has affected trade and commodities in unprecedented ways, such as the spot price of crude oil temporarily becoming negative. But how will Agriculture, one of the pillars of the Canadian Economy, be affected?
In his recent paper, published in the Canadian Journal of Agricultural Economics, Dr. Rick Barichello analyzes how even though global trade will continue to fall during the pandemic, agricultural trade will be less affected, due to food being a necessity. Canadian Agricultural trade will be affected mostly through livestock, pulses and horticulture exports, but cereals will perhaps feel a lesser impact. However, all of Canada’s agricultural exports face the threat of costly inspections, constricting food safety regulations or preventive measures to protect domestic producers.
Dr. Barichello answered the questions below to further illustrate these points. You can read his full paper here.
1. What measures are you using to track agricultural trade?
All trade data I am using comes from Statistics Canada. I use mostly measures of value of exports at the point of export (FOB price), but also include some import data. Values are taken in the form at which trade occurs, it includes grains, oilseeds, and livestock, but also include beef, pork, flour, and oils.
2. What has been the impact of COVID-19 on overall trade for Canada, and how does this compare specifically to trade in the agriculture sector?
The COVID-19 recession will reduce trade overall for Canada and virtually all other countries. I did not attempt to estimate the fall in overall Canadian trade, but, using WTO estimates, we can calculate a decline between 13% and 32%, I used a mid-point of 20%. The WTO expected this to be worse for North America and Asia. As the US recession seems relatively serious, perhaps Canada’s aggregate trade decline could be greater than 20%. I did not speculate on this. However, it will likely be less severe for agricultural exports since when income declines, the effect of this is greatest on products with high income elasticities (i.e., luxuries). Food, by contrast, is a necessity with low income elasticities, so although agricultural exports will also fall, they can be expected to fall by less.
3. Canada is known as the world’s ‘breadbasket’ for its production of wheat – is that why trade in cereals are least affected?
No. The reason that cereal trade is least affected is that cereal production has low income elasticities. In many parts of the world, meat is a luxury and it has a mid-range income elasticity. Cereals, on the other hand, are not luxuries but very much basic necessities. So people continue to consume similar amounts, even as their income levels change. There will be some drop in demand for Canadian wheat, but not as much as for most other agricultural products.
4. Can you explain the threats that Canadian agricultural trade faces? What would motivate these threats from other countries?
The first threat is that the worldwide recession becomes deeper and longer, not just for this year, but beyond. Most of the estimates of falling incomes, and hence falling trade flows, is based on the assumption of just one ‘wave’ of COVID-19. If there are several waves, that will extend the recession for longer. Similarly, if more countries like Brazil refuse to use public health measures that reduce the infections and deaths, there will be a deeper recession and slower recovery in those countries. This will dampen worldwide demand by more than the numbers I used.
The second is that the Canada-US border is likely to stay closed for longer than estimated, and consumer demand in the US will come back more slowly if the infection rate stays high. This will damage Canada’s export prospects, although maybe not terribly much on agricultural products.
The third threat comes from a separate source, namely the various disputes between Canada and China that have already lowered our agricultural trade. This will be due to China making technical claims on Canada’s exported products, such as Sanitary and Phitosanitary (SPS) violations, which even if contested through the WTO, the problem will not likely be resolved for several years. This threat can be expanded to other countries that now import Canadian food products, who may, for domestic political reasons, try to protect local jobs and incomes in agriculture by raising import tariffs and other restrictions. These restrictions may take the form of costly inspections, tightened SPS and food safety regulations. The motivation may differ from that of China, but the result will be the same: reduced market access, and exports, for Canadian food and agricultural exporters.
5. After COVID-19, do you think Canada will fare better than other countries in resuming its agricultural trade?
It is not clear that Canada will be in any different position than other agricultural exporters in resuming its agricultural export levels. One advantage in Canada is that we will have our domestic supply chain relatively intact, because the pandemic appears to be moderating rather well in Canada. Migrant labour is an issue that will slow us down, but it is not that clear to me that we are at a disadvantage relative to other countries.
About Dr. Richard Barichello
Dr. Barichello is a professor at The University of British Columbia in the Faculty of Land and Food Systems and the Masters of Food and Resource Economics (MFRE) program. His research interests include agricultural and trade policy, regulated markets, dairy industry economics, quota markets, international development, and rural labour markets. He teaches courses in Food Market Analysis and Policy Analysis in the MFRE program.