Another Reason to

Enjoy the Asian Boom

The pork industry, among others, has waited too long for promises issued by market fundamentals in the world of agrifood to come true. A growing world population, the expanding middle class in emerging countries, scarcity of resources required for production: all of these factors are an argument for a sustainable rise in the price of foodstuffs on the world scale. Sectors under supply management, which are only slightly exposed to world market dynamics, only see these tendencies from far. Will China's influence on the world's chicken and dairy products consumption mean something for us?
Chicken is currently the type of meat that is experiencing the most rapid consumption growth throughout the world. And the USDA is expecting demand to get stronger over the next few decades and that the world chicken trade will increase by 30% by 2021. These projections are in line with the break-neck pace of new KFCs appearing all over China. The same goes for dairy products. Industrialised countries are currently experiencing a lower growth rate but the consumption of dairy proteins is rising in emerging economies. Based on recent estimations issued by Rabobank (an immense Dutch cooperative bank specializing in agri-food), the consumption of dairy products is expected to grow rapidly over the next few decades. The OCDE estimates this increase in consumption to reach some 35% over the next 10 years.

Such an increase in demand for dairy protein and chicken may very well result in structural price increases across world markets. Countries with heavy export activities are basically salivating at this notion. Let's get this clear: the prices they will be getting for the products they are currently exporting - and continue to export over the next few years - are not in any way to be compared with those in Canada. So let's just forget about taking advantage of these markets. Anyway, supply management and export do not make good bedfellows.

Price evolution of the boneless chicken breast



This said, how would supply management be affected by a potential price hike in world markets, particularly in terms of tariff wall tightness? The graph illustrated on this page shows the progress of protection provided by customs tariffs in the poultry sector (boneless chicken breast). The import price (green line) is calculated by adding transport fees, bills of exchange and customs' tariffs to the world price (blue line). The higher the world price, the higher the import price and the greater the protection provided by the tariff wall. All of this being equal, a structural price increase in the world market is potentially good for supply management since it improves tariff protection. However, heavy price volatility remains in the realm of world prices, combined with a relatively weak margin for manoeuvre provided by tariffs; all add pressure to the system. Not only would any tariff drop be prejudicial, but for purely mathematical reasons, the trend of increasing prices on the domestic market could be difficult to maintain. And this is true for all products under supply management.

Some say that a very high and significant hike in the prices of dairy products and poultry could reduce Canadian farmers' interest in supply management. A prediction worthy of the world of Care Bears… The price difference between international and domestic markets is so wide (almost triple), that this is not about to happen. We could even state with confidence that it will never happen, at least not as long as prices are set according to production costs.
 
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