Agriculture Committee on March 29th, 2007

[Wayne Easter, Liberal, Malpeque, PE]

Okay.

Mr. Funk, would you comment?

[Bob Funk, Vice-president, Bank of Nova Scotia, Canadian Bankers Association]

The follow-on I would make is that the situation around the CAIS was a little different. I think there were some natural circumstances that caused the differences. One is that it was introduced fairly quickly, and introduced at a time when a decision had been made to go in a fairly linear approach with support programs, and to try to avoid having multiple programs in operation.

The issue that fell out of it was that almost simultaneously with the introduction of CAIS we also had BSE and avian influenza in B.C. The government was forced to respond to that, and it chose to deliver those kinds of support programs through CAIS.

The fallout for financial institutions occurred in two ways. One was that CAIS was very new and wasn't really fully functional yet, and the timeframes for it had been relatively short. The other part was that as we layered on the additional programs, it got to be confusing for us, and then consequently more confusing for our customers, to try to explain what was an add-on program and what was the original program, and when we were talking about CAIS and when we were talking about something that was special delivery relative to a shock to the system. That, for us, was basically the core dilemma.

[The Chair, Conservative, James Bezan]

Thank you.

Monsieur Bouchard.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chairman.

I'd like to thank you all for your testimony.

My first question is for the representatives of the Canadian Banking Association. We met with representatives from the Union des producteurs agricoles before you, and they compared the indebtedness of U.S. farmers to that of Canadian farmers. Since 1997, the debt levels of farmers in Canada have grown significantly, whereas the situation has improved on the American side.

I would like to ask Mr. Little a question. Has the indebtedness of farmers in Canada reached a troubling level?

[Brian Little]

I would agree with you, the debt load has been growing over the past number of years, but I believe that as lenders we are monitoring the situation closely and ensuring that our clients are able to meet the requirements. In cases where there are difficulties, we work through the challenges with them.

I don't think it's too far out of line, from my perspective; however, we do watch it closely, sir.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

I'd like to go back to the chart. We have also talked about the evolution of agricultural total net income, always comparing Canada to the United States. We can see that income in Canada has declined, for a certain number of years, compared to that in the United States. You also told us, if I understood correctly, that the number of producers had declined.

To what factors can we attribute this situation? Is it because of farmers' drop in income? I would like to hear what you have to say on this matter, at any rate.

[Brian Little]

I think there are a number of issues that are impacting that.

There are some consolidations going on in the industry, whereby you have older farmers who are retiring and whose operations are being purchased by large farm operations. These large farm operations are reducing their fixed costs by expanding their land base and are buying out some of the older operations. They're doing it for size and scale, because of profitability and margins.

There's also a group of smaller farms that are growing and expanding within their own right because they're getting into niche marketing, value added, doing something over and above the production of commodities, and they are located in areas surrounding the urban areas, such as around cities like Ottawa, Toronto, Montreal, and Quebec City. So there's that group that is growing and expanding.

The other component that would be impacting this is, to summarize, I guess probably the size and scale of business that's required to generate a profitable business, because of the thin margins in the industry at this point.

[The Chair, Conservative, James Bezan]

Mr. Gaudet, did you want to have a quick follow-up?

[Roger Gaudet, Bloc, Montcalm, QC]

I'd like to ask a question that may be indiscret, but I will ask it any way. In your financial statements, what is the amount of bad debt in agriculture? Banks usually have bad debts. At the beginning of the year, the banks set aside certain amounts for bad debts. With respect to agriculture, what is the annual amount or percentage of bad debt? Or is it more a case of there being no problems because all of the loans are guaranteed?

[Brian Little]

I'm speaking about the bank I work with. Our portfolio is in very good shape, and our difficult loans are not at all out of line with any of the commercial business. In fact, we have a very good quality portfolio. We're quite comfortable with it at this point in time.

[The Chair, Conservative, James Bezan]

Thank you very much.

You have five minutes, Mr. Gourde.

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

Thank you very much, Mr. Chairman.

We've seen that the situation in agriculture often depends on the trust farmers have in the markets, the trust they have in government programs and the trust they have for their banker.

Between 1998 and 2005 or 2006, there was a very significant increase in farm debt. In broader terms, it was Canadian banks that allowed the farm debt to grow so much.

I actually know some people in my riding who came forward with huge projects that were hard to get approved and were turned down by the caisses populaires. But the banks accepted these projects and even allowed the producers to pay nothing down on the capital for five years. For the first five years of the loan, the producers were only paying off the interest, and in Quebec, this resulted in tremendous inflation of quotas, land and agricultural buildings. Of course, the producers got the best available in technological terms. I've seen hog farms where the cost was $600 per hog, even though the maximum for profitability is known to be $300 per hog.

Did the banks benefit somewhat from the enthusiasm of the early years of the new century in farming to increase their share of the market at the expense of Farm Credit Canada and the caisses populaires? It was really clear among farmers in Quebec that there was tremendous competition between the banks and the caisses populaires. That was not beneficial to farming in Quebec and Canada.

May I have your opinion on this?

[Brian Little]

We evaluate the risks of each individual application as presented, based upon the merits, the strength of the deal, the security available, the ability to repay, the management, the business plan, and the marketing plan.

All of the banks have agricultural specialists, and Canada's chartered banks have specialized in agriculture for almost 39 years. We've developed a team of specialists who are knowledgeable and well trained in that industry. They assess each situation on its own merit. They also look at each situation and make a determination.

We understand there is a cycle in the agriculture industry. We're comfortable about working with peaks and valleys. The industry has traditionally had peaks and valleys.

The point is that we look at each situation on its own merit, and we also have specialization within our group adjudication to approve the deals. We feel we have the expertise and the knowledge within our own systems. We evaluate each proposal on its own merits. If we feel comfortable in doing the deal, we'll carry on from there and we will put the package together.

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

Thank you.

Some dairy farmers, hog farmers or people with mixed farms had debt levels of 50% to 55%. However, these big producers have tremendous value in terms of quotas and land.

In my constituency, land values dropped 40% to 45% in the last two years, and even the value of quotas is showing a downward trend. The new approach is to lend quotas to the next generation of farmers. That will not give farmers the full value of their quota, which they will have to buy back in the future.

How will banks react to these drops in farm equity, which can be major for some producers? There may be a drop of between $1 million and $2 million for farms that may be worth $4 million to $4.5 million and have $3 million in loans to pay off. These farms will no longer have any equity.

What will the banks do about this situation?

[Brian Little]

As I said previously, we'll look at each situation on its own merits, and we will sit down with the customer and map out, over a number of years, how this plan is going to work and whether the debt is serviceable.

We might reach a stage or point at which we have to have a very frank discussion with the farm family, and this doesn't happen quickly. We'll look at all options before we ever make a final decision. But we'll work with the family and look at the situation. They may have to decide at some point in time whether they want to protect their equity, and if they do, perhaps liquidation may start, or maybe they will liquidate part of the business or a piece of the business that might not be as profitable as it could be.

We'll do this in a very responsible, proactive way, and that's how we deal with those situations, sir.

[Bob Funk]

If I might add something to that, with the changes that both Quebec and Ontario have made relative to quotas and how quotas will be priced going forward, I think that's one of the issues you raised as a concern.

What we have done over the course of time is to lend on relatively conservative ratios. We would not lend more than 40%, 50%, sometimes as much as 60% of the value of the quota. That was one of the pressures on producers: to make sure they could actually service the cashflow needs of those changes to their business when they were purchasing additional quota so that the change in value in and of itself would not destroy the security package that was behind the financing of that business.

The other thing that should be remembered about the farm income, in the circumstance of the changing quota values, is that the income itself is not changing at this point in time. The price for milk is not changing. The producer's ability to sell milk is not changing. That is not changing. And it really goes to what the future transactions in respect of the purchase of quota and the sale of quota will do.

[The Chair, Conservative, James Bezan]

Merci.

Mr. Atamanenko.

[Alex Atamanenko, NDP, British Columbia Southern Interior, BC]

Thank you, gentlemen, for taking the time to be here.

We've heard over and over again that in agriculture in Canada, everybody is making money except the primary producer, and that those people with an input and output are surviving or making money and the producer isn't.

Mr. McNeill, you talked about the cost of safety regulations being prohibitive. There are three choices. Either we retain the status quo, and ultimately the cost gets passed down to the person buying, the producer; or there is some kind of government intervention, and if that's the case, I'd like to know what you have in mind and how that would be worked out. And here again, we have the philosophical question that if there is not enough money to go around to support farmers directly, should government be intervening to support industry? So I'd like your comments on that. I guess the other possibility would be that we would have fewer regulations. So if there are fewer regulations, then this cuts down the costs.

If possible, would all of you gentlemen like to comment on that?

Mr. MacKay, you haven't said anything yet. I thought I'd give you a chance.

[Dave MacKay, Executive Director, Canadian Association of Agri-Retailers]

I'm conspicuous by my absence.

There is no question, I think, of our going the direction of less stringent regulations. We recognize that these regulations are important. They're important for the security of Canadians, and the benefit does accrue to Canadians.

If we were to give you the shape of what we think would be the solution, we believe the blueprint actually already exists in the form of the example we provided. And you have notes to that effect in the appendix called the “Marine Security Contribution Program”, whereby 75% rebate to the retailer would be appropriate for all approved eligible costs that are applied for on an annual basis. It's a $115 million program. It's absolutely identical to the requirements for the retail sites.

What we require and what the new regulations are likely to bring down are things like fencing requirements, surveillance, lighting requirements. It may get even more intricate than that, but right now I want to emphasize that retail sites are in compliance with current regulations, whether they're industry-regulated or whether they're government-regulated. But the future is going to be far more stringent.

We agree that we have to do it, and not only to do it thoroughly, but do it promptly to pre-empt a potential event. What I mean by that is terrorist acquisition or criminal acquisition of some of these hazardous materials.

We believe that the blueprint is already there. It's a simple one. It has precedent in the form of the Marine Security Contribution Program.

CAAR, however, would like to further suggest that our association be the central coordinator or facilitator of a program, because we have the relationship with the retailers, and we have the expertise to work with them to bring the consulting so that these sites can be upgraded appropriately and quickly. With that, we can be the central coordinator if you so choose, even doing on-site consultation with some of the members as well to bring them up to code, up to regulation. We think we could work hand-in-hand with government to do that.

[Alex Atamanenko, NDP, British Columbia Southern Interior, BC]

Does anybody else have any comments on that?

Maybe I'll pursue a second question.

If the threat of terrorism is one of the factors that's in this game, maybe government should be playing more of a role directly. Let's not beat around the bush. If that's one way we feel we can be more secure, rather than taking money out of agriculture, maybe there should be some other funding coming in. What are your comments on that?

[Dave MacKay]

Do you mean other than what's suggested, for example, in the retail approach?

We welcome any assistance from government at this point. We all want to deal with this from a standpoint of being proactive, as opposed to being after the fact reactive if, God forbid, an event were to occur. That wouldn't be good for government or the sector—or for Canadians, of course.

We'd be amenable to talking about any solutions, as long as they meant that it would get toward prompt compliance with future regulations—maybe doing it before government mandated the regulations. That's why industry would like to step up, move this forward as fast as possible, but obviously not at the expense of the economic viability of the retail sector.

[Alex Atamanenko, NDP, British Columbia Southern Interior, BC]

I have time, I guess, for another short question.

Statistics that we've talked about show that the farm income decline was severe and is severe particularly for the medium-sized farms, and of course for small farms. What should be the primary focus of agriculture policy in Canada? If assistance is given, should it be to try to maintain that family unit in our rural communities, with a spin-off effect obviously being that people are there, and they buy and they go to school and they contribute? Or should it be shifting away to helping to promote the whole agricultural sector and some of the big businesses to keep us competitive, thereby depressing our population growth in small communities?

Are there any comments from the bankers?

[Brian Little]

I think there's probably a place for both groups. The small family farm that has some sort of specialization, a value-added niche market, can survive by taking the extra steps, whether that's agri-tourism, eco-tourism, or a special kind of production. There's also room, I think, for the corporate family farm—the large family farm that's cropping more acres, or more livestock enterprises. There's a spot for them in Canada also.

I think there's a need for both. Both will survive.

[The Chair, Conservative, James Bezan]

Thank you.

Madam Guarnieri.

[Albina Guarnieri, Liberal, Mississauga East—Cooksville, ON]

Let me ask, if you'll permit me to ask a more general question, about the philosophy surrounding government intervention.

In many countries, of course, there are subsidies for producers, and in Canada we see more support for insurance programs and for market allocation measures such as quotas.

Do you think farmers would actually be better off in the long run with stable and predictable subsidies combined with flexible financial products from banks, such as payment option loans that could carry farmers through crop failures?

You mentioned that the banks recognize the cyclical nature, the peaks and valleys that farmers experience. And farmers always appear to get credit; I think that was the other comment that was made. When there's a crash, or when there's some kind of catastrophe, government always steps in.

Do you think that payment option loans would be a feasible way to go?