Agriculture Committee on March 29th, 2007

[The Chair, Conservative, James Bezan]

Mr. Wells.

[Stewart Wells]

I would just build on what the two previous speakers have said, actually, especially in reference to the cross-subsidization.

I've been critical of these independent and ad hoc government programs because lots of times it seems that the government would like to tie farmers to the mailbox at election time. It could be just coincidence, but that's the way some of these things get rolled out. That's not what farmers need to keep in business. That's not going to give farmers the ability to plan into the future.

What farmers really need, which ends that discussion about how we get around the cross-subsidization on the farm, is increased market power so that farmers are allowed to make their money from the marketplace, earn a living from the marketplace. There was, in fact, a report published just a couple of years ago, which I know you're quite familiar with, called Empowering Canadian Farmers in the Marketplace, which started to go down that road. It talked about changing competition policy, for instance. So there is some competition amongst the input suppliers and the retailers and the handlers and the other people whom farmers deal with.

What we've really set up here in this country right now is a double standard: one standard for industry and one standard for farmers. So on the industry side, we have a legislated marketing tool called patent protection so that those industries can get their money back from the marketplace. Look at who is the most profitable. Drug companies, machinery companies, and seed companies are doing very well. They have to stay in business. But on the other side, the legislated marketing tools that are exactly parallel to patent protection, things like supply management and the Canadian Wheat Board, are being destroyed. Farmers are being told, “No, you can't have this legislated marketing protection because we don't feel it's appropriate.” So we've got a double standard, which is working against farmers.

[The Chair, Conservative, James Bezan]

Thank you, Mr. Wells.

Mr. Devolin, you have five minutes. We started late. It was almost 3:40 by that clock when we started, and we want to give ourselves the full hour. So, Mr. Devolin, you have the last five minutes in this round of questioning.

[Barry Devolin, Conservative, Haliburton—Kawartha Lakes—Brock, ON]

Thanks, and thanks to the witnesses for being here today.

It's often said that success has many fathers, but failure is an orphan. I'm fairly new around this place, but I haven't heard anyone claim responsibility for the CAIS program in the three years I've been here. That's just an observation.

I have a couple of questions. One of you said that some of the programs that are in place, CAIS and others in the past, are based on the belief that income is cyclical over time, that it goes up and it goes down, but the problem is it's not going up and down, it's just going down and down and down.

I guess my question is this. The market changes, demand changes for different products, the external environment changes. How do you create a system that supports farmers when they need to be supported? I agree farmers have a lot of money invested and they work hard, and it seems reasonable that they should be able to make a living doing that. But on the other hand, how do you design a system that's sufficiently sensitive so that we don't create a situation where we're just continuing to produce some commodities that the world is producing in abundance, that we're creating an increased demand for more and more support, to support the production of things that there doesn't seem to be a profitable market for?

How do you suggest we balance market realities with the needs of farmers?

[The Chair, Conservative, James Bezan]

Mr. Friesen.

[Bob Friesen]

Thank you. You're absolutely right. Again, we're looking at two issues. How do we create profitability in the industry and how do we sustain farmers through an income crisis? Profitability. We're committed to finding solutions and creating a policy environment within which farmers can be successful.

In the U.S. they've somehow learned how to prime the pump, which has accrued benefits to the primary production sector as well as to value-added. But as long as you have a program that's based on a historical reference margin on a whole farm, you will always have the problem that when prices decrease, your program starts ratcheting down with regard to how effective it is.

That's another reason why we've been trying to build components around it. Now the contributory top tier is a baby step toward addressing declining margins, in that an ENS margin never deteriorates as fast or as far down as a production margin will. So we believe the top tier is going to be effective, once we go to that component, in addressing declining margins, but the provision for companion programs allows us to do things on a provincial-specific basis, which, if we did them nationally, would attract tremendous trade challenges.

So if we do some of those things to address declining margins on a provincial-specific basis, we think we can make the business risk management programs more effective as well.

[The Chair, Conservative, James Bezan]

Mr. Qualman.

[Darrin Qualman]

Thank you for that question.

I'll make three quick points that I think build on each other. In terms of production and supply and the often cited overproduction, if it ever was a reality, it is less and less so. In six of the last seven years, the world consumed more grain than farmers produced. That's not being reflected back to the farm level.

Having said that, I think there's a bit of truth at the core of your point, because farmers need to match production to demand, and if the markets are signalling through low prices that they think there's sufficient supply or too much, we maybe need to back off some of that production, and supply management does that very well. The United States does that by idling land, and we've advanced the program here in Canada, that we need to call the bluff of some of these corporations and maybe take some land out of production and managed supply.

The third point is the last point. You were wondering how we create programs that match market reality. I think what you've heard from every speaker here today is that profits are allocated on the basis of market power. Who has market power in that agrifood chain? That determines where the profits land and who gets to hang onto those profits and who gets the profits taken away. The farm income crisis is caused by an imbalance of market power within that agrifood chain. We are using taxpayers' money to backfill that right now, but if you're serious about doing something new in business risk management, do what everybody at this table has said: deal with market power; give us more market power.

[The Chair, Conservative, James Bezan]

Mr. Wells.

[Stewart Wells]

I have a short comment on your quest for the parents of the CAIS program. Whether this helps or not, I would direct you to our website. I think it was in 2002. You could look for a press release entitled “Leaky Farm Aid Bucket” and you'll see what our comments were on the CAIS program when it was announced.

[The Chair, Conservative, James Bezan]

You're out of time, Mr. Devolin.

There is a quick response, as well, from Mr. Bilodeau.

[Denis Bilodeau]

When you take a look at how the CAIS program, which you referred to, has been implemented, you will note the following: in Quebec, the producers that have been penalized the most are those that grow grain or who have mixed crops, as a gentleman mentioned earlier.

Grain producers found themselves facing low prices. You may be able to cover fluctuating profit margins, but over the past few years, we have been in a situation where the margin is very low. There is scarcely any more fluctuation. The only thing that has changed is that the producer is falling behind because of negative farm income. That cannot continue like that.

On the other hand, we have the other producers growing mixed crops where one crop would compensate for the other. So there were no big fluctuations in profit margins, except that in the long run, this type of operation gradually grew poorer. In Quebec, it was felt that this type of operation had the best structure because it ensured that as much money as possible would remain in the operation. When you produce grains and feed cattle, you are already a primary processor with respect to grain production. You are processing the grain into meat or milk and, with what is left over, you are manufacturing fertilizer that can be reused on the farm. This process ensures that the operation keeps most of the money for itself and does not have to spend it on other things. This type of operation should, under normal conditions, produce more income at the farm level. And in cases where the CAIS program is required, or where there are price differentials, meaning that, in one year, one crop can fetch a lower price but is compensated by another crop, what happens is that, year after year, there is a general decrease in the profit margin of the operation, but not enough to warrant implementing a program. This type of operation gradually grows poorer and declines. Grain producers are really in a tough situation. We came here to Ottawa calling for ad hoc programs that would compensate for the effect of the Farm Bill, which was already in force when the CAIS began.

[The Chair, Conservative, James Bezan]

Thank you, Mr. Devolin.

I'm going to ask for a little homework from everyone. We're out of time, but I do have one question--actually two--surrounding the BRM.

Every time I go out and talk to farmers—and I'm a cattle producer myself—I'm not hearing a whole lot of support for a CAIS-style program or a lot of support for a margin-based initiative, so I need to be sold on this. CFA is suggesting this; we're hearing it from the provincial organizations. Definitely, through the discussions that have taken place, through the consultation across the country, there has been a lot of talk about a margin-based program. So I want to know why this and not something else. It hasn't worked as far as many producers are concerned, so I want to know, in a written submission, why a margin-based program?

Secondly, we have all this talk about more provincial programs, more companion programs. We are a trading nation. How do we make sure that those programs don't put us over the top and create some sort of trade retaliation?

I'm a cattle producer living through the BSE crisis, so I know exactly what happens when we get initiatives taken by other countries and how it hurts us right in the pocketbook. So I ask that you do that.

With that, I thank you all for coming in today.

We're going to suspend for a minute or so to clear the table and bring in our next witnesses. We will extend tonight till quarter to six to deal with everybody in a proper manner.

Thank you very much.

[The Chair, Conservative, James Bezan]

Okay, we're starting our second hour. We will extend the time as need be.

We want to welcome to the table Bob Funk, vice-president of the Bank of Nova Scotia; Brian Little, head of agriculture for the RBC Financial Group; Ian McNeill, president of the Canadian Association of Agri-Retailers; and Dave MacKay, executive director of the CAAR.

I'll turn it over to Mr. McNeill for ten minutes, please.

[Ian McNeill, President, Canadian Association of Agri-Retailers]

Thank you very much to the committee for having us present today and for listening to the concerns of our industry.

The Canadian Association of Agri-Retailers represents a national voice for the crop input retailers across Canada. We have approximately 960 members across the country.

We have four main critical issues we are concerned about, but we want to address one that's of primary concern to our agri-retail sector today and a top priority. That's the cost of compliance with new and proposed industry and government regulations, specifically in two areas. First is the physical upgrade to retail sites to comply with security and safety regulations for crop input products. This spans a wide area of government sectors, including public safety, agriculture, environment, transport, and health. Second is proposed industry and government amendments to safety and stewardship requirements for anhydrous ammonia, which is more of a specific product. It's a fertilizer our members sell to growers to produce their crops.

On site security and safety upgrades, part of the cost-of-compliance issues relates directly to the future industry and government security standards regulating physical upgrades to retail sites, as well as currently mandated safety standards for crop input products. We believe government and industry have a shared responsibility to Canadians to ensure that safety.

Crop input products like fertilizer are essential to modern agricultural production, but must be secured from terrorists and criminals. These products include ammonium nitrate, which has been and is a possible bomb-making material; and anhydrous ammonia, which is a possible catalyst for crystal meth production. The crop protection products we sell may also cause bodily or environmental harm.

The cost of physical security upgrades can be prohibitive. These include fences, locks, surveillance, guards, etc. All these can be mandatory upgrades under the industry-related ammonia code of practice.

The cost of compliance with government and safety regulations can also be prohibitive. These include proper use guidelines, tracking, training of staff, storage, transport regulations, as well as insurance and liability exposure. We already contribute to the AWSA warehousing regulations, and we are also involved in container recycling programs with manufacturers. They get the bulk containers back from growers and into the system to be reused.

Ultimately, when retailers incur these costs they can try to pass them on, but in a very competitive market it is very difficult to do. If they can pass them on they will end up with the consumer, or they may decide to no longer carry that product, which diminishes competition and puts additional costs on the grower.

Until now the retail sector has met all current regulations, but resources are being strained. Government support is essential to ensure future compliance and avoid economic collapse of some of these operations.

On the issue of ammonia safety, there is the cost of compliance to new and more stringent regulations pertaining to the safe handling and storage of anhydrous ammonia, which is critically important to crop production. Examples of potential new regulations facing retailers include consideration to perform hydrostatic pressure testing of all anhydrous ammonia field tanks. In Canada we have approximately 12,000 tanks currently in service. Another example of regulations that are already forcing retailers to incur additional costs is the reclassification of ammonia. That requires special labelling, and of course training of staff again.

CAAR is working closely with Transport Canada and other industry stakeholders to implement these important regulations, but the cost of compliance with so many regulations has become prohibitive, with no current assistance from industry and government.

Unfortunately, the net consequence is that farmers will be hit indirectly in most cases. Operational closers or retailers may make the decision to not carry a particular product like ammonia, forcing that grower to go farther to acquire it. In the end he may have to change his equipment and move to a product that's available. That could be a dried form, like urea or phosphate, or a liquid. So there are costs to the grower if our operators and dealers no longer carry it. And of course the retailer himself loses revenue on a very legitimate product.

We believe there is a viable solution to these problems. CAAR recognizes the importance of prompt compliance with all security and safety regulations to protect Canadians, but urges the government to help offset the economic strain on the retail sector in this process. CAAR believes the blueprint for a solution has already been established in the form of a government contribution program for security upgrades at designated Canadian ports, whereby government rebates 75% of the approved upgrade cost.

CAAR recommends that a similar type of rebate program be established to assist agri-retail sites to comply with new security and safety regulations. We would be very eager to work with the appropriate departments to define eligible expenses.

In closing, we hope we have clearly defined the single most challenging business issue we face as agri-retailers in our sector. Security and safety regulations are important, but unfortunately come at a high cost of compliance. Agri-retailers implore the government to consider a cost-sharing program that will facilitate prompt compliance without adverse economic effects.

Thank you.

[The Chair, Conservative, James Bezan]

Thank you, Mr. McNeill.

Mr. Little.

[Brian Little, Head of Agriculture and Agri-business, RBC Financial Group, Canadian Bankers Association]

Thank you, Mr. Chair.

On behalf of the members of the Canadian Bankers Association, we would like to thank the House of Commons Standing Committee on Agriculture and Agri-Food for inviting the banking community to appear before you today to speak about business risk management within the agriculture sector.

You've already met me. My name is Brian Little. I'll introduce my colleague, Bob Funk, who is the vice-president, agriculture, at the Bank of Nova Scotia. We're representing the industry as a whole. However, there may be times when we will be speaking specifically for our own institutions.

The government has undertaken a consultation process on the next generation of agriculture and agri-food policy, and the banks have participated in that discussion. Financial institutions constituted only a small part of the stakeholder group participating in that consultation, so we're pleased to see in the summary of stakeholder comments that “Participants consistently mentioned lending institutions as key to the future of their businesses”.

The summary went on to say that these participants “suggested that governments maintain open, ongoing relationships and dialogue with financial institutions to ensure a clear understanding of programming, and to help governments to understand how program design could make programming more transparent and predictable, thus making lending decisions easier.” Participants also expressed the need for predictable and bankable programming. Our focus as bankers is primarily on the risk management component of these programs.

The banking industry could not agree more with this. These are all important elements for lenders because government initiatives play a big role in agriculture. Programs can be an important component of farm incomes and can therefore determine the risk that lenders are exposed to. Therefore, good communication is important and very crucial between the industry and government.

The CBA and members meet regularly with the Minister of Agriculture and Agri-Food. We did so last month and will do so again later this year. We think it's fair to say that an important factor that helped all the stakeholders related to the beef industry weather the BSE storm was the fact that the banks maintained close communication with the government, with their clients, and with other stakeholders during that period of stress. It was extremely important for all stakeholders to fully understand what the banks were doing and were prepared to do during that crisis. It is good to see that others recognize the value of such ongoing relationships, and the banks will continue to take this approach going forward, in normal times and in times of stress.

On the role of lending institutions in agriculture, we believe that banks and other financial institutions are important components to what makes a healthy and successful sector. Lenders are there to help ensure that the sector has access to financial capital to grow and to make investments that improve productivity in the sector. Lenders are there to ensure that the producers who have viable operations over the long term can withstand temporary shocks, even if those shocks last for a long time. This is precisely what we did in the case of BSE, avian influenza, drought, and floods.

The banking relationship with the agricultural sector is about more than just lending. We provide cash management and transaction accounts. Often producers come to their banker for advice. That said, the focus on bank activities in the agricultural sector is usually with respect to lending, so let's talk about that.

Canada's banks are important financial supporters of the agricultural community and rural Canada. Since 2004, total bank authorizations to the agricultural sector have grown by 6% and now exceed $28 billion, about 43% of total authorizations to the sector. Bank loans outstanding to the sector now exceed $20 billion. These funds are increasingly provided to producers across the country in new ways, through the opening of strategic branches, and more commonly, through the use of mobile bankers, who employ cars and laptops and meet with the client at the farm as opposed to in the branch.

Banks are one part of a very competitive financial market that the agricultural sector can draw upon. There is the Mouvement Desjardins, which is concentrated primarily in Quebec. In the rest of the country, there is a network of credit unions providing a wide range of services. There are suppliers of trade credit, and there is Farm Credit Canada, a federal crown corporation that offers financing. Together, these institutions supply over half of the debt financing available to the agricultural sector. In total, including the banks, about $65 billion in financing was made available to the sector in 2005, of which $46 billion was outstanding at the end of the year.

With so many different institutions offering financing and so much competition in the marketplace, we believe that financing is not a primary concern of producers in this sector, and we believe the evidence supports that view.

According to Statistics Canada, agriculture producers and other primary industries did not view access to financing as an obstacle to growth. The real issues facing the sector were low profitability, government regulation, and taxation, each of which was cited as a concern by over 50% of the respondents.

On the other hand, obtaining financing was cited as a concern by 16% of the respondents. The availability of credit to agriculture has been enhanced through the use of specialized staff, trained account managers in agriculture in both the marketplace and in the risk adjudication process. The only factor that scored lower as an obstacle to growth was management capacity of 13%.

Statistics Canada's survey of small-business owners in small and medium enterprises provides further evidence that there is a great deal of competition and choice with respect to access to finance in rural Canada. Rural SMEs, of which the agricultural businesses are a part, are more likely to request financing in any given year than urban SMEs--34% versus 20%. In addition, rural SMEs are more likely to have their debt-financing requests approved than are urban SMEs--88% versus 77%.

So both of these statistics indicate clearly that banks and other lenders have a strong commitment to agriculture and to rural Canada and understand the nature of the sector. Again, access to credit doesn't seem to be the major concern of rural SMEs.

When Statistics Canada asked these firms why they did not seek financing, less than 5% of the rural SMEs responded that they thought their request for financing would be turned down, that applying for a loan was too difficult, or that the cost of debt financing was too high. The SMEs that did not apply for financing did so largely because they didn't need it.

Based on government data and surveys, it appears that the major issues facing the sector are of a basic economic nature. The key result in this respect is profitability. Only 20% of the income of farm households comes from net farm income and most of this is related to program payments.

In addition, an increasing share of production is being exported, so access to world markets is an issue. There are fewer farmers in Canada, they are getting older, and they are operating larger farms. Succession planning and entry into the sector by a new generation of producers are serious issues, especially in light of the large capital requirements for farming.

Moreover, as more producers and processors employ new business models to increase the value added, new approaches to financing will be needed. Banks and other lenders must find ways to support their agricultural clients within the context of this environment.

Before closing, I'd like to make two observations about government programs for the sector. The banks and other deposit-taking institutions have a close relationship with their agricultural clients. That relationship is made stronger through government programs that provide income support to the agriculture sector and that help to lower the risk of lending to the sector.

We note, for example, in the recently tabled budget the reference to the new income stabilization program that would be delivered through the establishment of a new savings account program for farmers. Consultations with the provinces are forthcoming and that will require the establishment of savings accounts, and the banks will be meeting with Agriculture and Agri-Food Canada very soon to discuss those criteria.

As the accounts will have deposits made by both farmers and the government, with the deposits and interest income being subject to different tax rules, depending upon the source of the deposit, tailor-made accounts need to be set up. It is imperative that the industry be given sufficient time to do this. In order to avoid unnecessary and costly system changes, it's important that the industry be provided with certainty that the program speculations and system requirements are finalized before institutions begin setting up their accounts.

Secondly, the government has decided to continue delivering the Farm Improvement and Marketing Cooperatives Loans Act, FIMCLA, which is designed to increase the availability of loans for improvement and development of farms and the processing, distribution, or marketing of farm products.

Some reforms of the system have recently been suggested by the department. We would simply like to make the observation that the loan limits for the program have not kept pace with the developments in the sector, in particular, the rapid escalation of capital requirements for farms. Consequently, we are observing a decline in the number of producer requests for financing under this program.

We thank the committee for this opportunity to share with you the banking industry's thoughts, and we welcome your questions.

[The Chair, Conservative, James Bezan]

Thank you, Mr. Little.

Thank you both for your presentations.

We're going to Mr. Easter for the first five minutes.

[Wayne Easter, Liberal, Malpeque, PE]

Thanks, Mr. Chair. Thank you, gentlemen.

My first question is to the Canadian Association of Agri-Retailers. Much of your presentation was on the cost of compliance in several areas. I'll not go into them, but do you know what happens in the U.S. in that regard?

Some of the inspection fees that we have in Canada through CFIA and other agencies, if they were operating under the U.S. government policy, would be paid for by the government, and they are GATT green. In this area of anti-terrorism and security measures, do you know the policy in the United States and do you know if it's GATT green?

I heard you say these costs are not passed on to farmers, but in one way or another, they are--not directly, but in one way or another they are, so if they can be picked up under a GATT green program, maybe that's what we ought to be doing.

While you're thinking about that one, I'll ask the Canadian Bankers Association the other one. You made the case, I think, that whatever programs we come up with have to be basically predictable and bankable. My feeling is that although we don't know the details--the government is slow in getting us the details--the savings account program is likely the right idea. It's likely a NISA-type program.

If this is going to be similar to the previous NISA--which we're not sure of, but I think it will be--did you have any problems in the banking industry with the previous NISA savings account program that we ought to be aware of before this one is brought into play?

Those are my two questions, Mr. Chair.

[The Chair, Conservative, James Bezan]

Go ahead, Mr. McNeill.

[Ian McNeill]

I'm not aware of that under the GATT green. The only one we are aware of is the tax rebate system under the security act that was passed a couple of years ago. It's under homeland security, but that's the only one. It's a tax rebate through which they can get 50% of what they spend claimed on a tax rebate system. That's the only one we're aware of.

[Wayne Easter, Liberal, Malpeque, PE]

Okay.

I should know the answer to this, but I don't. Did your industry get any funding out of either the previous or current government anti-terrorism initiatives? There's been a lot of money spent, and my thought was that it was supposed to go to security areas--not just border, but the security costs for many areas, including.... You didn't get any.

[Ian McNeill]

No. We as an industry didn't get any. There are some situations in which you can claim those under whatever tax situation you're under; some of those costs would qualify for tax incentives, but that was it.

[The Chair, Conservative, James Bezan]

Mr. Little, go ahead.

[Brian Little]

Although I wasn't around at the time that the previous NISA program was developed, I believe part of its success was due to the fact that the program criteria and specifications were fairly clearly outlined at the time it was developed. My experience from speaking with others and from speaking with producers was that from a banking perspective, the program was very well received. We were able to operate it, and it was able to function quite successfully.