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Canada & Australia: Big Wheat Exports, Challenges

Trade across Ambassador Bridge between Windsor, Ontario, and Detroit, Michigan, is equal to all trade between the U.S. and Japan. Canada also is a formidable competitor.

The U.S. and Canada enjoy the largest bilateral trading partnership in the world. The North American Free Trade Agreement, signed in 1994, is a major driver of this turbo-charged trading relationship.

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However, Canada is revving up its engine as an ag export competitor. In less than seven years, it has concluded free trade agreements with nine countries and currently is negotiating with 30 more.

Wheat is a major export. The U.S. is Canada’s biggest wheat importer, followed by Japan with 1.22 million tonnes, down 5% from 2013. Indonesia is in third place with 1.06 million tonnes.

“U.S. imports of Canadian wheat jumped by 36% last year when Brazil came into the U.S. market more aggressively,” says Sterling Liddell, grains and oilseeds analyst for Rabobank Food & Agribusiness Research and Advisory Group.

“Argentina dropped from a 12 million exporter in 2011-2012 to 2 million tonnes, leaving Brazil short. This year, Argentina will export about 6 million tonnes of hard red winter wheat.”

Following a record-breaking crop in 2013, Statistics Canada pegs this year’s crop at 27.5 million metric tons, down 26.8% from last year. Protein quality is a bit lower, especially in Saskatchewan.

“Canada is back to normal, down from 37 million metric tonnes last year,” Liddell says.

The Canadian Grain Commission shows total exports up 14% over 2013. Year-end wheat stocks are down 38%.

Barley acres continue to decline as demand for canola rises, and canola’s higher profit margins also absorb traditional wheat acres. Most of this year’s smaller canola crop is bound to China, up 27% over 2013.

Canada’s soybean crop is headed to another record high at 6 million tonnes.

New Trade Deals

Canada’s cowherd has contracted significantly, but surging beef prices haven’t ramped up cattle numbers, says Don Close, protein analyst, Rabobank Food & Agribusiness Research and Advisory Group.

“The revised country of origin labeling (COOL) has been a factor in encouraging producers to continue to sell cattle aggressively,” he says.

Canada recently won a WTO case challenging the U.S. COOL meat labeling rules. It’s likely to be appealed.

The July 1 Canadian Cattle inventory was 13.3 million head, a 1.5% decline from a year ago. As a result, Canada’s net beef exports are projected to rise steadily, but not above the past decade’s levels.

Canada and the 28-nation European Union have an historic new free trade agreement, called a game changer for Canada’s beef industry.

Once the Comprehensive Economic and Trade Agreement (CETA) is implemented, the EU will allow duty-free access for  50,000 tonnes (carcass weight equivalent), including 35,000 tonnes of fresh/chilled beef and 15,000 tonnes of frozen beef. Canada also will have continued access to the existing shared duty-free quota for high-quality, grain-fed beef.

CETA will give EU access to 70% of Canada’s most favored nation cheese imports. The U.S. Dairy Export Council says that violates the 1994 General Agreement on Tariffs and Trade.

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Earlier this year, Canada and South Korea concluded a new free trade agreement. It gives Canada access to the fourth-largest economy in Asia.

Canada also has its eye on the growing middle-income markets in Southeast Asia. Two-way trade between Canada and Thailand surpassed $3.5 billion in 2013, making Thailand Canada’s second-largest Southeast Asian trading partner.

A high-level Thai trade delegation visited Canada in October to explore opportunities for trade, investment, and technology cooperation.

Australia

At the Global Forum agri benchmark Cash Crop Conference in Des Moines Iowa, in August 2014, Ashley Herbert was optimistic about the Australian ag economy. His consulting company, Agrarian Management, is based in Perth.

“The last five years haven’t been great, but we’re harvesting our best overall crop in 15 years,” he says. “It’s a hot, dry finish in the northern Wheat Belt, but the rest of the crop is going gangbusters.”

Australia is a significant net exporter of agricultural products. “Two thirds of our grain goes overseas,” Herbert says.

Wheat is the top export crop. “Out of the 25 million metric tonnes we produce annually, we export 20 million,” he says. “Australia has 20% of the world trade in wheat.”

The 2014-2015 wheat harvest is predicted to fall 1.33 million tonnes, according to the Australian Bureau of Agriculture and Resource Economics and Sciences. That’s 12% below its five-year average.

Indonesia is Australia’s single largest wheat customer.

“It’s mainly a function of freight advantage, but quality plays a role,” he says. “The big worry is the Black Sea countries. Their grain is low-cost, lower quality, but they’re increasing production.”

Australia has dropped from the world’s second-largest beef exporter to third place. In the 2013-2014 year, 8.3 million cattle were slaughtered. It’s the second consecutive year slaughter has topped 8 million head.

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As a result, the cattle herd dropped from just over 29.2 million in 2013 to a forecast 26.1 million in 2015.

Cattle producers in Queensland once again are slaughtering livestock at record levels because of drought. “Prices were at all-time lows earlier in 2014,” Close says.

Record slaughter and beef production is supported by a strong export market. Exports year-to-date are 16% higher than the same period in 2013.

Southeast Asia is a major destination for Australian beef. From 2012-2013 to 2013-2014, Vietnam leaped 726%, Indonesia increased 130%, and Malaysia rose 44%.

“Australian fresh and frozen beef to China was 360% higher in 2013,” Close says.

Australia’s ag GDP nosedived as a result of the 2006 drought. As it recovers, exports are projected to stabilize at about 0.5 million tons.

Australia’s beef exports are projected to plateau during the coming decade, with India and the U.S. eventually overtaking it, leaving it the fourth-largest beef exporter.

Australia and the U.S. remain significant trade partners. Its exports to the U.S. totaled $9.6 billion, with meat as the top category at $1.6 billion. The U.S., the biggest export destination with 227,107 tonnes per cwt for the 2014 year to the end of August, registered a 67% increase over the same period in 2013.

“The Australian dollar is high relative to the U.S.,” Herbert says. “As an exporting nation, it hurts. We’d like the U.S. dollar to strengthen.”

Australia’s farm sector has high debt –A$64 billion (US$59 billion). Australia and New Zealand Banking Group estimate that A$600 billion in added capital will be needed between now and 2050 to generate growth and profitability.

The drought in Queensland dropped farmers to their lowest income on record last year. The average farmer experienced a loss of A$77,000.

“Long-term interest rates are 6% to 7%,” Herbert says. “About 10% of western grain growers are in financial difficulty, but our good crop year could push that down to 5%.”

However, the Australian Bureau of Meteorology estimates there’s at least a 25% chance of drought again, due to an El Niño’s recurrence.

Australia’s location between the Indian Ocean and the Pacific Ocean positions it well for achieving its goal of becoming a food bowl to Asia. Competition for this burgeoning market from Canada, the U.S., Russia, and the Black Sea region is heating up.

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