In Canada, a New Competitive Edge

By George Myles and Marilyn Bailey

In agricultural trade, it seems that NAFTA is a double-edged sword. There are many successes. Yet implementation of NAFTA between the United States, Canada and Mexico over the past five years hasn’t been free of problems.

While Canada was the second largest market (after Japan) for U.S. agricultural, fish and forest products in 1997, disputes over imports of Canadian grains, potatoes and livestock and Canada’s extremely high tariff rates on U.S. imports of dairy, poultry, eggs, barley and margarine have clouded an otherwise rosy picture.

But NAFTA’s strengths help place some of the problems in perspective. Since 1988, the year before the United States and Canada signed a Free Trade Agreement (CFTA)¹ were incorporated into the NAFTA agreement. to remove all tariffs between the two countries over a 10-year period starting on Jan. 1, 1989, the value of U.S. agricultural exports has risen at an average annual rate of nearly 13 percent.

In 1997, U.S. agricultural exports to Canada reached a record $6.8 billion, up more than 11 percent from 1996. More than 70 percent of the total came from sales of fresh and processed fruits and vegetables, snack foods and other consumer-oriented products. If fish and forest products were counted as well, U.S. agricultural exports to Canada would climb to $8.8 billion for 1997.

U.S. Products Have an Advantage

U.S. agricultural products have several advantages over goods from other nations in the Canadian market:

• Most U.S. agricultural products enter Canada duty-free, thanks to the CFTA/NAFTA.

• Declining import duties and an easing of Canadian packaging requirements due to the CFTA/NAFTA gave Canada’s grocery product and food service sectors permission to expand their geographic sourcing area to include the United States, resulting in significant gains for U.S. consumer-ready foods.

• Modern infrastructure, transportation and wholesale networks in the United States and Canada mean that Canada’s 30.3 million people, nearly 90 percent of whom live within 100 miles of the U.S.-Canadian border, get their agricultural products promptly.

• Immigration patterns have changed the face of Canadian cities, where 75 percent of Canada’s population resides. The influx of Asians and other ethnic groups has transformed consumption away from sugar, animal fats (including butter and lard), red meat, eggs, canned vegetables, skim milk powder and alcoholic beverages toward more rice, breakfast cereals, pulses and nuts, vegetable-based fats, chicken, fish, fresh vegetables, cheese, yogurt, coffee and soft drinks.

• Changing lifestyles have resulted in fewer meals eaten at home and an increasing demand for imports of high-value U.S. products that are ready-to-eat or can be conveniently prepared. This trend has been fueled by an increasing number of dual-income families that began emerging after real disposable incomes in Canada began to decline in the early 1990s.

• Closely linked cultures and similar lifestyle pursuits, along with ease of travel between our two countries and the availability of U.S. television programs and commercials on Canadian television, has created a growing demand for new U.S. value-added foods and food preparations.

Numbers Speak for Themselves

U.S. agricultural products accounted for two-thirds of the $10.3 billion in total Canadian agricultural imports in 1997. The U.S. agricultural products with the best prospects for sales to Canada include fresh vegetables, baked goods, fruit and vegetable juices, pet food, breakfast cereals and pancake mixes, sauces and condiments, animal feeds, nursery and greenhouse products, wine and beer and salted snack foods.

Fresh vegetables. Last year, U.S. exports of fresh vegetables to Canada reached $747 million, the highest level on record. There are several reasons for this growth.

• Canada’s growing season for fresh vegetables is short, while demand is year-round.
• Seasonal duties on U.S. exports during the local marketing season have been eliminated, making Canada our No. 1 market for fresh vegetables.
• Asian immigrants now account for about 10 percent of the population of Canada’s two largest cities, Toronto and Vancouver. These newcomers have a propensity toward eating a traditional diet rich in fresh vegetables.
• Consumers in general are eating healthier diets, as evidenced by the fact that the largest department in retail grocery chains is the produce department.

In fact, on a per capita basis Canada has one of the highest consumption rates of fresh vegetables in the world.

Baked goods. Canadian imports of U.S. baked goods reached $276 million during 1997, up 6 percent from the year before.

Several factors accounted for this increase: U.S. bakery plants are more automated and efficient than their Canadian counterparts and are located close to the U.S.-Canadian border; Canadian import licenses are no longer required for wheat and flour products, including breads, buns, bagels, rolls, pastry, cakes and muffins; and there is no duty on these products. All these factors have increased the competitiveness of U.S. bakery products sold in Canada and influenced Canadian grocery store chains to turn to U.S. manufacturers for their finished baked goods.

Fruit and vegetable juices. Canada is dependent on imports of fresh and frozen fruit and vegetable juices to meet total market demand. The United States supplied more than 61 percent of the total value of Canadian imports in 1997, reaching $236 million and making Canada our No. 1 market. Strong gains were made in the mixed juice category, but orange juice still leads, with apple and grape juice sharing 23 percent of total juice sales. Best prospects for market growth include retail markets, custom retail packaging for Canadian distributors and new products and blends in new packaging.

Pet food. Dogs and cats continue to be popular pets in Canada. During the 1980s, the total market for pet food doubled and remained strong throughout the early 1990s, reaching $650 million in 1997. The United States captured nearly one-quarter or $191 million worth of the total market in 1997 and prospects point to future increases.

Premium and special diet subsectors at specialty pet food retail stores have emerged as pet owners become increasingly conscious of the nutritional qualities of pet food. The demand for special pet foods has led to the opening of several pet superstores in major Canadian cities, but Canadian retail grocery stores remain another important outlet for retail pet food sales.

Dog food is still the largest market segment, but cat food is catching up, reflecting an increasing number of cats as pets. Modern urban lifestyles and a growing number of dual-income families have contributed to this increase.

Breakfast cereals and pancake mixes. In 1997, U.S. exports reached $135 million, making Canada our No. 1 market for these products. Since implementation of NAFTA, U.S. exports have grown at an average annual rate of 8 percent and now account for one-quarter of the total Canadian market of about $510 million. Prospects are good for continued future gains as U.S. market share rises.

Canadians have become more conscious of the importance of fiber in the diet, leading to higher sales of ready-to-eat breakfast cereals. Even so, competition is robust -- about 100 cereal brands are currently on supermarket shelves. But the market is still growing, particularly in the children’s segment. In the adult segment, hot cereal sales are increasing as consumers seek nutritious oatmeal and multi-grain cereals during the colder winter months.

Sauces and condiments. U.S. sauces and condiments have benefitted greatly from tariff elimination under the CFTA/NAFTA. Prior to NAFTA, these products were among the most highly taxed in Canada’s tariff rate schedule. In 1997, U.S. exports reached $128 million, up 8.5 percent from year earlier levels and comprised 39 percent of the total market.

Tomato-based sauces were the category leader, accounting for nearly half of U.S. sauce and condiment exports, but salad dressing and other condiments are registering strong annual increases. Canada’s food service industry is importing more tomato ketchup, sauces and mixed condiments to meet growing demand, creating sharp gains for U.S. products. Specialty sauces, such as salsa, are in demand by Canadian restaurants and grocery stores to satisfy consumer appetites for complements to nachos, tortillas and other corn-based snack foods.

Animal feeds. U.S. exports of animal feeds to Canada rose to $111 million during 1997, a 12-percent increase over 1996. The Canadian market for prepared animal feeds and feed supplements for livestock, poultry, horses and fish grew steadily during the early 1990s. This trend is expected to continue as Canadian farmers seek specialty feeds for their growing stocks of hogs and poultry. The United States is forecast to capture a larger share of this market over the next five years. However, the annual rate of increase may fluctuate from year to year due to the vagaries of livestock feed prices.

Nursery and greenhouse products. In 1997, U.S. exports of live plants, cuttings, foliage and cut flowers rose nearly 12 percent to $103 million, making Canada our No. 1 market. The introduction of the Greenhouse Certification Program in 1997 may have helped fuel this increase. This program facilitates entry of U.S. greenhouse-grown products into Canada.

Another factor contributing to sales growth is the rising popularity of indoor and outdoor gardening and landscaping for residential homes and commercial properties. Television, radio and the print media have contributed to this trend through gardening shows and articles.

With demand for nursery and greenhouse products expected to increase and a Nursery Certification Program planned for the near future, prospects for U.S. sales growth appear bright.

Wine and beer. Canadian imports of U.S. wine and beer surpassed the $100 million mark for the first time in 1997. Since 1993, U.S. exports have risen 70 percent and prospects are good for continued growth.

Even though the United States grabbed a 40-percent share of Canada’s beer import market last year, U.S. beer sales will be more modest due to restrictive regulatory policies that limit growth of beer imports.

Salted snack foods. As a component of the snack food market, U.S. salted snack food exports reached $83 million in 1997, nearly double the 1990 level. U.S. exports comprise nearly 100 percent of total Canadian salted snack food imports.

The potato chip is the undisputed leader of the Canadian salted snack food market, with an estimated 60-percent share of total salted snack food sales in 1996. However, Canadian consumers are purchasing a wider range of salted snacks, including corn-based tortilla chips and salted snack mixes. Canada’s salted snack food market is forecast to see continued strong growth.

¹The agricultural provision of the CFTA were incorporated into the NAFTA agreement.

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George Myles is an agricultural specialist and Marilyn Bailey is an agricultural marketing assistant at the U.S. Embassy in Ottawa, Canada. Tel.: (613) 238-5335, ext. 267; Fax: (613) 233-8511; E-mail: agottawa@fas.usda.gov

Last modified: Thursday, October 14, 2004 PM