Department of Agricultural Economics Project on Organic Agriculture Number 7 January 2005 By Shon Ferguson and Simon Weseen The Economic Effect of Canada Making or Missing the EU 3 rd Country List: The Case of Organic Wheat 1. Introduction Canada presently has a voluntary national standard for organic food production and handling. The federal government is currently working with the organic sector in order to develop a mandatory national standard. A mandatory national standard is necessary in order to allow the Canadian government to negotiate organic standard equivalency agreements with other countries if necessary so that organic agrifood products can continue to be exported from Canada. Equivalency is currently established on a sale-by-sale basis with the European Union (EU), which is a costly and time-consuming process. Once equivalency negotiations with the EU are complete, Canada will be placed on the Article 11 list (granted 3 rd country status). Canada must be placed on the 3 rd country list in order to continue exporting organic products to EU member states after December 31, 2005. Organic grain exporters such as Hungary, Australia and Argentina have already been placed on the EU 3 rd country list. There are multiple scenarios that could occur with respect to the EU 3 rd country list deadline. When Canada is eventually is placed on the list, exporters of Canadian organic products may enjoy higher or lower costs of trade and less hassle. However, if Canada does not make the 3 rd country list before the deadline, the EU may close its border to Canadian organic food imports. The EU may also choose to extend the deadline to accommodate Canadian imports until Canada is placed on the 3 rd country list. This paper analyzes the effect of each of these scenarios on world organic wheat markets. This report proceeds as follows. A background on the international organic wheat market is provided in Part 2. A brief description of the theory that is used to analyze the problem is provided in Part 3 and a description of the methodology is given in Part 4. The results of the analysis follow in Part 5. Discussion of the results and the study s implications in Part 6 conclude the report. 2. The International Organic Wheat Market Canadian Organic Wheat Production and Trade The value of organic grains produced in the prairie region of Canada (Manitoba, Saskatchewan, and Alberta) in 2003 was estimated at $98 million, while Ontario and Quebec produced an estimated $32 million in organic grains (AAFC 2004). At least $40 million of this production is exported 1. The EU accounted for about 52% of Canadian grain exports in 2003, while 40% of exports are destined for the U.S. Japan purchased about 5% of Canadian grain exports in 2003. Organic wheat was produced on 179,000 acres in Canada in 2003, which constituted 32% of all organic grain acreage (AAFC 2004). In 2002, Canada exported about $13.2 million worth of organic wheat (IFOAM 2004). Of this value, 50% was exported to 1 The value represents only reported amounts and the percentage of the total is not known.
the EU, 40% was exported to the U.S. and 5% was exported to Japan. The U.S. imposed a 14.15% tariff on Canadian wheat (CWB 2004), which has decreased exports to the U.S. and increased exports to the EU, now comprising about 80% of the total. It is evident that the EU is a very important export market for Canadian organic wheat. Global Organic Wheat Trade Global organic wheat exports are dominated by only a few countries. The U.S. is the largest organic wheat exporter, with an estimated 33% of world market share in 2002 (IFOAM 2004). Canada held 27% of world export market share in 2002. Hungary, Australia, Argentina and Slovakia held export market shares of 22%, 9%, 5% and 4% respectively in 2002. The EU imported 65% of traded organic wheat in 2002, and is the major customer of all exporting countries. The trade flows of organic wheat are provided in Table 1. 3. Theory The Economics of Trade Policy The economics of international trade forms the basis of the theory in this report. There are several policy instruments available to governments that can affect the welfare of producers and consumers domestically and in the countries of their trading partners. These policy instruments include tariffs, non-tariff barriers, quotas, export subsidies, production subsidies and export taxes. Trade costs can also affect trade, and are influenced by government policy. A tariff is a system of duties that is imposed on an imported good. Tariffs can be applied as a dollar value per unit traded, or as a percentage of the value of the trade. A non-tariff barrier causes a halt to trade due to a product not meeting a condition of trade (e.g. a regulatory requirement). A quota is a maximum limit on quantity. Applied to imports, a quota designates the maximum quantity of a product that may be brought into a country during a specified period of time. An export subsidy is a monetary amount that is given to an enterprise in return for exporting a good. A production subsidy is similar to an export subsidy but is given in return for producing a good. An export tax is the opposite of an export subsidy, since the exporter must pay the government for the privilege of exporting a good. Each of these policy instruments has an effect on trade and welfare of consumers and producers both domestically and abroad. When a particular trade policy instrument is used on a foreign country, it has a direct effect on the domestic country and the foreign country, and an indirect effect on other countries that trade the same good. It is important to incorporate these third country effects when analyzing the effect of a particular trade policy. Table 1 - Trade Flows of Organic Wheat in 2002 (Cdn$, Thousands) Destination Exporter USA EU Switz. Norway Japan RoW Export % Argentina 1,638 578 28 28 2,272 5 Australia 2,097 805 210 942 478 4,533 9 Canada 5,087 6,676 742 742 13,247 27 Hungary 9,313 1,334 10,647 22 Slovakia 2,120 2,120 4 USA 9,577 4,789 1,437 15,802 33 5,087 31,421 7,506 238 3,120 1,248 Import % 10 65 15 0 6 3 RoW Rest of the World Source: IFOAM 2004, author s calculations 2
The Effect of Canadian Exports to the EU Halted If the EU ever halted the trade of organic food products from Canada due to Canada s absence from the EU 3 rd country list after December 31 2005, this would be defined as a non-tariff barrier. In economic terms, a non-tariff barrier has the same effect as an import quota of zero for Canadian organic foods, or a tariff that is high enough to completely halt Canadian exports 2. When the barrier is put up, the price of the organic goods goes up in the EU and goes down in Canada. EU producers gain welfare 3 and the EU consumers lose welfare because of the price increase. In Canada, the welfare situation is opposite; the lower price in Canada means that Canadian consumers gain welfare and Canadian producers lose welfare. The effects on producers and consumers in third countries are more complex, and the change in their welfare is not clearly positive or negative. Overall, a halt in trade causes a net loss of global welfare, which is referred to as an efficiency loss. The Effect of Canada on the EU 3 rd Country List When Canada is placed on the EU 3 rd country list, supply chain costs may subsequently increase or decrease. At a minimum, producers may save time filling out paperwork with their certification body (CB). CBs may save on the costs of accrediting to multiple standards. Certification time savings for the producer depend, however, on whether a new mandatory Canadian organic standard leads to more or less paperwork. If the newly developed Canadian standard involves more or less paperwork than the current system, then the costs will increase or decrease relative to the status quo. Exporters and importers may save time and have less hassle as a result of being on the 3 rd country list, which could translate into lower trade costs between Canada and the EU. The decrease in hassle may 2 Under perfect competition, a tariff that completely halts trade between two countries and a quota of zero are equivalent in their welfare effects. 3 Welfare, in the economic sense, is the net benefit provided by producing or consuming a good. also cause EU importers to more eagerly substitute Canadian organic wheat for other sources of wheat as Canadian prices become more competitive. However, the current system of obtaining equivalency on a case-by-case basis is generally hassle-free, so the cost savings would not be very large. Trade costs are like export taxes, since both create additional costs for exports. If organic wheat trade costs become lower for Canada, this will lead to a higher price for the organic wheat in Canada and a lower price in the importing EU. The quantity exported from Canada to the EU also increases. Other exporting countries will sell less organic wheat to the EU as a result of Canadian cost savings since they become relatively less competitive with Canadian exporters. In the end, Canadian producers gain from higher prices, but Canadian consumers are hurt by the price increase. EU consumers gain from lower prices while EU producers lose. On the other hand, any cost savings that do not affect trade costs will not affect exports from Canada. 4. Methodology and Data The effect of a trade policy instrument such as a nontariff barrier or a trade cost savings has very complex effects because of the interdependencies between countries. A model is required that can capture all of the trade effects between all of the countries involved. A Global Simulation Model (GSIM), developed by Francois and Hall (2003), is employed in this analysis 4. GSIM is used in this paper to analyze the impact of the EU halting imports of organic wheat from Canada, and the impact of Canada decreasing wheat export trade costs with the EU. GSIM calculates the effects of trade policy changes on prices, quantities traded and welfare of producers and consumers in each country. 4 GSIM is a partial equilibrium, single commodity bilateral trade model that distinguishes between imports from different sources (the Armington assumption). 3
The model requires data on bilateral trade flows, the responsiveness of production and consumption to changes in price 5 and the responsiveness of import consumption to relative import prices 6. The model also requires the input of the change in tariffs, export subsidies, production subsidies and export taxes or trade costs. It is these changes in trade policy instruments that create changes in quantities, prices and welfare for each country included in the model. The data on bilateral trade flows (Table 1) and export organic certification costs are taken from a study by the International Federation of Organic Agriculture Movements (IFOAM 2004). The IFOAM study uses the GSIM model to analyze the impact of harmonized guarantee systems on production and trade in organic wheat and organic coffee. The 2002 trade flows in Table 1 are adjusted to account for the current U.S. tariff on Canadian wheat, so that Canada s exports to the U.S and EU are 10% and 80% respectively. Assumptions on the elasticities of supply, demand and substitution for organic wheat, and certification costs between countries are also taken from the IFOAM study. Since data on domestic absorption 7 of organic wheat is not available, some assumptions on the domestic production of organic wheat were made in order to calculate rough estimates of the organic wheat production that was consumed domestically in each country. 8 The calculated values of domestic absorption were very large in comparison to the values of trade flows. 5 These are known as elasicities of supply and demand. 6 This is known as the elasticity of substitution. Given that a consumer will substitute an imported good for a domestic good if the import price decreases, this model assumes that imports from all countries are not treated the same. For example, Australian wheat exported to the EU may not substitute as easily for EU wheat as would Hungarian wheat, when the prices of Australian and Hungarian wheat decrease by the same amount. 7 Domestic absorption is domestic production that is consumed domestically. 8 Domestic absorption is calculated for each country using the value of organic wheat produced and adjusting for the value of organic wheat imports and exports. Canada and U.S organic wheat acreage is available (AAFC 2004). For all other countries, production was calculated by multiplying the conventional wheat production value by the percentage of agricultural land that is organic. 4 The scenarios to be evaluated are: 1) EU stops organic wheat imports from Canada 2) Canada placed on EU 3 rd country list trade cost and hassle savings 3) Status quo continued: Extension of the EU deadline The model is used for Scenarios 1 and 2 because they result in economic impacts. The analysis also checks the sensitivity of the results to changes in the elasticities of demand, supply and substitution. 5. Results The results of each scenario include the change in trade with the EU and with the world for each country, as well as the change in welfare of producers and consumers (referred to as producer surplus and consumer surplus respectively 9 ) for each country. The values are based on the trade of organic wheat that occurred in 2002 10, adjusted for the U.S. tariff. Scenario 1: EU Stops Organic Wheat Imports from Canada The impact of an EU non-tariff barrier on organic wheat imports from Canada on producer surplus, consumer surplus and trade is reported in Table 2. The results are given in both dollar changes and percentage changes. Canadian consumers and EU producers gain surplus, while Canadian producers and EU producers lose surplus as a result of the nontariff barrier. The implications for third countries vary; producers in Argentina, Hungary and Slovakia gain, while producers in Australia and the U.S. lose from the EU s action. The model illustrates that Canada loses all of its $10.6 million worth of trade with the EU. The EU makes up for the loss of Canadian wheat by absorbing more organic wheat domestically and through increased imports from the other countries. 9 surplus is the amount of benefit provided by producing a good. surplus is the amount of benefit provided by consuming a good. 10 All results are given in 2002 dollar values
Table 2 Scenario 1: EU Stops Organic Wheat Imports from Canada Welfare Changes Trade Changes Country Argentina 12 0.0% -19 0.0% 35 2.1% 30 0.0% Australia -179-0.5% 168 0.2% 97 4.6% -275-0.4% Canada -11,045-37.6% 9,156 13.0% -10,598-100.0% -16,814-30.4% Hungary 29 0.5% -11-0.1% 77 0.8% 45 0.3% Slovakia 25 1.0% -18-0.1% 23 1.1% 39 0.5% USA -986-1.8% 1,095 0.4% 650 6.8% -1,517-1.7% EU 7,352 0.8% -9,436-1.0% 11,324 0.7% 11,324 0.7% Switzerland -128-0.7% 182 0.1% 0 0.0% -197-0.7% Norway -3-0.1% 3 0.0% 0 0.0% -4-0.1% Japan -206-4.6% 386 3.6% 0 0.0% -315-5.9% RoW -698-863 2.0% 0 0.0% -1,073 0.0% -5,819-0.5% 2,369 0.1% 1,607 0.1% -8,757-0.4% RoW Rest of the World Source: Author s calculations Table 3 - Scenario 1 Canadian Trade Effects Changes in Canadian Trade Country Within Canada -7,633-18.2% Exports: USA 662 56.8% EU -10,598-100.0% Japan 338 45.5% RoW 417 56.2% -16,814-30.4% RoW Rest of the World Source: IFOAM 2004, Author s calculations Overall, the EU realizes a net increase of organic wheat consumption by about $1.6 million (an increase of 0.1%) through changes in domestic absorption and imports. However, total world trade decreases by $8.8 million, or 0.4%. The non-tariff barrier has the effect of decreasing world welfare by $3.5 million per year. The effects of an EU non-tariff barrier on Canadian export and domestic trade are given in Table 3. The direct result of the EU non-tariff barrier is a complete stop of exports from Canada to the EU. Canada s trade with its other customers is increased as a result. For example, Canada increases its exports of organic wheat with the U.S. by $662 thousand, an increase of 57%. Canada also increases its exports to Japan and the Rest of the World (RoW) by 45.5% and 56.2% respectively. Canada s domestic absorption (trade within Canada) decreases by $7.6 million or 18%. Overall, Canada loses $16.8 million (30.4%) worth of total trade within Canada and export trade. Given that there are 941 organic wheat producers in Canada (AAFC 2004), trade losses amount to $17,867 per producer per year. Canadian producer surplus losses amount to $11,738 per producer per year. It is interesting to note that the U.S. producers lose from the EU border closure to Canada. Even though U.S. producers end up exporting more organic wheat to the EU, this effect is outweighed by increased imports from Canada. The loss of the EU export 5
market leads Canada to significantly increase its exports to the U.S., which hurts U.S. organic wheat producers. Scenario 2: Canada Placed on EU 3 rd Country List Certification Cost Savings Only In the most conservative cost-saving scenario, the only cost savings are the decrease in paperwork for the producer if Canada is placed on the EU 3 rd country list. s may save about half a day in paperwork each year related to the process of applying for certification in this scenario (OCIA 2004). The amount of this cost savings depends on the value of producers time. Moreover, the impact on cost savings may be positive or negative. Regardless of the value of producer time saved, these savings are not likely to impact trade costs and will not have an impact on the amount of trade between Canada and the EU. Trade Cost and Trade Hassle Savings The impact of trade cost and trade hassle savings for exports to the EU, measured by producer surplus, consumer surplus and trade during 2002, is reported in Table 4. Although trade cost savings are not certain, this scenario assumes that gaining EU 3 rd country status will result in a modest decrease in trade costs. In this scenario it is assumed that exporters and importers will save a combined $125 per sale by saving time and hassle. This works out to a cost saving that is equal to about 1% the EU import price. Scenario 2 therefore estimates the impact of a decrease in Canada s certification costs when exporting to the EU from 1.3% (IFOAM 2004) to 0.3% of the EU import price. This decrease in certification costs puts Canada at par with Australia s EU export certification costs (IFOAM 2004). The fact that Australia is already on the 3 rd country list provides support that 0.3% is a reasonable certification cost assumption for Canada if it also joins the EU 3 rd country list. Scenario 2 also assumes that EU importers will substitute organic wheat more readily from countries on the EU 3 rd country list than from 6 countries that are not on the EU 3 rd country list due to lower hassle. 11 The impact of trade cost savings in Scenario 2 has an exactly opposite but much smaller impact than Scenario 1. Canadian consumers and EU producers lose surplus, while Canadian producers and EU consumers gain surplus as a result of Canadian trade cost savings. The implications for third countries are also exactly the opposite compared to Scenario 1; producers in Argentina, Hungary and Slovakia lose, while producers in Australia and the U.S. gain. In terms of trade, Canada gains $419 thousand worth of trade with the EU. The gain of Canadian exports to the EU has the effect of decreasing domestic absorption in the EU and decreasing all other countries exports to the EU. Overall, the EU realizes a net decrease of organic wheat by only $4 thousand through changes in domestic absorption and imports. world trade increases by $301 thousand (less than 0.1%) and the Canadian trade cost savings have the effect of increasing world welfare by only $108 thousand. The effects of Canadian trade cost savings on Canadian export and domestic trade are given in Table 5. The direct result of the EU non-tariff barrier is an increase of exports from Canada to the EU. Canada s trade with its other customers is decreased as a result. For example, Canada decreases its exports of organic wheat with the U.S. by $30 thousand (2.6%). Canada also decreases its exports to Japan and the Rest of the World by 2.1% and 2.5% respectively. Canada s domestic absorption (trade within Canada) increases by $235 thousand (0.6%). Overall, Canada gains $590 thousand (1.1%) worth of total trade due to trade cost savings in Scenario 2. Canadian trade gains amount to $627 per producer per year. Canadian producer surplus gains amount to $407 per producer per year. 11 Countries in the model are given an elasticity of substitution of 10 for EU imports if they are on the EU 3 rd country list and 5 otherwise.
Table 4 Scenario 2: Canada Placed on EU 3 rd Country List, Trade Cost and Hassle Savings Welfare Changes Trade Changes Country Argentina -1 0.0% 0.7 0.0% -1-0.1% -1 0.0% Australia 6 0.0% -5 0.0% -3-0.2% 9 0.0% Canada 383 1.3% -291-0.4% 419 4.0% 590 1.1% Hungary -1 0.0% 0.4 0.0% -3 0.0% -2 0.0% Slovakia -1 0.0% 0.6 0.0% -0.8 0.0% -1 0.0% USA 32 0.1% -35 0.0% -22-0.2% 49 0.1% EU -256 0.0% 288 0.0% -394 0.0% -394 0.0% Switzerland 4 0.0% -6 0.0% 0 0.0% 6 0.0% Norway 0.1 0.0% -0.1 0.0% 0 0.0% 0.1 0.0% Japan 7 0.2% -12-0.1% 0 0.0% 10 0.2% RoW 23 - -28-0.1% 0 0.0% 35 0.0% 196 0.0% -88 0.0% -4 0.0% 301 0.0% RoW Rest of World Source: Author s calculations Table 5 - Scenario 2 Canadian Trade Effects Changes in Canadian Trade Country Within Canada 235 0.6% Exports: USA -30-2.6% EU 419 4.0% Japan -15-2.1% RoW -19-2.5% 590 1.1% RoW Rest of the World Source: Author s calculations The effects of a 1% trade cost savings plus increased substitution with Canadian organic wheat exports to the EU are thus very small relative to the impact associated with the loss of the EU export market in Scenario 1. Moreover, it is difficult to say whether trade costs will actually increase or decrease as a result of obtaining equivalency with the EU standard. Scenario 3: Status Quo Continued Extension of the EU Deadline If Canada is in a position where it is cannot complete the equivalency agreement with the EU before the December 31, 2005 deadline, the EU may choose to extend the deadline to accommodate Canadian imports until such equivalency is reached. This scenario would imply a continuation of the status quo, with no impact on organic wheat markets. Sensitivity Analysis It is useful to know how sensitive the results are to changes in parameters such as the responsiveness of production and consumption to changes in price and the responsiveness of import consumption to relative import prices 12. Using Scenario 1, the elasticities of supply, demand and substitution are varied. The 12 These are known as the elasticities of supply, demand, and substitution. 7
results of the sensitivity analysis for Canada are presented in Table 6. When elasticities of supply are doubled for Scenario 1, this represents a long-run situation where organic production adapts to price changes. There is very little scarcity of organic land in the long run, since there is an abundance of conventional land in the world that can be converted to organic production. Likewise, certified organic land can easily convert to conventional production. A doubling of supply elasticities results in a more severe percentage decrease in producer surplus resulting from the EU trade barrier, but this impact is lower in dollar value terms because the greater elasticity makes producer surplus measures smaller to begin with. On the other hand, the doubled supply elasticities also result in a smaller total trade loss for Canada. When elasticities of demand are cut in half for Scenario 1, this represents a situation where consumption of organic wheat is less sensitive to price changes than consumption of conventional wheat. This situation is plausible if consumers of organic wheat are willing to consume the same amount of organic products regardless of the price. A 50% decrease in demand elasticities results in a greater loss of producer surplus for Canada, in both percentage and dollar value terms. The lower demand elasticities also result in a greater overall trade loss to Canada. A doubling of substitution elasticities for Scenario 1 results in a slightly smaller losses of Canadian producer surplus and trade. This occurs because more Canadian organic wheat is diverted to the U.S., Japan and the Rest of the World as a result of the EU trade barrier. A doubling of substitution elasticities for Scenario 2 results in a more positive impact for Canadian producer surplus and trade gains. The EU becomes more willing to use Canadian organic wheat as the Canadian price becomes more competitive. Overall, the sensitivity analysis illustrates that changes in the elasticities of supply, demand and substitution can have some impacts on the results of the model, but these impacts are small do not affect the direction of the changes. Increased supply elasticities in Scenario 1, which represent a longer-run situation, have a negative effect on Canadian producer surplus (in percentage terms) but soften Canadian total trade losses. Decreased demand elasticity elasticities in Scenario 1, which represents less price-sensitive organic wheat consumers, has a negative effect on Canadian consumer surplus and total trade. Increased elasticities of substitution, which represent buyers increased willingness to substitute between wheat from different countries, result in positive impacts on Canadian producer surplus and trade changes for Scenarios 1 and 2. When elasticities of substitution are doubled for Scenarios 1 and 2, this represents situations where buyers of organic wheat are more willing to substitute between wheat from different countries as the relative prices change. It is expected that most agricultural commodities have a very high elasticity of substitution because they are generally indistinguishable based on country of origin. The elasticity of substitution is expected to decrease as products from different countries are perceived to be more distinguishable from each other. 8
Table 6 - Sensitivity Analysis: Canadian Welfare and Trade Welfare Changes Trade Changes ( 000 CDN$) ( 000 CDN$) ( 000 CDN$) ( 000 CDN$) Scenario 1: Original -11,045-37.6% 9,156 13.0% -10,598-100.0% -16,814-30.4% 2 x supply elasticities.5 x demand elasticities 2 x substitution elasticities -6,759-46.1% 5,655 8.0% -10,598-100.0% -14,223-25.7% -11,970-81.6% 9,894 7.0% -10,598-100.0% -18,200-32.9% -9,170-31.2% 7,482 10.6% -10,598-100.0% -13,989-25.3% Scenario 2: Original 383 1.3% -291-0.4% 419 4.0% 590 1.1% 2 x substitution elasticities Source: author s calculations 437 1.5% -332-0.5% 565 5.3% 674 1.2% 6. Discussion and Implications The GSIM model provides an analysis of the impact of both a loss of trade with the EU and a decrease in trade costs and trade hassle with the EU. Overall, the results suggest that a halt to organic wheat exports to the EU would have a devastating impact on the Canadian organic wheat sector, as producer welfare and total trade would decrease significantly. Although Canadian consumers stand to gain through lower prices, this would be an overall negative impact on the Canadian economy. EU producers stand to gain from such a trade action, while EU consumers would surely lose because of higher prices. Global trade flows would also be altered substantially from an EU halt to Canadian organic wheat. Canadian organic wheat exports would be diverted to the U.S. and other importing countries, which would have varying impacts on their producers and consumers. U.S. producers would lose from Canada s predicament, since their markets would be flooded with Canadian organic wheat. History warns that a large increase in Canadian organic wheat exports to the U.S. could result in trade friction with the U.S. Potentially lower trade costs and trade hassle due to Canada being placed on the EU 3 rd country list has very small and uncertain positive impacts on the Canadian organic wheat sector compared to the possibly huge negative impacts of not making the 3 rd country list in before the December 31, 2005 deadline. There are many ambiguities regarding the cost savings and trade benefits related to gaining equivalency with the EU. The cost savings depend on whether CBs can lower their accreditation costs and whether exporters can lower their trading costs. Moreover, the cost savings accrued to CBs will enhance trade only if they are transferred into trade cost savings for exporters. It is also uncertain whether cost savings by CBs or exporters will be passed back to producers or not. Economic theory suggests that these cost savings may not be immediately passed back to producers, but producers will benefit from cost savings in the long run if CB and exporting firms are competitive. The question of whether or not CBs and exporters behave competitively is beyond the scope of this paper. 9
The results indicate that the main reason for negotiating equivalency with the EU before the deadline is to avoid the possibility of a trade barrier and the resulting negative impact for Canada. The uncertain impacts of being on the EU 3 rd country list are likely a very small part of the reason why Canada is putting so many resources in to negotiating equivalency with the EU, since trade costs will not decrease significantly by having EU equivalency. On the other hand, organic producers may find it easier to market their own wheat to EU if equivalency leads to fewer complications for those who wish to export. It is important to note that this study does not model the potential for EU demand for Canadian organic wheat to increase as a result of obtaining equivalency with the EU organic standard. The study simply shows how a possible decrease in trade costs can make Canadian wheat more price-competitive and result in increased exports to the EU. It is possible that some EU organic wheat buyers may begin to purchase Canadian organic wheat because Canada is on the EU 3 rd country list. This would further increase the positive effect of gaining equivalency with the EU standards. References Agriculture and Agri-Food Canada (AAFC) 2004. Organic Statistics 2003 Canada. from Certified Organic The Status of the Canadian organic Market in 2003. Prepared for Agriculture and Agri-Food Canada by Anne Macey, March 2004. Canadian Wheat Board (CWB). 2003. CWB Appeals U.S. Trade Ruling in Grain Matters Grain Marketing Report special edition. November/December 2003. Communications and Public Relations, CWB, Winnipeg, MB. Francois, J.F. and H.K. Hall. 2003. Global Simulation Analysis of Industry-Level Trade Policy. Version 3.0. Website:http://www.intereconomics.com/handbook/ Models/ Spreadsheet%20Models/GSIMpaper.pdf. Accessed September 13, 2004 International Federation of Organic Agriculture Movements (IFOAM). 2004. International Task Force on Harmonization and Equivalence in Organic Agriculture Impact of organic guarantee systems on production and trade in organic products. Prepared by Els Wynen, UNCTAD. In conclusion, this study illustrates that it is very important that Canadian organic wheat exports to the EU are not hindered by a lack of an equivalency agreement. The Canadian government must negotiate equivalency with the EU before the December 31, 2005 deadline or extend the deadline to continue the status quo, so that the Canadian organic wheat sector can avoid the worst case scenario that this study describes. Since the EU deadline applies to the entire value of Canadian organic products entering the EU, which has likely grown from $22.7 in 2003 (AAFC 2004), the overall negative impact on the Canadian organic agri-food sector is likely much larger than the results given in this study. Note: We would like to acknowledge the financial support of Saskatchewan Agriculture Food and Rural Revitalization (SAFRR) for this project. 10