Agriculture Committee on April 21st, 2010

[David Rinneard]

There are also some other product offerings by banks that facilitate young people trying to get into agriculture. As Marion alluded to during his introductory remarks, the CALA program, of course, is the most obvious of which, that is now available to new entrants, to new farmers, looking to get into the agricultural space. Other enhancements have been certainly of a higher level or a higher threshold with which the program now tolerates...and is now eligible for land finance.

In addition to that, banks are also willing to look at the succession of parents, through the use of vendor take-back initiatives, where some of the equity that my colleague suggested is critical to the future viability of a business can come from a parent or family member who can provide that while at the same time getting bank financing.

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

Kind of tied in with that is the fact that all of us have either read somewhere, or seen or heard stories, of situations where banks are ruthless with people in debt, and of foreclosures. I personally talked to a woman who had a very bad experience with a bank that was being very ruthless, but she wasn't a farmer.

In the hog sector or in the cattle sector, for example, for the farmers who have debt already, not the ones getting into the business but the ones who are struggling and who may not be eligible for any assistance from the government for whatever reason, is there leeway? I know this is just a general question, but is there a case-by-case assessment, maybe giving them a little extra time?

I have the impression that banks are very, “If you don't make your payment now, that's it.” So I'm just wondering if, given the fact that there is difficulty in the farming sector, there are provisions from different banks to help people through this crisis in the next year or so.

[Marion Wrobel]

I'm going to turn to one of my members, but first I just want to make one point. Prior to the HILLRP being put in place, the banks started to identify those farmers in the hog industry who needed restructuring of their loans. They started that process even prior to the announcement that the government wanted to create a HILLRP. So in some respects, the HILLRP complemented what had already been done.

I'll ask Bob, maybe, to talk to that specifically.

[Bob Funk]

I think David was looking at this.

[David Rinneard]

I think our track record is excellent, to be truthful. The BSE crisis, of course, really exemplifies that and our willingness and understanding of the strife that occasionally occurs within the agricultural space.

Through the BSE crisis, our Bank of Montreal specifically issued a program that lasted for the better part of two years and included things like principal deferral, interest rate reductions, and fee concessions. We used all of these tools to facilitate that producers continuity while the resolution was being addressed through political means or whatever.

I think we've got a fantastic track record in the agricultural arena.

[The Chair, Conservative, Larry Miller]

Okay. Thank you very much.

We'll now move to Mr. Shipley for seven minutes.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

Thank you, Mr. Chairman.

Thank you, witnesses, for being out today.

It's seldom that I get to see this many bankers all in one place, so I look forward to your input. The comments we're making here about young farmers are so important.

Mr. Wrobel, I look to your comments at the start, and I think they're extraordinary, actually. You say that the banking industry believes young farmers are “important”, and that you are seeing “a resurgence of interest in agriculture by the younger generation of farmers”, whom you call “bright and determined”.

I think that is an incredible, clear picture and description of what I see, not only, likely, in my area, which is an agriculture area in Lambton--Kent--Middlesex in Ontario, but there are young farmers coming along in a very difficult time. It's difficult sometimes because of markets, there's no doubt; and difficult, I think, because we have increasing land prices, increasing land rent, incredible prices. I farmed, and when I look at some of the equipment and their cost...

They need to be looking broader in terms of how they market. They are not just farmers who get up and do their job. They become marketers. Actually, they become more than marketers--they're commodity advisors, almost, within an integration of young farmers around them. These are just incredible young people.

You make the comments “recognize the new reality” as part of a “global supply”. Is that in fact a recognition that when they come in and talk to you, either with their support...? And it might be a parent, because usually these are often successions. I think the comments I made earlier recognize that there has to be, for someone to want to get into farming, to go into a multi-million dollar business, more than just a fleeting thought and just a love to do it.

So can you help me on this? Do they actually recognize these new risks they're up against?

[Marion Wrobel]

I'm going to ask my colleague--the bank that does the recognition.

[Gwen Paddock]

Sure, I'll answer that.

We talk a lot about the credit products that banks provide, but really there are a whole host of other products and services. When we have a conversation, depending on the commodity that the individual is producing, it could be around foreign exchange, it could be around trade arrangements. Whether it's letters of credit or documentary collections, that whole discussion has gotten a lot more complex because it is a global marketplace. A quick example would be the ash cloud that stopped the importation of roses from Kenya. When you think about how connected agriculture is today, it definitely is global.

So I think when we talk about providing financial and business advice, it's about helping those individuals, whether they be beginning farmers or established farmers, o understand what risks they need to manage in their operations.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

I have a quick question. When I started, loans were not always based on a solid business plan. Actually, they were often based on equity, which was a false misdemeanour. That has changed. They've now become viable business plans.

Is that in the agriculture industry any different than any other industry coming to you trying to secure funds to operate or to build capital expenditures?

[Bob Funk]

I think by and large when we look at a business application--regardless of the industry that it comes from--we use the same principles. You want well-managed businesses. You want enough capacity to repay the loan obligations that are projected as being undertaken. Then you want the collateral behind it to give you the safety net in that unlikely event that the business fails.

So to that extent you do look at loans very similarly, whether they are agricultural loans or steel company loans or automotive loans. The difference potentially comes in that agriculture has an asset that other industries do not, and that is land, which essentially appreciates. In many other industries you'd have depreciating real estate assets. So you've always got that sort of leverage in the balance sheet.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

Since they're in the same type of pool, only in the fact that when they borrow they have to have a business plan, they have to be great operators and managers and so on, what is the default on agriculture in comparison to those other industries in which they're competitive? Is there a larger...?

We keep hearing that agriculture is falling apart and nobody's going to be farming. We know that there are sectoral issues, but I'm asking in terms of the banking. Where does agriculture stand in terms of its default, in comparison to other industries?

[Bob Funk]

In our banks, the default rate for agricultural loans is not higher than commercial ones. In fact, most years it is less.

[Bertrand Montel]

I would also say that the rate of default is significantly lower in agriculture.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

Okay.

I want to move on to the next one, which is really the critical part of what we're talking about with beginning farmers, and that's succession planning. You mentioned that in your talk.

One of the things that is always critical in farming, I think, is the older generation actually wanting to let loose, to let the next generation take over. The significance of succession planning likely is going to be one of those issues that makes success or failure of the business; it could.

In terms of the capital gains exemptions that we allow now, $750,000, and with the advance payment for the funding that is available for beginning farmers, I'm just wondering, do you see these as effective tools? Are they being used? Are they being considered in your discussions in terms of succession planning?

[Darryl Worsley]

If I may answer that, yes, certainly they are. We have ongoing dialogue with our clients and their children--the successors of these businesses--looking at all of the different implications from a tax perspective. We look at some of the soft issues, to your point in terms of transitioning the business over time: do the people have the right knowledge, and will the farm be viable for the next generation?

So we work with our farm clients to ensure that they're asking those questions of themselves and that it's covered off. We also work to connect them with not only people within our organizations, as Gwen alluded to, but external people as well who can assist with that.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

I think my time is up.

[The Chair, Conservative, Larry Miller]

Thank you.

We now move to Mr. Eyking for five minutes.

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

Thank you to the witnesses for coming here. I have two questions. I'll ask the two of them, and then each representative can answer.

We often talk about farmers and farmers' assets. When we look at the farmers' assets, they're really society's assets, when you think of their importance.They produce our food, which is vital. The farmers are the stewards of the major part of our land mass in our country. But also, environmentally, they give carbon credits and things like that. They play a very important role in our society.

Should governments and your institutions treat them and other industries in different ways?

Second, how do your financial institutions see your future, in the next 10 years, in terms of your total lending portfolio? Do you see agriculture rising or falling as a percentage of the capital you're giving to agriculture compared to the other industries you support or lend money to? Do you see agriculture in the next 10 years with a larger percent or a lower percentage, and why?

[Marion Wrobel]

Do you want to address that to each banker?

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

Yes, sure. I think I have four and a half minutes, so they can all tell me in half a minute what they think.

[Marion Wrobel]

We'll start with Bob.

[Bob Funk]

To your first question, on whether government should treat farmers and other industries differently, obviously a policy decision on how you treat an industry is something a government can make and support with a policy network, as it chooses. If we look from a commercial standpoint at a farmer relative to any other business person, we know that in fact the marketplace they will operate in will be an international marketplace. We need to pay attention to whether the structure they are building is an economically viable one.

Essentially, short of government saying that there is a special area we want to address and that we want you to address in a special way with special loans and special guarantees and a special whatever else, we will say that we need to work with our clients so that we can help them be internationally competitive.

To the second question, on whether the percentage of capital to agriculture is going to grow or change, if I had a crystal ball I probably wouldn't be sitting here. I'd be giving somebody advice and taking a lot of money for it.

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

But you must have a sense. I mean, you would know if the oil patch or the auto industry were going to take more credit. You know your industries, and you have a little bit of a...

[Bob Funk]

What we do know is that there's a significant intergenerational transfer that has to happen in agriculture, and that has to be financed. To that extent, I think it is somewhat of an anomaly, perhaps, in industry. So for the next 10 or 15 years, I think there will be a significant demand for agricultural credit of a long-term nature.