Thank you, Mr. Chair, and good morning honourable members.
It's a pleasure to appear before the Standing Committee on Agriculture and Agri-Food on behalf of Farm Credit Canada, FCC. My name is Michael Hoffort. I am the president and CEO of FCC. With me today is Jean-Philippe Gervais, our vice-president and chief agricultural economist.
Today, we want to share with you our insights on the debt level in Canada's agriculture sector, as well as provide some context and perspectives on some of the numbers, which Assistant Deputy Minister Tom Rosser referenced earlier in his remarks.
By way of background, FCC is a commercial crown corporation with more than 100,000 customers and a portfolio of approximately $30 billion. The vast majority of our customers are small to medium-sized family-run farm operations.
My family's story is rooted in agriculture. It is because of this heritage that I chose a career in the industry. After completing my education in agriculture economics at the University of Saskatchewan's College of Agriculture, I joined FCC as an account manager, and have spent nearly three decades serving the industry I am extremely passionate about.
As an account manager new to FCC, I cut my teeth working in the depth of the farm debt crisis of the 1980s, when most of our time was spent working with farm families to resolve financial challenges brought on by a perfect storm of record high interest rates, collapsing commodity prices, and, in many areas, severe drought. This experience of the industry, and all who worked through it, confirms the importance of today's topic.
Reflecting on our industry's history, and all the positive things that have taken place since those challenging days, it is not just financial relationships, it's the human element that drives me and our employees in offices across the country to do everything we can to ensure the success of our customers. At FCC, agriculture is our passion. We are focused on delivering financial solutions to farmers and farm families, and we know this is a significant responsibility.
Today, FCC holds over one quarter of Canada's total farm debt. We want to ensure our customers are successful, no matter what challenges they may face, or what stage they happen to be in their business life cycle, whether they are just starting out, expanding their operations, sustaining their farm size, or in transition to the next generation.
From my own experience, I know the vast majority of farm operations are passed down from generation to generation, and this continues to be the case, as confirmed in the last census of agriculture. It showed 98% of Canadian farms are family owned and operated, often in multi-family or multi-generational farm structures.
We pride ourselves in delivering customized products and services for the agriculture industry. Through the FCC young farmer loan and, more recently, our young entrepreneur loan, FCC is improving access to capital that allows young people to enter the agriculture value chain, grow their businesses, and pursue their dreams. Our transition loan builds on pre-existing relationships between a buyer and a seller, usually a patient seller such as a parent, relative, or neighbour, to help young farmers start or expand the farm with a lower than standard down payment.
We believe the future outlook of the Canadian agriculture industry is positive on the whole. Our confidence comes from an industry that is diversified in what it produces, augmented by Canada's international reputation for consistently producing safe, high-quality food. It's important to note that while demand for agriculture commodities remains strong, commodity prices have declined over the past couple of years due to increasing world supplies. A weaker Canadian dollar relative to the U.S. dollar continues to partially shield Canadian producers from softer commodity prices that are strongly influenced by the dynamics of the U.S. market.
At FCC, we also understand agriculture is a cyclical business. We stand by our customers through all market conditions and throughout every phase of their business life cycle. We take a long-term view of agriculture. We monitor current trends, and provide economic insights and forecasts to help producers to make informed business decisions.
In recent years, we have largely looked through the lens of a booming farm economy, supported by a long stretch of increased production, strong demand for agriculture commodities, and favourable interest rates. At the same time, Canadian producers have made significant investments in land and technology, and diversified their operations. Farmers have always been quick to adopt new technology, which is why Canada is ranked second in global agriculture sustainability, according to a recent study by the intelligence unit of The Economist.
During this period, farm asset appreciation has mostly kept pace with farm debt levels. This is largely due to the continued appreciation of a key asset, farmland. According to our latest annual farmland values report, which we released just yesterday, the average value of farmland across Canada increased by 7.9%, the latest increase in a 25-year trend.
However, the report also shows that substantial farmland value increases of recent years are losing steam. This is the third consecutive year the rate of increase declined year over year and is in line with our expectations of a soft landing for the farmland market.
Strong income, increased profitability, and low interest rates have pushed up asset values, which in turn drive up demand for credit. As a result, in 2015 we saw an increase in farm debt that for the first time in many years exceeded farm asset appreciation. Yet the ratio of debt to asset values in 2015 remains lower than the 10-year average.
A low ratio provides financial flexibility to Canadian agriculture to leverage investment opportunities or face unexpected challenges that could arise. It is also important to emphasize that net worth in Canadian agriculture also kept rising, a sign of a healthy industry.
As Canada's leading provider of agricultural financing, we encourage producers to allow for flexibility in their balance sheet, as well as ensure sufficient working capital exists to guard against unfavourable changes in economic and market conditions.
While a low debt-to-asset ratio is healthy, this is nonetheless a secondary measure of the ability to repay debt. A primary measure is always income. On that basis, the outlook for Canadian agriculture is positive. The global demand for agriculture products remains strong. Minimal increases in farm input costs as well as a low Canadian dollar should continue to buffer producers from the impact of possibly lower cash receipts.
Even so, we are actively encouraging farmers to identify efficiencies in their operations to counter any potential drop in revenue and ensure the long-term profitability of their operations. We recognize Canada's producers and agribusiness operators use a number of strategies to manage risk in an increasingly sophisticated and dynamic industry. FCC offers a wide variety of free learning opportunities to help producers make effective business decisions, including workshops designed to help producers improve their bottom line and strengthen their business.
This is what makes FCC unique among other lending institutions. We are a stable and steady presence in the marketplace. We are not publicly traded, we are accountable to our shareholder, the Government of Canada, and our only focus is on the success of Canadian agriculture and our customers.
Our business is built on strong customer relationships. This means taking the time to understand our customers' business and ensuring that they have the products and services they need to grow their farm operations and agribusinesses.
It also means lending responsibly by making good loans to producers with solid business plans and encouraging our customers to have a formal risk management plan. Because of this practice and our focus on risk management, it bears noting that more than 99% of FCC's portfolio is performing and in good standing, which means customers are paying back their loans as per the agreed-upon terms.
While we know sector challenges exist, our industry is still in a very strong position. With this responsibility, it's important we also extend a cautionary message to the industry about the current trends and to ensure individual producers have the knowledge and the tools they need to prepare for tighter and more volatile times.
As a proactive measure, FCC has recently published a series of weekly blog posts on farm financial fitness, copies of which we have provided to the committee today. Developed by our agriculture economics team, these posts provide producers with valuable information, tips, and tools, and advice on how to manage their farm business and operations, plan for unexpected challenges, and work through them.
At FCC we are aware that other financial institutions play a significant role in the agriculture lending market. We believe that healthy marketplace competition and a choice of financing options is good for all Canadian farmers and agribusiness.
Agriculture is a robust contributor to the economy that requires capital from all of us: banks, credit unions, and FCC to achieve its full potential. That said, FCC is the only financial institution solely dedicated to advancing the business of agriculture, and we've done this successfully for the past 57 years. We add value to our commitment to provide expert knowledge and services for the evolving needs of the people who work in this great industry every day. No matter what changes take place, FCC will continue to serve as a strong and stable partner to the Canadian agriculture industry.
At FCC, agriculture is our business, and we will support Canadian producers in the face of challenging circumstances and celebrate their success as well.
Thank you for the opportunity to speak to you today. I look forward to any questions the committee may have.