The first day of spring is a time of rejoice and relief for those tired of the cold snowy winter months. As if on cue, temperatures rose to seasonal levels and helped turn mountainous snowbanks to streams. It is also that time of year when we think of the land and the planting of seeds for the coming season’s crops. Farmers on both sides of the border however, are not rejoicing thanks to the resurgence of trade frictions between the world’s major trading partners, and these past few weeks have offered a glimpse as to what we can expect.

Now for most investors, the time spent discussing agriculture pales next to things like technology, manufacturing and the state of the consumer. In terms of its direct contribution to output, agriculture represents roughly 5-7% of the overall economy in both Canada and the U.S. Still, based on federal government statistics, the entire agri-food segment in Canada not only accounted for 7% of GDP in 2023, but employed 2.3 million people, or 1 in 9 jobs. South of the border, this segment of the economy generated over $1.5 trillion to the GDP bottom line, or 5.5%. 

If you look at the above chart, there has been a progressive decline in the numbers of people employed directly in agriculture in Canada. This is similar to most other major developed countries, and it can lead one to think that with such a relatively small footprint, challenges to this sector won’t have a major impact on the overall economy. But when we think of things like consumer spending, housing and even government tax revenues, the numbers have a magnifying effect.

Market participants have become more focused on agriculture of late because of the trade tensions we find ourselves in, but before we launch into that, let’s quickly review the regions here and south of the border that are more in the line of fire.

Ontario’s key areas are soybeans, corn for grain, and greenhouse products. In Saskatchewan, the main products are wheat, canola, and lentils and peas. When we think of Alberta, beef comes to mind, but the province is also important to our national canola and barley production. For Manitoba, it is canola and wheat. The United States is Canada's top trading partner, accounting for about 60% of all agri-food exports and more than half of imports. China has been Canada's second-leading agri-food and seafood export market since 2012, with exports increasing by 112% since then.

South of the border Iowa, Nebraska and Illinois are major producers of corn and soybeans. In 2023, the top markets for U.S. agricultural exports were China ($33.7 billion), Mexico ($28.2 billion), Canada ($27.9 billion), the EU ($12.3 billion), and Japan ($12.2 billion).

After dealing with climate swings, the pandemic, labour shortages and then sharply higher rates, farms in both countries are now running straight into a tariff wall, largely created by the Trump administration. In two weeks, we could see 25% tariffs put into effect on a large cross section of agricultural products out of Canada and Mexico, which would likely prompt retaliatory measures from at least Canada. China has already retaliated against the U.S. imposition of 10% tariffs in February and then the additional 10% tariffs announced earlier this month. This included China suspending the soybean import licenses on three U.S. companies and import duties of $21 billion across a number of agricultural products, including soybeans.

And it’s not just the U.S. that China is setting its trade sights on.  On Thursday, the country’s announced tariffs on Canadian agricultural exports were implemented, covering about $2.6 billion in total product value. It also said that it was going to place a 100% tariff on Canadian canola oil, canola meal cakes and pea imports. This is in addition to a 25% tariff on Canadian water and pork products. Depending on the length of time both U.S. and Chinese measures stay in effect, the impact on Canadian farmers could be massive. The above chart shows the daily price of the Teucrium Soybean ETF (SOYB), which tracks soybean futures. As you can see, prices have already been on a downward trend so anything that negatively impacts demand is going to hurt even more.

From a portfolio perspective, the direct impact from an agricultural trade war will not be significant for the majority of Canadian investors.  The reason is that there are only two major publicly traded stocks in this segment – Nutrien and Saputo – and the latter is dairy, not crops. South of the border, there are a few more heavy hitters, but collectively they still represent a very small share of the S&P500.  It is the indirect effects that could be potentially more impactful to portfolios.  Agriculture equipment makers, like Deere and AGCO Corporation could see weaker demand as farmers hunker down for inclement trade weather.

We are already hearing anecdotal stories of farmers taking out a larger volume of operating loans as a pre-emptive defense against lower revenues and higher costs. No different than any other sector that is dealing with Trump’s policy vortex, if the revenue and profit outlook is uncertain, then the prudent course of action might be to curtail or delay capital expenditures.

Then there is the political angle.  Considering that a large number of districts in the U.S. with high agricultural sensitivity voted Republican in the last election, one would assume that vocal opposition to tariffs in this segment will grow louder. There has already been talk of farmers calling for Washington to provide a direct fiscal cushion in the event of severe financial hardship.  Given that Trump’s team is having a hard enough time finding enough cost savings to fund a multi-trillion tax cut, raising spending for relief aid will be tough. 

Here at home, we are expecting a federal election call this weekend and a vote before the end of April. Tariffs are already at the top of the agenda and how a new government proposes to deal with the threat from the U.S. and China is going to be listened to carefully by voters in the agri-food patch, as well as other sectors. In fact, it may be easier to deal with the Chinese in terms of rolling back some or all of the aluminum and steel tariffs Canada introduced, as well as the 100% tariffs on Chinese electric vehicles. The latter might be a good idea now that Tesla sales aren’t exactly booming.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle