Thank you.
Thank you for inviting me here today. For anyone who's unaware, the Conference Board is a non-profit, non-partisan think tank based here in Ottawa. We do research in a variety of areas, including public policy, organizational performance, and economic forecasting and analysis.
We were asked here today to talk about the food value chain. When we think of the food value chain, the four main segments we think of are essentially agricultural primary producers, food manufacturers, retailers, and restaurants. But it's also important to remember that there are the connectors between those main segments. We have the transportation network. We have wholesalers. It's important to look at the whole supply chain and how that relates in terms of the success of the agrifood sector here in Canada.
Now, when we talk about the agrifood sector, one of the things we always like to point out is that it's not a monolithic thing. There are very different market conditions in different segments of the industry, such as, for example, capital intensity. Farming is a very capital-intensive business. It becomes much less capital intensive as you move down the value chain. Retailing and restaurants are much less capital intensive. So the market conditions are different in that respect. Their need for capital is different.
With regard to the degree of competition and market power, Mr. Seguin already touched on this, but probably the most concentrated part would be the retail segment, where we have three grocery stores accounting for about 70% of the retail sales in Canada, but even there, there's a large amount of competition going on. There are literally thousands and thousands of small retailers. You have competition from other major chains outside the grocery store network, things like Walmart and Target. So there's a high degree of competition in that segment.
Other segments also face different types of competition. For example, manufacturing varies very much depending on what type of product you're talking about, but there is some ability for market power there through things like branding. In the case of restaurants, again, it's a very fractured market with many players, but players have some ability to create value through things like their menu offerings, their location, and the degree of service they're offering.
Finally, farming is often thought of as a commodity-driven industry. It is, broadly speaking, but there are many niches where farmers have been able to create value by not selling a commoditized product and starting, essentially, to create some brand power and some value associated with the products they're creating.
Finally, one other big difference across the value chain is the degree of volatility in output prices and input costs for the industry. At one end we have farmers' very volatile prices, and at the other end we have retail and restaurants where prices are much less volatile. There is much less need to control the volatility the industry is experiencing at that end.
One of the things we have had to work with, a challenge we have had to address when we've been doing research on the agrifood sector, is that it is a viable sector, and in Canada it is a growing sector. It is experiencing modest growth. Contrary to perceptions, it's not a sector that is shrinking or under significant threat. That said, there are obviously individual companies in the sector that have faced their challenges, and the number of players in the industry is shrinking. So what we're seeing is fewer players that are bigger. There's a consolidation process going on.
What's driving this growth, this success of the industry? There are a number of factors. First we have our natural endowments here in Canada, our water and our land. These provide us with the resources necessary to be major players on the global stage in terms of agrifood production. Just as an example, we are among the major exporters of major foodstuffs such as wheat and canola and soybeans, and we are the largest exporters for a number of specialty products such as oats, peas, and lentils. So we are already major players on the global stage, and there is certainly the opportunity to grow our presence.
Another big factor of support for the industry—and this is one reason the industry has had slow, stable growth over time—is that we have the domestic market to support the industry. Import penetration in the industry is relatively low. Much of the industry is really reliant on the domestic market. With the exception of a couple of key segments, such as crops, seafood, and some red meats, most of the industry is very domestically oriented. So there's that slow, stable growth, where you have, say, population growth, a reasonable level of wealth, and income growth. It means that the industry has a stable base from which to operate.
But where's the growth going to be going forward? Emerging markets certainly have a growing presence. They are some of the factors behind the global rise in food prices we've seen in the last few years. In big marketplaces like China, India, and Brazil, their populations are growing, wealth is growing. They're demanding more food, better-quality food, and a greater variety of food products. Canada has the potential to meet some of those demands, but how do we fully leverage these opportunities?
As Mr. Seguin touched on, we do a lot of industry analysis, but our success is determined at the firm level. What are individual companies here in Canada doing to succeed? As part of our research on the agrifood sector, we've done a number of case studies on different success stories in the Canadian agrifood sector.
There are a variety of things, and they are often combined together. One of the things we often see is successful vertical integration with their supply chain, either upwards or downwards. So they're dealing with their suppliers and they're dealing with their customers. This may be through direct ownership, where they own additional parts of the value chain, or through partnerships, joint ventures, those sorts of things.
This allows a variety of benefits. For example, it allows diversification of products and markets. If you're making one thing for one customer through vertical integration, you can hopefully smooth out some of the fluctuations in your own business cycle. Maybe one particular portion of the agrifood supply chain is experiencing difficulties at one time, but it's very unlikely that the entire chain will be experiencing difficulties. So you can get the benefits of diversification.
Branding is an important issue. Are you making just a beef product, or are you making something that customers can know, recognize, and value? Do they understand that this is a consistent quality product that they will be able to buy on a regular basis?
There's product development. Are products being developed in isolation, or are products being driven by what is desired by consumers? What's possible at the producer end of things? Can we get together to understand the characteristics of our products and see how we can adapt them to the needs of consumer markets?
These are all ways that value-chain integration can help to improve the value we're creating with our agrifood sector here in Canada.
To sum up, agrifood has been a consistent source of modest growth for the Canadian economy over the last 20 to 30 years. Our natural endowments allow us to experience this growth—our land, our water. We need to understand and leverage those endowments to see how we can take advantage of the opportunities going forward, particularly in emerging markets. Effective management of our food value chain is one of the ways in which we can take advantage of those opportunities.
Thank you.