Years of difficult market conditions for wheat and other grains have led some Canadian farmers to switch to specialty crops. These innovative producers had a record year in 2005, generating about $1 billion in export revenues and creating new employment in the processing business.
Specialty crops include dry peas and beans, chickpeas and lentils (collectively called pulses), mustard seed, canary seed, faba beans, sunflower seeds, safflower seeds and buckwheat. For example, Canada is the largest producer and exporter of dry peas in the world, with exports of nearly $500 million in 2005. Canada is also the world's largest exporter of lentils, with sales averaging around $230 million annually, and the largest exporter of mustard seed. Indeed, some exotic imported mustards are actually prepared abroad using Canadian mustard seed.
As with most agricultural sub-sectors, specialty crops depend on the weather. Exports in the first half of 2006 are running well above levels in 2005, because last year's bumper crop boosted available stocks. Assuming normal weather in 2006 globally, it is likely that prices for many of these products will remain soft. If so, then revenues are likely to increase only modestly in 2006 and could be flat to slightly lower in 2007, even though volumes of exports will continue to grow.
Despite this relatively solid outlook, the sector faces a number of challenges. Fertilizer costs have skyrocketed in the past year by some 50 per cent. Although this will inevitably lead to some softening in fertilizer demand later in 2006, and perhaps some retreat in pricing, fertilizer costs seem likely to remain on the high side this year and next.
Similarly, fuel costs have gone up a lot, and even though oil prices should ease in the wake of moderating global demand, most forecasters expect them to remain north of $50 US per barrel for the foreseeable future.
On the financial front, interest costs have risen and the exchange rate has moved decidedly against producers.
With global pricing for these commodities set in U.S. dollars, every percentage-point appreciation of the Canadian dollar takes a percentage point out of the producer's or processor's bottom line.
Interest rates appear to be near their peak, but that does not mean that interest rate relief is on the way, at least not yet.
And, although the Canadian dollar should ease in the coming months along with oil and other commodity prices, if oil prices retain their political risk premium, the Canadian dollar will probably remain north of 80 cents US - a modest amount of relief, especially when prices in U.S. dollars are softening still.
But perhaps the most important challenge on the horizon, and one that is shared with many other Canadian exporters, is the rising risk of not being paid by foreign buyers.
Around 70 per cent of Canada's specialty crop production is exported, and moderating global economic growth will mean a more competitive, potentially deflationary, global marketplace. Payment risks associated with companies and countries alike are beginning to ratchet higher.
The bottom line? Canada's specialty crops sector has a good business going, but the going will probably get tougher in 2007.
Hard work and ingenuity will be needed to keep the sector growing.
(Stephen Poloz is senior vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
