Managing through volatility in Washington and Ottawa

3. Managing through volatility in Washington and Ottawa

As we start 2025 we will cover one of our 10 trends each week. We want to explore them in more detail and give you some options, understand the impact, provide ideas and strategies you can implement in your business. Our third trend is a tough one as it keeps changing. When we originally created the trends our focus was on volatility in Washington after the 2024 election. We now believe we must include Ottawa in this trend as well. With the resignation of Justin Trudeau and the election we will see in Canada in 2025 there will be changes in Canada too.

At SKUFood, our perspective is you need to understand consumers, customers and the marketplace if you want to be successful in the food and beverage industry. Our annual trends are created based on exposure to both key stakeholders and the market. When we are doing our job, we support you to get your products on the shelf and into the shopping cart.

We are entering a period of instability and protectionist trade policy with the United States. The volume of food and beverage going to and coming from our largest trading partner dwarfs all others. The Make America Great Again thinking could have a significant impact on the Canadian food and beverage industry. The people in charge are not as predictable and seem to relish in putting our own government on its heals. This results in decisions being made differently and with influence coming from different sources. We will have to adapt because we cannot change what they are going to do.

On January 7^th, President Trump declared he wants to use ‘economic force’ to make Canada the 51^st state. Probably the first time in our generation we would feel threatened in Canada.

Tariff threat remains very real

After Donald Trump was elected, he declared Canada and Mexico were taking advantage of the U.S. and that our respective borders were to be blamed for people entering the U.S. illegally and the route for illegal drugs. He threatened a 25% tariff across the board on all product coming into the U.S. from each country. On inauguration day the message during the day was he would be directing government officials to investigate the trade imbalance and suggest solutions. Then in the evening, while signing executive orders, the President stated the 25% tariffs for Canada and Mexico would start February 1^st. Now you see why we included the word volatility in our trend. We do feel for the people on the Canadian side trying to figure it out and negotiate.

It should be clear a 10% tariff after a 25% threat is not a win.

We would recommend to producers and processors not to be too dependent on one retailer for a large percentage of your sales. For example, if you sell 70% of your volume to Loblaw and they do not like the cost increase you need to implement, your business could be at risk. Unfortunately, Canada is too dependent on the U.S.

As you can see from the FCC food and beverage report released Jan 22, 2025, approximately 30% of our processed food has been going to the U.S. Less than 10% is exported to other countries and we consume just over 60% in Canada. In some sectors the threat of tariffs will have a huge impact.

Another way to look at this is 75% of our food and beverage exports go to the U.S.

We cannot control what the U.S. will do. We can get ready and be prepared. The unfortunate outcome in all of this is food prices will go up again. It will end up being a tax on food, paid by consumers in increased prices that will go into government revenue.

Preparing for tariffs

A number of ideas have been shared by industry associations, mass media (there was a good article in the Globe and Mail but you need to be a subscriber to read it) and bureaucrats. Here is a summary of the ideas we have heard and that we have been talking about:

• For Canadian companies exporting to U.S., explore partnerships with U.S. based companies to co-pack for you. Product is made there so not subject to tariffs. This is not an ideal solution because production will leave and impact the operations of your business. There is the potential to earn something form managing the sales and the customer relationship. Do not sign long term commitments as this could change quickly.
• If you are in the position to pursue option 1, check to see if the company you are working with in U.S. has similar products going to Canada. You never know, it could be private label. If that is the case, you might pick up some volume from them. Especially if Canada retaliates with similar tariffs.
• Push government, retailers and other manufacturers to support ‘Buy Canadian’ programs. This will help in some cases but never make up for the lost volume going to U.S.
• Put pressure on your U.S. customers to explain what is happening. Our research indicates a lot of these U.S. based businesses do not understand how this will be implemented. Their price will go up 25% unless you plan to absorb some of the tariff. Not too many Canadian manufacturers are willing and able to do that. It is more likely U.S. policy decisions will be made based on pressure from their own businesses, as opposed to Canadian politicians or bureaucrats.
• Put pressure on our Canadian regulators to reduce the cost of doing business in Canada. We are over regulated and with companies probably facing lost volume, the bottom line will be even tougher. This is the time to get attention and improve our ability to compete globally.
• Put pressure on Canadian regulators to reduce interprovincial trade barriers. If you want to ship processed food across provincial borders you need to be CFIA inspected. That is one thing in a market the size of Ontario. You can probably build your volume within the province to generate enough revenue to invest in your own inspected facility. Try doing it in a market like PEI with +/- 150,000 people. Food safety should be determined on risk, not provincial borders.
• Labelling and sustainability initiatives are important and some of the reasons Canadian products are preferred in many markets. We might need regulators to pause change as it all costs money. If we are going to see these 25% tariffs for a longer period of time, there will be serious pressure on Canadian businesses. Forcing them to spend on these initiatives might have to wait until the marketplace improves.
• Explore new export markets. This is much easier said than done and it takes time, money and persistence. Given the protectionist approach being pursued in the U.S. it is possible some countries will be less interested in U.S. products. Explore export markets where your product could work and look for U.S. made products on the shelf. They might be looking for a friendlier alternative from Canada. We do need to diversify our export volume so perhaps now is the time to explore something you had put lower on the priority list.
• If you are willing and able to produce private label, it is time to take another look at the volume you do not have. If a retailer is getting product produced in U.S., they might be eager to find a solution made in Canada. The cost disadvantage you had might be different if Canada imposes a 25% tariff on U.S. products coming into the country. Our understanding of the priority list is they will focus on products produced in states with most Republican influence. These are the people Canadians want complaining to the top in Washington.
• Consider the packaging, inputs and other expenses you have with the U.S. If Canada does retaliate with our own tariffs your prices could go up. If possible, explore buying more now before the tariff is imposed. Another consideration is to determine if Canadian suppliers (or other countries) would be better and more cost effective.
• We are not economists, but it appears our Canadian dollar will suffer in this battle with the U.S. Try to understand what impact that will have on your business. You might need to change the timeline for buying equipment that is sold in USD or Euros.
• Review your labour contracts. You might have entered into an agreement with export volume part of the economic model. If you lose a portion of volume it will impact your work force and your efficiencies.
• Review your logistics commitments. Often trucking rates are built on volumes. If you expect to lose some or all then you will need to understand the impact on your delivered prices.
• As much as we do not like to say it…explore production south of the border. Some states are actively pursuing Canadian companies to set up facilities there. Perhaps it will put pressure on Canadian regulators to keep the playing field level.
• If you do export, talk to your export broker to understand how the money will flow. We understand some are expecting the Canadian company to pay the tariff amount up front. This could have a significant impact on cash flow and shield the impact from your U.S. customers.
• We know the appetite for a cost increase is very low, given the period of food inflation we have been through. The reality is you need to know your costs and if this will impact your business. Be proactive with your current Canadian customers and let them know the impact on your cost of goods. For example, if you are going to incur a 25% increase in ingredient cost from U.S. because of tariffs that is a reality you and they need to reflect.
• Participate in the dialogue with your industry trade associations and bureaucrats so they understand the impact on your business. They can only advocate for you when they understand your position.

We apologize for the long list…we hope it is helpful in your business. If you have ideas to share, please let us know.

This whole situation is frustrating given the volatility and the potential impact. Unfortunately, it is a reality and one we will be faced with for the next 4 years. Tariffs are only one component in a protectionist trade strategy. Our food and beverage industry should continue to reduce dependence on this market to reduce our risks going forward.

Instability in Ottawa

As we are entering this challenging time with our biggest trading partner we also have a gap in leadership in our own federal government. The Prime Minister is still in place but on his way out. We will have a relatively quick leadership race for the Liberal party. From initial indications the top contenders are trying to distance themselves from Justin Trudeau. This means promises to change policy. We could see the carbon tax modified or scrapped, for example.

Then at some point we will have an election. The polls indicate we will have a change in government. If that happens, we will probably see policy change in areas such as sustainability, carbon tax and who knows what else. We have elections because polls are not always correct so stay tuned.

We know we have a new direction in Washington and we will likely have a different or very different direction in Ottawa. As you operate your business in 2025 you will have to assess the impact of these changes and adjust your strategy accordingly.

Peter

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