The Benefits of Canadian Food Aid Policy to the Canadian Economy

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The Benefits of Canadian Food Aid Policy to the Canadian Economy

By Oleg Nekrassovski

Tied aid involves a developed country giving a loan or a grant to a developing country

while dictating where in the world they should buy what they need with that money. This

generally amounts to the recipient country being told to spend the given money in the donor

country (i.e. on the goods and services produced by that country) (Tied aid, n.d.). Untied aid, on

the other hand, involves a similar transaction between a developed and a developing country,

with the main difference being that the developing country can spend the received money

anywhere it wants (Untied aid, n.d.). The present paper, however, will focus neither on the tied

food aid nor on the untied food aid. Instead, it will focus on the direct, free transfer of food

produced in Canada, to the countries in need. And it will argue that such food aid is highly

beneficial to Canadian economy in various ways.

Most experts agree that surplus disposal and addition of value to Canadian food products

are the two key potential benefits of Canadian food aid policy to Canadian economy (Charlton,

1992). Surplus disposal involves reducing excess inventories of locally produced food products

by sending them off as foreign aid (Charlton, 1992). The surplus food produce, of course, does

not get shipped off without any compensation to its producers; otherwise there would be no

benefit to the Canadian economy. Instead, a federal government agency, such as the Canadian

International Development Agency (CIDA), purchases the surplus food produce from its

producers at a mutually agreed upon price, which is seldom equal to the lowest one on the world

market (Charlton, 1992).


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Canadian economy can benefit from surplus disposal in at least two ways. First, the

handling and storage of excess inventories carries considerable costs, which are significantly

reduced by early disposal of the surplus (Charlton, 1992). In fact, there are many unnecessary

costs, which are incurred by the carrying of excess inventory. Every item kept in stock must be

financed by its interest or opportunity cost, which amounts to between 10% and 15% of the

item’s value. Moving items in and out of facilities incurs its own costs; as does storing them in a

rented space (Sahin & Robinson, 2007). And even if the storage space is owned rather than

rented, a considerable opportunity cost may be incurred by using this space to store excess

inventory, if the same space can be used for another, more productive activity (Sahin &

Robinson, 2007). Also, taxes must be paid on all inventory assets. While insurance is also

usually paid for all types of stock. Finally, inventory shrinkage also has its costs. Shrinkage

occurs due to pilferage, obsolescence, or deterioration (Sahin & Robinson, 2007). In the case of

food produce, deterioration is doubtlessly a major cause of inventory shrinkage.

Second, large surpluses have a depressive effect on the markets of food products. Surplus

disposal, not surprisingly, greatly reduces this depressive effect (Charlton, 1992). In fact, a

surplus of food produce on the Canadian market means that the supplied quantity of food

produce is greater than optimal, i.e. above that required to achieve the equilibrium price.

Moreover, the increase in the quantity of any commodity on the market means a decrease in the

quantity of it demanded by the customers (McConnell et al., 2002). Since, the equilibrium point

is the only point at which the quantity supplied is equal to the quantity demanded, under surplus

conditions the quantity supplied at a price acceptable to the producer, is considerably greater

than the quantity demanded, at that price, by the consumers. Consequently, under surplus

conditions, the producers cannot sell a large quantity of their produce at a price acceptable to


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them (McConnell et al., 2002). On the other hand, if they are determined to sell all of their

produce (because, for example, it will simply rot and become worthless if they don’t), they have

to considerably lower the prices in order to cause the quantity demanded to increase. Thus, the

existence of the surplus in the food market, while having no effect on the consumers (as they

always get as much or as little as they want depending on the price), greatly harms the food

producers (McConnell et al., 2002). This is why surpluses are said to ‘depress’ the markets and

harm the economy.

In order to be effective, however, the disposal of surplus food products should be

correctly matched with eternally changing market conditions. During the late sixties, for

example, the disposal of surplus wheat was a primary objective of Canadian food aid policy

(Charlton, 1992). On the other hand, during the boom years of the seventies the shipping of

surplus wheat as foreign aid became uneconomic, because during those years the Canadian

farmers had no trouble selling all of their surplus wheat to other countries. Consequently, the

boom years of the seventies saw a shift in Canadian food aid exports from wheat to products like

fish, dried eggs, canned meat, and milk powder (Charlton, 1992).

The value added to Canadian food produce by processing it, is another economic benefit

of Canadian food aid policy (Charlton, 1992). Value added is the market value of the product

sold by a firm minus the value of the inputs that the firm has purchased and used to produce that

product. Value added to every product is paid out as wages, rent, interest, and profit by the firm

that produced it (McConnell et al., 2002). Consequently, the shipping of flour instead of wheat,

for example, causes an addition of value to wheat through its processing into flour and a

resulting input of wages, rents, interests, and profits into the Canadian economy. Moreover, the


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processing of various food products leads to an increase in the utilization of the existing

productive capacity of the industry that processes these products (Charlton, 1992).

In its most basic conception, “capacity” is an aspect of output, which is directly

proportional to the changes in capital stock over the long-run. Capacity is measured in various

ways, and it is useful to split it into two categories of “engineering” and “economic” capacity.

Engineering capacity is the maximum production level which can be sustained over a certain

interval of time. While economic capacity is the desired production level (Shaikh & Moudud,

2004). For example, it may be possible, for a certain flour-milling plant, to mill three thousand

tons into flour in one week. But it may turn out that the higher costs of milling the second and

third ton, due to extra maintenance requirements, higher wages for night workers, etc., make the

milling of only one ton per week, most profitable. Hence, economic capacity constitutes an

optimal level of output (Shaikh & Moudud, 2004). A persistent production below economic

capacity indicates the need to slowdown the planned capacity growth, while that persistently

above it indicates that the planned capacity growth can be accelerated (Kurz, 1986). Thus, an

increase in demand for processed foods, leads to increased output of the food processing plants,

and an increase in their capacity growth. Moreover, over the short-run, changes in output are

thought to correlate with changes in employment. Thus, in the short-run, an increase in capacity

utilization rate (the ratio of output to capacity) will likely see a collateral increase in the

employment rate (the ratio of employment to labour supply), which is unquestionably beneficial

to the economy of any country (Shaikh & Moudud, 2004). The increase in demand on canola oil

and wheat flour, caused by using them as food aid, has greatly benefited the flour-milling and

canola oilseed crushing industries, which previously experienced chronically low levels of

capacity utilization in their facilities (Charlton, 1992).


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Aside from surplus disposal and the addition of value to Canadian food products, there

are other, though lesser, benefits of Canadian food aid policy to the Canadian economy. The

foremost among them is market development. Market development with respect to food aid

generally works through the shipping as food aid of a certain type of Canadian food produce to

recipient countries unfamiliar with this type of food (Charlton, 1992). The result is that the

recipients get thoroughly familiarized with the quality of these Canadian food products and end

up developing a taste for them. Once that happens and once the short-term famines, in the

recipient countries, are over, the former food aid recipients start to be treated as full paying

customers (Charlton, 1992).

Food aid has also been used by Canadian political leaders to obtain and/or seal trade

agreements with other countries, once again to the benefit of the Canadian economy. For

example, in 1977 Colombia signed an important trade agreement with Canada, which may not

have taken place if Canada had not also offered to sign another agreement with Colombia which

stated that Canada will donate to Colombia 1800 tons of skim milk powder (Charlton, 1992).


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References

Charlton, M. W. (1992). The making of Canadian food aid policy. Montreal: McGill-Queen’s

University Press.

Kurz, H. (1986). Normal positions and capital utilization. Political Economy: Studies in the

Surplus Approach, 2(1), 37-54.

McConnell, C. R., Brue, S. L., & Barbiero, T. P. (2002). Macroeconomics. Toronto: McGraw-

Hill Ryerson.

Sahin, F., & Robinson, E. P. Jr. (2007). Inventory management. In J. T. Mentzer, M. B. Myers,

& T. P. Stank (Eds.), Handbook of global supply chain management (pp. 185-201).

Thousand Oaks, California: Sage Publications, Inc.

Shaikh, A. M., & Moudud, J. K. (2004). Measuring capacity utilization in OECD countries: A

cointegration method. The Levy Economics Institute Working Paper Collection, 415.

Retrieved from http://homepage.newschool.edu/~AShaikh/measuring%20capacity.pdf

Tied aid. (n.d.). Retrieved November 30, 2011 from Wikipedia:

http://en.wikipedia.org/wiki/Tied_aid

Untied aid. (n.d.). Retrieved November 30, 2011 from Wikipedia:

http://en.wikipedia.org/wiki/Untied_aid

http://homepage.newschool.edu/~AShaikh/measuring%20capacity.pdf

http://en.wikipedia.org/wiki/Tied_aid

http://en.wikipedia.org/wiki/Untied_aid

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The Benefits of Canadian Food Aid Policy to the Canadian Economy