Agriculture Committee on June 2nd, 2009

[John Schmeiser, Vice-President, Canadian Government Affairs, North American Equipment Dealers Association]

Thank you, Mr. Chair and committee members.

Thank you for the opportunity to make a presentation on behalf of our 800 dealers in Canada. Canadian farm equipment dealers are represented by three regional associations that are part of 18 like organizations that comprise the North American Equipment Dealers Association. I'm pleased to make this submission to the standing committee as the government considers the competitiveness of Canadian agriculture. Our dealer members retail equipment that is primarily used in agricultural or farming practices. Our members are sensitive to the changing needs and demographics of farmers. We have seen many advances in equipment offered for sale. As members of the committee know, farming today is vastly different from 30, 20, or even 10 years ago. However, we believe government policy affecting our industry has not moved as fast. Therefore, in my presentation today I would like to provide a state-of-the-industry report, address some competitive concerns, and provide a perspective on an emerging issue affecting the farm equipment industry.

Farm equipment sales in Canada are driven by a number of factors. However the most important are weather and commodity prices. If we have a combination of good crops and strong commodity prices, our customers will reinvest in their equipment and our dealers will benefit through stronger equipment sales. That is what our members across Canada saw in 2008. Last week StatsCanada said that 2008 realized net farm income increased by more than 63% over 2007, and our members benefited from this, as every category of farm equipment saw an increase in sales in 2008 over 2007. There were 28,722 new tractors sold in Canada in 2008, which represents a 20% sales increase over 2007. Additionally, Canadian dealers sold 2,206 new combines in 2008, which represented an increase of 33% over 2007. However, for 2009, Canadian dealers were not as enthused on their sales prospects. For the first four months of the year we are seeing year-to-date tractor sales down 20% over 2008. We look toward the rest of the year with cautious optimism and are hopeful that commodity prices will rise and the weather will cooperate.

Our industry has been in transition for many years. There is continuing consolidation within the dealer network, and dealerships have had no choice but to merge with neighbouring locations to reduce costs and improve efficiencies. Mainline farm equipment manufacturers such as John Deere, Case IH, AGCO, and New Holland continually reinforce their desire to consolidate the dealer network. Although some dealers see this approach as a threat, many of our members see this as an opportunity to grow their businesses. This is a significant issue within our membership, and all our affiliates are providing assistance to dealers to help them through this transition.

We would like to advise the committee that this is a trend we don't see changing over the foreseeable future, nor one we wish to intervene in. From our perspective, farm equipment and agriculture in general is in a North America-wide market. Farm policy on both sides of the border has an impact on our business. As an example, the U.S. stimulus package last fall enacted an accelerated depreciation provision for agricultural equipment purchases. This measure allows U.S. farmers to fully write off their equipment after five years. The American Recovery and Reinvestment Act of 2009 also makes an additional $250,000 of equipment depreciation available, in addition to another measure of a 50% bonus depreciation provision for farm equipment purchases. All of these recent U.S. initiatives put a Canadian farmer at a huge disadvantage compared to their U.S. counterpart.

Our organization has appeared before both this committee and the Standing Committee on Finance in the past requesting an increase in the capital cost allowance schedule on new farm equipment purchases. The current depreciation rate of 30% on class 10 equipment is not reflective of today's environment nor competitive in North America. We feel the CCA rates should be increased to 40% in the first year from the current 30% for investments in new class 10 agricultural equipment, and that class 8 agricultural equipment be increased from 20% to 30% in the first year. Furthermore, we believe that larger items such as air seeders, air drills, corn planters, and high clearance sprayers should be reclassified to class 10.

Although the federal government has recently made changes to CCA rates in other areas, the rates on agricultural equipment have not changed since the 1970s. Our experience is that today's equipment is larger, more efficient, and more environmentally friendly. Today's farm equipment farms more acres in a shorter period of time and thus has a shorter effective life. Today's farmer and the innovative farmer of the future are trading in their equipment at a faster rate than in the past. An increase in the depreciation rate is warranted to reflect the current purchasing pattern. As we are starting to see declining sales numbers in 2009, and the government is looking at areas to stimulate the Canadian economy, such a change should be considered. With that, all sectors in the Canadian agricultural equipment market would benefit, but the major benefactor of this change would be our farmer customers.

Our second issue addresses environmental concerns. We’re requesting that the committee propose and support the introduction of a program that would see financial incentives to farmers to replace, repower, and retrofit older diesel engines. We base this initiative on a program currently in place in the United States that is successfully reducing emissions from diesel engines.

Recently the Obama administration announced a new directive to reduce carbon dioxide emissions. Soon the State of California will be requiring all tractors to have a tier 4 engine. We don't envision that tractor manufacturers will be making tractors with two different engines for the North American market, so Canadian dealers and farmers will be impacted by these changes. We feel that manufacturers, dealers, and our farmer customers are ready for environmentally responsible changes; however, our concern is who pays, and what value will the farmers' old equipment have once new environmental standards are imposed?

To keep the Canadian farmer competitive, we believe financial incentives are needed as we transition to newer, cleaner farm equipment. Such support at the federal level would place Canada as a leader in reducing pollution emitted from farm equipment.

The most challenging issue facing the farm equipment industry today is credit availability. When the credit crisis hit North America in September 2008, it severely affected the lenders that were providing wholesale financing to Canadian farm equipment dealers and specialty or short-line manufacturers. Wholesale financing is separate and distinct from retail financing. Canadian lenders, such as Farm Credit Canada, Agrifinance, and Canadian chartered banks, have more than adequately provided retail financing at very competitive rates to the Canadian farmer. Wholesale financing is lending that helps finance a dealer's inventory and improves a manufacturer's cashflow. Short-line farm equipment manufacturers and dealers utilize this credit to help them manage the financial burden of building and subsequently carrying equipment inventory at the dealership level.

Prior to the credit crisis there were very few organizations that provided this highly specialized type of financing; however, wholesale credit had been readily available for many years to dealers and manufacturers. Since last fall, the non-captive finance companies have either pulled out of the industry altogether or have scaled back their lending options. Captive finance companies have also tightened credit, raised their interest rates, or limited the brands of equipment they will finance.

Unlike the auto dealer network, a Canadian farm equipment dealer could carry multiple lines of farm equipment, which are manufactured by one of the five main-line manufacturers or a short-line manufacturer. Also unlike the automotive industry, where sales occur daily, Canadian sales of farm equipment are more seasonal in nature, so short-line manufacturers typically build on seasonal demand. This requires the dealer or short-line manufacturer to arrange credit facilities for the months before the retail sale.

Our climate only allows for a single production season, versus multiple harvests that can occur in parts of the United States. That forces Canadian dealers to stock larger ticket inventory items for longer periods. A typical Canadian dealer will carry, on average, $800,000 more in inventory than his American counterpart because of these reasons.

Due to their volume and limited product lines, short-line manufacturers typically do not have their own finance companies. These manufacturers and their respective dealers had to rely on outside, non-captive credit providers to finance those products. We have surveyed our members on the severity of the situation and over two-thirds have stated that they do not have a wholesale financing alternative in place. Additionally, over 80% of our members have indicated that the lack of wholesale credit will result in reduced short-line equipment orders.

In the 2009 federal budget, the government announced a new $12 billion secured credit facility that would be administered through BDC. The terms of reference of this new initiative place our industry outside the lending parameters. At present this program does not provide any relief for our industry.

The tightening of wholesale credit is having a disturbing effect on Canadian farm equipment manufacturers and dealers. Without the participation of a new Canadian wholesale financer in our marketplace, the result will be further slowdowns in sales, layoffs in Canadian farm equipment plants, restricted product availability at equipment dealerships, equipment delivery delays, and higher costs to Canadian farmers.

The credit availability crisis is threatening the momentum we saw in 2008, as well as the entrepreneurial spirit of Canadian agriculture. This ultimately will severely limit the growth of Canadian farm equipment manufacturing and equipment sales and will subsequently reduce the competitiveness of Canadian agriculture. Our industry is not looking for a bailout, just access to capital at a competitive price.

In closing, our members remain committed to selling and servicing quality products for Canadian farmers. We are hopeful that all sectors of the industry will be profitable in 2009.

On behalf of our dealer members across the country, I would like to thank the committee for the opportunity to make this presentation on their behalf, and I look forward to your questions and comments.

[The Chair, Conservative, Larry Miller]

We'll go to Mr. Howard Mains, for the Association of Equipment Manufacturers, for 10 minutes or less.

[Howard Mains, Canada consultant, Public Policy, Association of Equipment Manufacturers]

Good afternoon, and thank you, Mr. Chair, for allowing me to address the committee today. I want to be brief in my comments. But first let me say a few words about the members of the Association of Equipment Manufacturers.

AEM is the trade association representing manufacturers of agriculture, forestry, construction, and mining equipment. In addition to Canadian equipment manufacturers, such as MacDon Industries of Winnipeg, there are about 700 other members, including those that manufacture the tractors, tillage, harvest, and electronic equipment Canadian farmers depend upon to plant, manage, and harvest their crops.

This afternoon I wish to speak about three areas of interest to the committee as it studies the competitiveness of Canadian agriculture: the sales history of agricultural equipment and the forecast for 2009, capital cost allowance rates, and trade with Russia.

I have provided the clerk of the committee with a report showing the 20-year history of sales of combines and tractors in Canada. As you will see, by comparing the sales data over the last few years with the 20-year average, with the exception of last year it is not a rapidly growing market. Simply put, there are fewer farmers using fewer machines to cover the same amount of ground. However, this is also a good measure of how Canadian farmers are becoming more efficient and are remaining competitive on a global basis.

AEM recently published an outlook for sales of agricultural equipment in Canada and the United States for the coming year. This updated forecast suggests that tractor sales in Canada for the coming year--2009--for four-wheel drive tractors and 100-horsepower and over two-wheel drive tractors are expected to be down anywhere from 10% to 20%, if current sales data trend out for the rest of the year. Combines have maintained their growth rates over the last two years and during the first four months of 2009, but that is expected to taper off over the rest of the year.

The last time I had the privilege of appearing before this committee, I spoke about the issue of capital cost allowances. Last December, a coalition of some 14 producer, dealer, and manufacturer groups--three of us are represented at the table today--wrote to the Minister of Finance asking the government to modernize CCA rates. We were disappointed that this request was not addressed in the budget. Since then, however, the U.S. government has introduced very aggressive depreciation rates on new capital expenditures.

I've included in the package I've provided to the clerk a document that summarizes this. To help you understand its significance, for an investment of $250,000 in new equipment, farmers would benefit from a 100% writeoff in the first year. For a $500,000 investment, they would benefit from a 78% writeoff in the first year. We would urge this committee to recommend CCA rate changes, and what John spoke about earlier, to the government and that the government incorporate those in its next budget.

Allow me now to turn to a significant concern of AEM members about increasing protectionist measures coming out of the Russian Federation. I know that the information I provide to you is current, given that one of our members, Scott MacDonald, from MacDon in Winnipeg, was just in Russia last week.

The Russian government has increasingly resorted to industrial policies that limit market access of goods of non-Russian origin and that further create barriers to trade, particularly in the area of agricultural equipment. Today agricultural equipment trade with Russia is becoming progressively less transparent, and it is now affecting Canadian exports. For example, Russia recently placed temporary import duties on combine harvesters and self-propelled forage harvesters of up to 15%. This action will not be reviewed until November 2009. While limited to only two types of equipment today, there are growing concerns that these tariffs will expand to include all agricultural equipment in other sectors, such as the equipment made in Canada by AEM member companies.

Moreover, Canadian exporters are being harmed by a loan program delivered through the Russian Agricultural Bank that gives Russian farmers a 20% discount on loans if they buy domestically made machines.

Protectionism is harmful to any industry. In an effort either to raise tax revenues or protect their domestic producers, countries like Russia are stifling the growth of their agriculture sector and their own infrastructure. Russia has emerged as one of the world's largest markets for agricultural equipment, especially in combine harvesters, tractors, and air seeders. As some of you from out west know, we are pretty good makers of air seeders in this country.

As long as the agricultural economy continues to improve, the demand is a long way from being satisfied. Canadian companies exporting to Russia have already experienced a significant decrease in exports in their first quarter of 2009. It's important that the Canadian government heighten the urgency of this issue with its Russian counterparts.

AEM and the Agricultural Manufacturers of Canada, an association based in Saskatchewan, jointly wrote to the Minister of International Trade on May 12 asking that this matter be addressed in future meetings with the Russian government. We would ask that this committee urge the Minister of International Trade to add this trade concern to the agenda for discussion when he meets with his counterpart during the week of June 22.

Thank you.

[The Chair, Conservative, Larry Miller]

Thanks, gentlemen.

Mr. Easter.

[Wayne Easter, Liberal, Malpeque, PE]

Mr. Lennox, you had in your presentation some of the costs and the slowdowns that I think Ambassador Wilson talks about as thickening the Canada-U.S. border. It seems like an impressive list. Could you get what you have on that to the committee quickly? I know it was in your statement, but we are going down to Washington tomorrow. Could we get that from you?

[Ron Lennox]

Yes, I can send something to the clerk by the end of the day.

[Wayne Easter, Liberal, Malpeque, PE]

That would be helpful. When you start to compile them, you see huge problems at our border that are making us non-competitive.

Mr. Schmeiser, would you tell us specifically what you're suggesting in the way of financial incentives, beyond the capital cost allowance? Are you talking about investment tax credits, or what?

[John Schmeiser]

Are you referring to the environmental aspect of the tractors?

[Wayne Easter, Liberal, Malpeque, PE]

I want to hear about any aspect that will encourage producers to modernize their equipment. If it improves the environment at the same time, that would be great.

[John Schmeiser]

The State of California has a program called the Carl Moyer program, to which it annually commits $150 million. If a farmer has an older tractor with a tier 0, 1, or 2 engine in it, and the engine needs to be rebuilt or replaced, the State of California will make up the difference between the cost of the rebuild and the tier 3 engine. It commits $150 million to that program.

We fear what might happen when we move to a tier 4 engine. The concept of the tier 4 engine is that the air coming out of the engine is cleaner than the air going into it. There are frame adjustments that will have to be made. We're not even sure if we'll be able to get a tier 4 engine on an older tractor. We have a lot of customers who have made investments in farm equipment over the years, and many dealers have their used inventory. Who's going to absorb the cost? If a farmer's 10-year-old tractor is no longer compliant with environmental standards, who's going to absorb that cost?

[Wayne Easter, Liberal, Malpeque, PE]

If you have any more ideas, we'd like to get them as well.

On the railways, Cliff, we're not hearing as pretty a picture from the farm community as you present here. I understand your changes on the maximum revenue cap, but to get over your concern about that cap, wouldn't it make more sense if the costing review of the railways were done immediately? The farm community clearly believes--and I agree with them--that the railway efficiency gains haven't been passed on to the primary producers. The Canadian Wheat Board study clearly showed that the railways were basically gouging farmers to the tune of substantial millions. I forget whether it was $32 million or $72 million. So why not have a costing review right away?

[Cliff Mackay]

As you know, the government is engaged in a service review as we speak. We strongly believe that's a very positive development. Over the years, we and a number of people involved in the supply chain in the transportation industry have been frustrated by the abysmal lack of good, independent data on what's really going on out there. It doesn't matter whether you're talking about trucking, railways, shipping, maritime shipping, or whatever.

We are very hopeful that this study will result in some good data on what is happening in the overall supply chain when it comes to moving freight. And frankly, 75% of the freight in this country moves by rail. We think that's a first good step to take. We're hopeful that a panel discussion on that will identify where the soft points are and the good and bad aspects of the overall service levels in the industry. We think that's a much more constructive approach than going directly to cost.

I think the number you referred to was a specific dispute that went on with regard to hopper cars. That was arbitrated by the CTA and the matter was resolved. Going forward, I don't think there will be that difference in view between railways and suppliers on that item. In the last couple of years, my members have invested $35 million in addressing some of the design problems in the existing fleet of hopper cars, and we're fully committed to continuing that.

[The Chair, Conservative, Larry Miller]

Thank you very much.

Mr. Bellavance.

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

Thank you, Mr. Chairman.

Mr. Lennox, you no doubt know that since yesterday, the Americans have been requiring Canadians who want to cross the border to have a passport. I would like you to give me some information about the impact this new requirement is having on our trucking industry.

I would imagine that most truckers have had to acquire a passport. I also know that truckers can use a FAST card or a NEXUS card—I think that this is what they are called. We have heard a great deal about the fact that—and you alluded to this in your testimony—since September 2001, it is much more difficult, or at least it takes a lot longer, to cross the border. Moreover, we know that agri-food products cannot be kept waiting very long.

Do you see any positive impact resulting from the fact that nearly everybody must now have a passport? They are going to have to show it, which may speed things up. Do you not see any difference or, if so, do you think that there will be any negative impact resulting from the fact that truckers must now all obtain passports? How do you see the future as far as this is concerned?

[Ron Lennox]

First of all, in terms of our own industry, what we have been saying for quite some time is that we weren't overly concerned about our own preparedness for June 1 and the introduction of this passport or other document requirement.

Our members have been preparing for it. We've known about this for well over a year, and frankly, any trucking company that sends a driver to the border who is not prepared is really their own worst enemy right now. Our biggest fear has always been that perhaps the travelling public might not be prepared. If there are backups that move beyond the actual customs compound into the lanes leading to the border crossing, that's where we would get hit, and that's where trade would get hit.

Yesterday, of course, we were all watching the news very carefully, and we were making phone calls to various border crossings. Things actually went quite well. The U.S., quite correctly, used an informed compliance approach. They were issuing warning cards as opposed to actually turning people back. We're glad that happened.

Monday, of course, is not the busiest time of the week, and we might want to take a look at what happens this weekend. Maybe we'll get a better feel for how this is going to go. Again, I'm not concerned about the ability of our industry to comply.

In terms of whether it will speed up border crossings overall, I suppose, especially as more and more people adopt the frequent traveller cards, the NEXUS cards on the passenger's side and the FAST cards on the driver's side, that will likely speed up the processing of people through the borders.

We've been a big proponent of the FAST program. There are tens of thousands of truck drivers with them in their wallets right now. I don't think NEXUS has taken off quite the way they had expected it to so far, but hopefully now that it's a passport alternative, more and more people will use that as well.

[France Bonsant, Bloc, Compton—Stanstead, QC]

I have a question for Mr. Lennox. There are seven border crossings in my riding. I see all kinds of situations.

I would draw your attention to the case of a trucker who must travel approximately 30 km from his place before reaching the border, where he has to have his truck go through an insect detector. He was compelled to unload all of the fir trees from his truck because there was a mouse inside. In order to speed up transportation, do you think that all of the border crossings should be equipped with an x-ray reader such as the ones we find at big border crossings?

Also, having a special lane reserved only for truckers would free up the other lanes, used by tourists. Highway 55 has a truck lane, but everything is mixed up when it comes to the other six highways in my riding. My sister is a trucker and she tells me about certain things.

I would like to know your opinion about the special lane reserved for trucks and transportation of goods.

[Ron Lennox]

We already do have special lanes reserved for truckers. At all but the smallest of border crossings, there is commercial processing and then there's passenger processing. They are separate.

In addition to that, I spoke of cards issued under the free and secure trade program. They're meant to expedite the flow of frequent trade across the border by known entities. At a number of our border crossings we have dedicated lanes even for that. So they really do exist already.

I must admit, I didn't understand the first part of your question. I'm familiar with the radiation detection portals at the border. Is that what you're referring to?

They're just a reality. What I think about them is immaterial. They're already in place at all U.S. border crossings. They don't emit any radiation. They're just there to detect radiation. I can tell you that every single U.S. customs and border protection officer at the border also carries one as part of his kit.

They haven't caused any major disruptions for us. Every now and then they do malfunction, and that can cause problems. However, it has not been a major issue for us.

[The Chair, Conservative, Larry Miller]

Time is up.

Mr. Atamanenko, go ahead for five minutes, please.

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

Mr. Mackay, in regard to the costing review that was mentioned earlier on, in my riding we have a major employer, a pulp mill, that has really been hit hard by CP Rail.

In their difficult times over the past few months, they've actually had an increase in rates of 15%. This is at a time when they've had bad service over the Christmas holidays. Their feeling is that this railway in particular isn't cooperating with our particular pulp mill.

I'm wondering whether it would be wise, as the service review continues, to at least do a separate costing review, and to get that done quickly, so we know exactly what's going on, and if something is wrong, we know whether we can fix it.

[Cliff Mackay]

My immediate response is that obviously I'd like to know more detail, and we'll follow it up with CP Rail. That's something we always do.

I will give you a quote from Fred Green, who is the CEO of CP Rail: “Please, if anybody raises a service problem, tell him to call me directly.” And he means it. I'll give you his phone number.

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

Okay, thank you.

[Cliff Mackay]

On the broader question, we very strongly believe that the first step is to get some reasonable information as to what is going on across the whole system: who does what to whom, what is the general ebb and flow, what are the rates, what have the rates been. It's very similar to the kind of work the grain monitor has been doing on grain transportation in the last two or three years, which has frankly been very helpful in addressing any disputes or issues within that sector of the transportation system.

We would very much like to see similar kinds of data out there, and we would argue that this data would give us the basis to address some of your questions. If we try to jump-start a cost study in the absence of that overall data, we think we'll become very confused very quickly and will be back to antidotes one more time.

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

Thank you.

My next question deals with short-line railways. There are a couple of situations, actually, in my riding also. There's one railway that goes from the United States to a community called Grand Forks on the border, and it's in danger of being shut down because OmniTRAX has applied to leave this area, and it is, of course...I'm not sure. The community is trying to get together with industry to work with them.

There is another incident near Summerland in British Columbia. There's another short line; I believe it's OmniTRAX also. I know the member of Parliament there is working on this and trying to...because I've had a letter from the Federation of Agriculture wondering whether we can do something here.

Is there something we should be doing, that government should be doing, to assist your industry to keep these small lines open? They are the lifeline of a lot of our small communities.

[Cliff Mackay]

The short answer is yes. The dilemma that short lines find themselves in is that they are very low-density operators. Our industry is the most capital-intensive industry in the country by far. We spend 20% of our revenues—not of our profits, but of our revenues—every year on infrastructure, and that's just to maintain the system.

Short-line railways just don't generate enough revenue to be able to do that on a consistent, ongoing basis. What happens over time, and it has been happening in the last few years, is that the infrastructure starts to degrade. We're now seeing a number of short-line railways in Canada with operating ratios greater than one, i.e., they are losing money on their operations, and that's simply not sustainable.

We have in a number of jurisdictions tried to pursue an infrastructure upgrade program. The most successful so far has been in Quebec, where we have a $75 million package—split three ways between the province, the federal government, and the industry—that is specifically targeted to short lines for upgrading their infrastructure. We have a package before the Ontario government now for slightly less than $90 million to do the same thing, and we are talking to other provincial jurisdictions across the country on precisely that issue.

We believe very strongly that the loss of that capability would be frankly catastrophic to small towns in Canada and to regions. They are critically important to the local economy and development. Just to give you a sense of the importance of these short lines, 25% of all the rail freight, where it originates or at final destination, moves on these railways. They are not at the margin; they are a very important part of the overall system.

We would encourage the committee to pursue that line of inquiry with the government and others. If you need more details, Mr. Chair, I would be happy to provide them.

[The Chair, Conservative, Larry Miller]

Okay. Thank you very much.

Mr. Hoback, you have five minutes.