Why the proposed labeling law is a red herring

From 2003 to 2006

Mexican agriculture imports increased 51% to $878 m
Chinese agriculture imports increased 38% to $430 m
Indian agriculture imports increased 27% to $152 m

The major food stuffs, recording the largest increases were: fresh garlic, apple juice, cabbages, carrots, turnips, peas, beans, spinach, grapes apples, peaches, rice, pickled cucumbers and pet food. ref  Today's Farmer March 29, 2008

The reason for the increase in imports

Imports increased due to the strength of the Canadian currency versus the weakness of the US currency. The distributors and brokers in these particular countries deal in US funds and therefore our manufacturers/food processors and distributors can now buy their produce at reduced Canadian prices. It is the benefit of a strong dollar. On the downside our exports cost more and that's hurting the farmers as well.

The manufacturing process (under the current rules)

In manufacturing the raw materials, in this case the food, represents the lowest percentage of the cost of goods sold.

In other words a can of Apple Juice (we’ll call it Willy’s Apple Juice because I like the name) that sells for $1.29 at the supermarket actually nets out at about 80 cents of revenue coming to Willy. Under the current laws: if in manufacturing that can of Apple Juice, Willy spent more than 41 cents in Canada, that Apple Juice could be labeled Made in Canada or Product of Canada.

But in reality Willy has been spending more than the 41 cents in Canada to manufacture that can of Apple Juice. Because Willy wants everyone to know his name and everyone to believe that he has the best Apple Juice, Willy spends 15% of his revenue on Marketing costs or 12 cents per can.

Willy has factories, machinery, trucks, employees, sales people, marketing people, and executives. They cost Willy 35% of his revenue or 28 cents a can.

Willy also has a family to feed, and more importantly to Willy sometimes, shareholders and a stock price to keep increasing. Willy is a big time guy. And those shareholders expect a NBT or net profit before taxes of at least 18% of revenue each year or 14 cents of the price of the can.

Also as an aside because they are profitable and the Willy Apple Juice Company pays 3 cents in corporate taxes for that can (about 25% of their NBT).

Altogether Willy’s expenses add up to 54 cents per can, leaving 26 cents for Willy to buy the apples and deliver them to his factories for processing.

And since our dollar went to parity with the US dollar, Willy can pay the brokers and/or distributors in China plus pay for the shipping of the goods to his factory (that’s the way it works with China), at a lower cost than he can buy the apples from the farmers in Norfolk County, Ontario and deliver them to his factory.

And Willy’s customers didn't notice, the apple juice tasted the same.

The result of the proposed legislation

The only way that the apple farmers in Norfolk County, Ontario will benefit from these proposed changes, is if they are willing to sell their raw materials at the same price as the Chinese.

Or if the consumer is willing to pay more for a can of Willy’s Apple Juice with the new Made in Canada label.

Manufacturing and retail operate under fixed percentage costs. Their costs are at a fixed percentage of their selling price, for all of the reasons above.

A five cent increase in the price of the raw materials to manufacture Willy’s can of Apple Juice means that Willy would have to sell his apple juice to the supermarkets for 97 cents as that is the way percentages and margins work.

The supermarket has to maintain their gross margins (percentage of profit) and with their cost going up to 97 cents from 80 cents, their new retail price for a can of Willy's Apple Juice will be $1.56.

And half the consumers will say why the hell did Willy's Apple Juice go up in price and buy a lower cost, imported brand and the other half will say good let's buy Canadian, at least for the next few months. 

And the juice will taste the same.

Willy and I both like the farmers as much as anybody, in fact I married the daughter of one. But this proposed label change has less to do with protecting the health of Canadians and assisting the farmers and more to do with Harper appeasing the rural voting block in Ontario by changing the 51% rule. A change that farmers have been lobbying about for a while now.

And although the farmers might believe that it is a panacea for there problems, it  will not change the math. The only thing that would accomplish that would be tariffs, and I don't think that goes along with Harpers basic ideology or subsidies to protect our farmers. And Harper isn't willing to do that either.

The stronger Canadian dollar (versus the US dollar) means the cost of our exports increases and the cost of our imports decreases. Unfortunately the farmers are now facing the same predicament that the our manufacturing industries are dealing with, in fact most Canadian businesses are dealing with, a rising currency that makes our products and services less competitive in an international market. And unfortunately the solutions are also the same: lower the production costs, improve productivity, specialize and develop the produce, products, services or markets where you can compete. 

Or I guess, elect a new government that will bring in laws that will actually protect key market segments. The problem there, is finding one.