Imagine squeezing a ripe tomato in the palm of your hand. Some juice squirts out. More juice runs down your arm with the tomato looking very different from when you started.
This is being written just ahead of incoming President Trump’s inauguration and threatened tariffs, but if he follows through on his threats, business will react to the pressure.
Some commodities will immediately go squirting off in various directions. Others will find cracks and crevices to ooze through at variable speeds. Some will remain more or less intact, but overall, it won’t be pretty.
The imposition of a tariff will mean that percentage of the sale price is charged as products cross the border. The money will go to a U.S. government agency and Trump plans to use this money to lower American taxes.
Canadian exporters will try to recoup the tariff cost by raising their sale prices, thereby transferring the pain to American consumers. On some commodities, this may have some success and on others it may not be successful at all. It all depends on the commodity and whether U.S. buyers can access it somewhere else at a lower cost.
In the case of canola, we don’t export very much raw seed to the U.S., but they buy the vast majority or our canola oil. If buyers are able to pivot to cheaper vegetable oils from other countries, the price of canola oil will come under pressure. Then the question for Canada becomes whether or not other viable markets can be found.
American biofuel policy also becomes part of the equation. If canola oil can’t be used or is made less attractive for renewable diesel, that will also be a major setback. Canadian canola crushers might become less competitive relative to the export of raw seed.
On some crops, we rely heavily on the U.S. market, while for other crops they are a minor customer. We don’t sell a significant percentage of our wheat, barley, lentils or peas to the U.S. so these should see less direct impact.
The U.S. is a more important market for durum than it is for wheat and chickpeas are more U.S. dependent than lentils and peas.
On oats, flax and yellow mustard, the majority of our production goes straight south so the imposition of a tariff is likely to encourage more U.S. production. If you’re a trader or processor needing these commodities, it would be logical to raise your new crop bids to encourage more acres thereby avoiding Canadian purchases.
Alternatively, American buyers may turn to other countries instead of Canada. Of course, this only works if other potential suppliers face a lower tariff than we do.
For cattle and beef exports, a tariff wall is especially troublesome because the two countries have such an integrated market. As Farm Credit Canada analysis points out, a calf could be born in Alberta, sold to Montana to graze, sent to an Alberta feedlot for finishing and then shipped back to the U.S. for slaughter.
FCC says Canada exports 17 per cent of its total cattle production with exports to the U.S. making up 99 per cent of all exports. Similarly, 99 per cent of Canadian hog exports are to the U.S. and that’s 22 per cent of total Canadian hog production. The livestock sector has limited ability to pivot to other markets.
Ramifications of a tariff squeeze are difficult to predict, but like a squashed tomato, it will be messy.