Agriculture Committee on June 9th, 2009

[Randy Hoback, Conservative, Prince Albert, SK]

You would agree, then, that it has been a problem for some of these smaller credit unions. The sheer volume of agriculture is too much for the portfolio, and they just couldn't take some of that business. Is that correct?

[Pam Skotnitsky]

We've been continuing to be out there. The loan demand has been met. We also, through other entities such as Credit Union Central of Canada and Concentra Financial, have been able to syndicate loans so that we are able to off-lay some of that risk, and we continue to do that. Behind the scenes, members might not know that the loan has been syndicated, but if they qualify for credit, we're definitely still able to serve those needs.

[Randy Hoback, Conservative, Prince Albert, SK]

Okay. I'll move forward, then, to the wholesale financing.

We have a lot of small manufacturers in western Canada, such as Morris and Easy-On. They are tremendous people and they employ a lot of people. When Textron pulled out of the industry last December, there was a gap left, and it was a gap that nobody in the banking industry in Canada seemed to want to take up.

I'll address my question to Mr. Wrobel. Do you do wholesale financing to agriculture dealers? Have you guys looked at that area?

[Marion Wrobel]

I think that's a question better directed towards my members, and I will start with Bob Funk.

[Bob Funk, Vice-President, Agriculture, Scotiabank, Canadian Bankers Association]

In the course of the last six years, Mr. Chairman, we've--

[Randy Hoback, Conservative, Prince Albert, SK]

You'll have to be quick, we've only got seven minutes, sir.

[Bob Funk]

--undertaken a pretty significant initiative to finance the accounts receivable that independent dealers who supply inputs--

[Randy Hoback, Conservative, Prince Albert, SK]

Are you doing that through tied-to-serial-numbers financing or are you doing it through general lines of credit?

[Bob Funk]

We're doing it through individual credit facilities through to the producer who would require it.

[Randy Hoback, Conservative, Prince Albert, SK]

Okay, so that producer is buying a piece of machinery where the breakdown is happening in the markets. When the machinery is built.... I'll use Bourgault as an example, because it's close to my riding. They build air drills, and they make a damn good air drill, but the concern is about after they've built it; they might build it in July and it won't get used until next spring. The dealers need to bring that inventory in to sell it. So they'll speculate a bit. They'll basically base it on knowing their farmers, who's going to buy what, or based on programs at the time. They'll bring that inventory in and Bourgault gets paid usually, historically, from Textron and then basically the interest would be paid by the dealer or by Bourgault, depending on their arrangement.

And then when the machinery is paid out, Textron is paid out, they make the capital and the interest rate, and FCC or somebody else may come in and actually finance it for the farmer, or the credit union in this case too. But what's missing is that link. That link is tied to a serial number. What I think a lot of people don't understand is that the banks come in and say, we'll up your operating line. They go to the dealer and say, we'll up your operating line, we'll take you from $1 million to $2 million, but we're going to up it about two or three points. What the dealer's really asking for is, no, don't up our operating line, just give me the wholesale financing that's tied to that serial number. So when that air drill comes in, that security is that piece's serial number. That's what we need in the industry.

I'm just curious, have any of you guys looked at that or are you going to? I know FCC was talking about that. Where are we at?

Greg, can you comment on that maybe first?

[Greg Stewart]

Thank you.

This past year we were named the preferred retail and lease supplier for the Canada West Equipment Dealers Association, which we're very pleased about. We have been working with John Schmeiser and Canada West to try to find a way to help their members, and specifically short-line dealers, get through the challenges with Textron out, for example. We're trying to use some of our existing products or advance a product. We're working with the dealerships one on one. Our capacity right now is tapped, as they well know. We have been trying to do whatever we can to help and we're continuing to look at it over the next year with them to see if we can develop a product that may work.

For us, it's simply capacity and timing. We're doing a major IT overhaul and we're having lots of demand from clients in the industry, so we're busy. They're well aware of it, and we're continuing to work with them to try to find a solution.

[Randy Hoback, Conservative, Prince Albert, SK]

Do you have a deadline for when you're going to be approaching something?

[Greg Stewart]

We don't have an exact deadline. The talks are ongoing. A lot of it depends on how complex the solution will be. We're working together with Canada West to hopefully find something that's suitable.

[Randy Hoback, Conservative, Prince Albert, SK]

Where I get a little confused is that there's already a process for how to go about doing this business, and it's not just Textron; other companies have been doing it. Why are we trying to reinvent the wheel with the balance of loans and stuff like that? Why wouldn't we just look at this process and put the tools in place? Maybe I'm oversimplifying it, but why don't we just get to work and bring some security to that industry? Right now there's a lot of instability because of so many pieces missing.

[Greg Stewart]

We don't have any of the systems to monitor. We have never done it. Historically we don't monitor inventories, like for car dealerships or anything like that, as the banks do. We don't have any of that experience. We don't have any of the systems that would track the inventory or the skill set. We would have to develop those systems and attract that skill set.

In the immediate interim, because the situation was just this spring, we said, we can't do it right now; send the dealers to us who are really having difficulty, and we'll see if we can make our existing products work for them to help get them through this year.

[Randy Hoback, Conservative, Prince Albert, SK]

So you're just bridging this year, nothing else?

[Greg Stewart]

That's correct.

[The Chair, Conservative, Larry Miller]

Okay, your time has expired, Mr. Hoback.

I have a question before we go on to our second round. I know I did meet with a number of you in the room over an issue a few months back. It was to do with an increase when it came time for different farmers to renew their credit lines, regardless of what prime was. And some of them had negotiated deals where they could be at prime, or 1% over prime, 0.5% over prime, or whatever. But all of a sudden a number of them were asked to increase that by 2%, 3%, or 4%, depending on the circumstances.

Of course, I heard a lot of complaints from them, and it upset me. If I ever sat down and figured out the amount of interest that I've paid to banks and farm credit over the years, it would probably ruin my day, so I just don't bother doing it. There is this love-hate thing out there about banks and government and insurance. They lump all three together, but unfortunately we need them all.

Anyway, from the meeting I had with a number of you, what I found out was--and some of it has been touched on today--that the cost of borrowing money worldwide has increased, and I recognize that. But I have also been told by more than one banker in my riding that they have had instructions from the top to make sure you keep your profit levels at the same price. I do have an issue with that; I know you've heard that from me.

Back during the BSE crisis, I remember there were a couple of banks that I found were not going to play ball in a tough situation with some producers. I brought that up with the Canadian Bankers Association when I met with them, and to their credit, they backed off. Overall. I don't have a lot of complaints on how the banking system handled our agricultural producers through that.

But this time around I'm still seeing what I think are extra interest rates that I certainly don't see as being totally justified. If your interest rates are costing you more to borrow worldwide, then you have to pass that on to the consumer. But it's more than that. As in the BSE time, when there are tough times out there, everybody has to absorb a little bit of it, and frankly, I don't see the banking and lending institutions doing that.

Would anybody like to comment on any of that?

Mr. Wrobel.

[Marion Wrobel]

In addition to what has been happening in the financial markets--and we all know there has been quite a bit of turmoil there--in the last two quarters we've now entered into one of the more serious recessions that people can remember. From the banking side, I know that provisions for credit losses have been increased quite substantially. Our losses are going up.

In my opening remarks I said that we lend to individual businesses but that the lending rates are affected by the general environment that is out there. And the recession means that a lot of the loans are substantially riskier today simply because those borrowers are operating in an environment that is tougher for them. I think some of the increases in the rates we charge are reflective of the increased costs to us, but some of it is also reflective of the higher risk that is associated with this recession.

I don't know if I have a member who would like to comment on that.

[Brian Little, National Manager, Agriculture and Agri-business, RBC Royal Bank, Canadian Bankers Association]

I'm Brian Little.

As everyone is aware, we do an annual review process with our clients and we evaluate each client on a client-by-client situation. In some of those situations whereby the position has deteriorated, yes, we may need to implement a slight premium for that change year over year. But we don't do that across the board. We only do it in situations that perhaps have weakened.

In fact, looking at our past six to eight months, we continue to grow so we are writing more business as time goes forward and dealing with more clients, which is our goal for the future. We want to continue to maintain our role and continue with our goal for this.

[The Chair, Conservative, Larry Miller]

My last comment, Mr. Little, is one I may have said to you before. By increasing the interest rate on somebody's borrowing loan or just a straight-out mortgage, by increasing it on a less than stable loan, or whatever, you're actually making the client's position inward. And to me it's either a viable loan or it isn't.

Mr. Eyking, five minutes.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you, Mr. Chair.

I thank the guests for coming here today.

Mr. Easter alluded to some of the numbers that are out there on the financial situation in the industry, whether it's the higher debt load or the shortage of cashflow, especially for the hog and beef producers. I think the other thing you see when that is happening, as was mentioned, is some of the banks getting a little gun shy in making loans. I also think a lot of potential young farmers start looking at this situation and wonder if they want to get into this business.

My question is, can we have a better environment out there, especially for young farmers, to get into agriculture?

I remember a program we had before called NISA. I thought it was a really good program in which banks, farmers, and the provincial and federal governments were involved. It was like a nest egg. Everybody put into it, took out, and there was a good interest rate. I thought that was a good program where you had a bit of partnership.

Also, you see in Europe and other countries now that they have what I think they call a perpetual mortgage. For example, for a young farmer getting in, it's a $1 million or $2 million operation. The way I understand it is that the mortgage continues on with the farm; and where you have the governments, banks, and the young farmer involved, the pressure is not as much. It's not only in the interest of the young farmer, but it's also in the interest of the agriculture community and the governments that that farm is viable.

I'd like to have some comments on the NISA program that we had, but also, looking forward, are there other things out there to encourage a better financial arrangement for young people getting into farming?

[Lyndon Carlson, Senior Vice-President, Marketing, Farm Credit Canada]

Mr. Chair, one of the things we do see is a great interest from young people to enter agriculture. In the past year, of the $5.1 billion that we've made in new disbursements, $1.6 billion was to loans with young farmers as participants, so we do know that on the conventional side there is great interest. In fact, in a survey we did late this fall, 67% of Canadian farmers said they would recommend a career in agriculture to their son and daughter--

[Mark Eyking, Liberal, Sydney—Victoria, NS]

I don't mean to cut you off, but the numbers don't qualify for that. The average farmer is 50-some years old, or close to 60. There might be interest, but it doesn't resonate to the average farmer.

[Lyndon Carlson]

As I said, $1.6 billion of new lending went to young farmers.

The other thing we have is unique products like our transition accelerator loan, which allows young farmers specifically to work with a patient vendor and get into a mortgage product with a modest down payment and still have a sound repayment capacity because of the way we handle the disbursement of the principal amount of the loan.

We also do have products, called a cash flow optimizer loan and an advancer loan, where we don't have a prescribed principal pay-down period. For those well-established operations that do want to have a long-term mortgage and take advantage of the low--