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.