Agriculture Committee on Feb. 8th, 2007

[John Schmeiser]

In the capital cost allowance, the big difference between Canada and the United States, in my opinion, is that we never fully depreciate farm equipment. As it currently stands right now, it's 30% in the first year, but it's 50% of the 30%, so a farmer who purchases a new tractor or combine--any new farm equipment--gets 15%; each subsequent year after that, it's a percentage of the remaining amount, whereas in the United States a farmer can fully depreciate that farm equipment over seven years.

Our colleagues with the North American Equipment Dealers Association have noticed that construction equipment can be fully depreciated after five years, so NAEDA and the affiliates in the United States have taken the message to Washington that we feel farm equipment should be equal to construction equipment and should be fully depreciated after five years.

We're a long way from even the current seven years that it is in the United States right now, because we can't fully depreciate our equipment.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

The U.S. manufacturers and, consequently, producers therefore enjoy another benefit, in addition to agricultural subsidies for raw materials. That's another advantage the Americans have over us.

[John Schmeiser]

I agree.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

A little earlier, Paul talked about more environmentally friendly products. You mentioned the report of the Standing Committee on Finance, which appeared in December 2006, concerning capital cost allowances in various sectors.

Witnesses have proposed that depreciation rates be increased for environmentally friendly investments. In Quebec, the Union des producteurs agricoles believes that agricultural equipment investments that have environmentally positive effects should be subject to a 40 percent capital cost allowance.

There's a lot of talk about environmentally friendly equipment and the environment. In the case of biofuels, that concerns your field as well. What do you think about the position of the Union des producteurs agricoles?

[Howard Mains]

The increase in the CCA rate would indeed encourage the acquisition and purchase of new tractors, and the new tractors coming off the line today have to adhere to the new EPA tier three standards for diesel emissions. The quicker you can get the new equipment, the new tractors, into the marketplace, the quicker the ultimate benefit of lower emissions from those older diesel engines is realized. One of the benefits of getting CCA rates increased today is that you're going to move newer equipment through the marketplace faster.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

That could be an encouragement to buy higher performance vehicles, but that are ultimately more environmentally friendly, greener.

[Peter Maurice]

Absolutely, yes, that would be a very big advantage. If farmers could change tractors sooner, that would make it possible to get rid of machines that are less efficient. That would help a great deal.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Where does the technology stand?

Go ahead.

[Duane Smith]

What I was going to add to that is that we don't always have the new buyer. There are some of the smaller farmers who can't afford the new equipment. That's why we have the recommendation as well to retrofit, re-power, and replace some of the older tractors that don't have the tier three emissions control.

That's where we feel we need an incentive similar to what California has implemented, so that those who might not be able to afford a new piece of equipment might take their older tractor and replace their older engine with a new engine that meets those requirements. But we need an incentive for them to do so.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Where does the technology stand today, in 2007? The research service document stated that the Cummins diesel engine firm perhaps had doubts about the capacity of current engines. I know we can use biodiesel, biofuels, but there may be doubts as regards longevity, and so on. Does the current technology allow us to think that... With the program that the government has put in place and what's happening in other countries, such as the United States and Brazil, we use an enormous amount of biofuel. I imagine that the engines' efficiency is proportionate to their longevity, but I'd like to hear your views on that.

[Howard Mains]

It depends on the manufacturer. It's either Deere or CNH, I think, whose warranty covers.... I'll have to get back with the precise number, but the manufacturers recognize that biodiesel is entering the market, and they will honour the warranty when biodiesel is used, up to a certain percentage, in the fuel supply.

Maybe one of the Deere dealers would have a precise number.

[Doug Tibben]

I know that Deere sends out the tractors from the factory with biodiesel in them. We have a letter on that from Deere.

Also, Deere is sponsoring a project at Kemptville College of the University of Guelph, near here, on a biodiesel program. We've been active in that one as well. There's been a lot of testing taking place with it.

So they are very strongly supporting it.

[The Chair, Conservative, James Bezan]

Mr. Gourde, you have seven minutes, please.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

Thank you. We've touched a bit on the question of used equipment exports. The number of farmers is definitely declining from year to year. There is a large fleet of used equipment, which we have a little more difficulty exporting. Are there any other markets outside the United States, such as Russia or Brazil, where equipment could be exported, or is it simply condemned to the junkheap?

[Peter Maurice]

As for the various places where we could send these tractors, we haven't done any research to determine whether other countries would accept these machines. As we said earlier, a farmer who has a large business, who has a large number of acres to cover, wants tractors over a shorter term and a fixed expenditure every month. He therefore leases. At the end of three years, those tractors go back to the dealer's lot. Are there any other markets? That's probably one aspect on which some research should be done.

One of my customers had a snowplow. He's going to send it to Afghanistan in a container. I don't know where he got the contact, but probably some research should be done with a view to exporting outside North America. I don't have an answer to that question right now.

[Duane Smith]

Our dealership unertook an initiative a few years ago in which we went to Kazakhstan. The whole purpose was to export used equipment to Kazakhstan. My partner did three trips to that country, but it was a challenging market to try to break into. We did one container shipment to it, but we really didn't have success.

There are a few other dealers. There's one dealer in northern Saskatchewan, Farm World, that has had significant success exporting used equipment over there, as well as some new tractors, but it is limited.

There are a lot of challenges involved, one of them being primarily the financing of it and getting the proper funding to secure payment to the dealer.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

It's mainly used equipment, I believe, that's becoming a problem for dealers. I know that it's a problem in Quebec. Our dealers have very large inventories the costs of which they have to bear. Used equipment usually loses value when it isn't sold during the first year after acquisition. For example, if dealers keep used equipment in their yard for two or three years, they often have to resell it at a lower price than the one they had negotiated with the former owner.

Would you need help from the government to export this equipment, or do you simply prefer to let the market do its work globally?

[Peter Maurice]

Assistance in exporting this equipment would definitely be welcome. We're going to do some research on our side, but, if we can get assistance, that would really be very much appreciated.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

As regards parts, some are relatively simple. Personally, it seems to me that prices haven't necessarily followed the market curve.

Let's take the example of brake shoes on a mower-conditioner. In 2000-2001, it seemed to me they were expensive, but people said that was because of the value of the Canadian dollar. Today, the price of the same brake shoe should have fallen since the value of the dollar has risen. But it increases five to 10 percent every year. Wouldn't the problem be a competitiveness problem?

We can currently have parts manufactured by jobbers. I bought some new ones from a dealer, but they cost me 50 percent less if I buy them from a jobber.

[Peter Maurice]

The manufacturer dictates prices.

[Howard Mains]

I suppose the market size in Canada is not nearly as large as the United States, so that would have something to do with it. I'm not sure of any other concerns about spare parts.

I was going to pick up on one point earlier about the prices of equipment. One thing that the industry has faced over the last few years as the dollar appreciated was that as the dollar was appreciating, the cost of steel was going up almost in tandem, and that for the industry was a huge concern, because of course there's not much else that goes into a tractor other than steel. That may address an earlier question as well. As for the cost of spare parts, I think it's one of the challenges of living in a relatively small market.

[John Schmeiser]

There are a number of suppliers that will provide wholesale or what we call jobber parts. The only time that we are really required to sell the manufacturer's part as opposed to a jobber part is when we do warranty work on behalf of the manufacturer. It makes a lot of sense to do it that way. At one time the province of Saskatchewan legislated that parts could not be sold for higher than the suggested list price that was provided by the manufacturer, and the manufacturers on a continual basis had to provide their pricing updates to the province. That went away in 2003 because the province dictated that we should let the market decide. There was a fairly good supply of jobber parts in Saskatchewan, and the market would dictate that farmers had the option: if they didn't want to buy real genuine parts from the manufacturer, they could purchase them from a wholesaler.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

The concentration of dealer franchises has forced a large number of small dealers to join forces or associate, or simply close their doors because they could no longer have access to certain well-known brand names of tractors or other equipment. In this market, that has forced producers to travel farther to get to a dealer. In some regions, I know producers who have to travel 250 kilometers to get to the nearest dealer, whereas, some 20 years ago, there were small dealers who covered their territory.

You mentioned market conditions, but there's also the question of services for producers. Producers are still all over the territory, and they feel abandoned by dealers.

Will we be able to see an improvement in service quality in future, or will things continue in the same direction?

[John Schmeiser]

That's a great question.

In August 2006 the North American Equipment Dealers Association convened a meeting in St. Louis of all dealer leaders to talk about the future of our industry. We have some challenges, and the one everybody agreed upon was profitability.

The reason we are seeing dealers leave some of the smaller communities and consolidating is that we're not making a lot of money. The margin, or the return on assets, investment, that our dealers are making is very small. I'm sure that the farmers in this room will find that very hard to believe, but it is a reality. This is impacting consolidation.

Manufacturers see that dealers are not meeting profitability targets. They are not making as much money as they think they need to remain viable. On one hand, from a dealer's perspective, we have the manufacturers encouraging consolidation. The dealers also recognize that to be profitable and remain dealers, they may have to look at a merger or a buyout, and it is our customer who gets caught in the middle.

We know our customers don't like it, but we don't foresee that trend changing.

[Duane Smith]

Mr. Chair, could I add to that, please?

In my introductory remarks I mentioned that I have five stores. We were a single store to begin with and then expanded to five. Four of those five stores would not be in existence today had we not consolidated, which enables us to achieve a cost base that allowed the stores to remain in those communities.

Initially the producers were apprehensive about whether prices were going to go up or not. But now they realize it's actually been a benefit, because they would have lost the dealership in their community. In that example, it's been positive for them.