Agriculture Committee on April 11th, 2017

[Tom Rosser]

The only thing I was going to add is that we have done a bit of analysis on farm debt levels by farm size and by income level. What that showed, in general, was that debt levels tended to be higher with larger, higher-revenue operations, and that a significant portion—30%, if memory serves—of the lower-revenue farms were actually debt free.

I should note, Mr. Chair, that I know that colleagues from FCC have distributed some materials to the committee. We too have done some analysis on farm debt levels that we'd be happy to share, if it would help to inform the committee's work.

[Joe Peschisolido, Liberal, Steveston—Richmond East, BC]

The FCC is a fascinating concept.

Banks and you guys: what's the difference? Why are you there and how can we be helpful to you in helping farmers?

[Michael Hoffort]

Regarding FCC and why we exist, it really goes back to where we came from. The first organization that was part of our organization was the Farm Loan Board, and it was established after the dirty thirties. There were no mortgages available to farmers post that period from the private sector FIs, so the Government of Canada established that organization.

The other organization that was part of our foundings was from the veterans land administration act, which was after World War II, to settle the vets. An organization was set up to do that. We were brought together in 1959 and really have provided a lot of the mortgage financing for Canadian farmers from that time forward. That would be our primary area of participation. Of course, that has expanded as the industry has changed, with regard to equipment and to being able to provide some really unique operating types of facilities and also with regard to the agribusiness and agrifood sector.

We're not a deposit-taker. The chartered banks of Canada would be much more active in the operating loan area. We provide an alternative in every area of Canada and in every community in Canada that's involved in agriculture. There's that consistent availability of credit no matter where you're located.

When I look at the organization, what's unique about us is that we're only in agriculture; we have nowhere to go. When things are good, we're in and we participate fully, and when things get tough, we go nowhere. We stay in and we participate fully. That would be different from some of the other FIs that could make other choices if, for example, there was a robustness in the economy somewhere else where they could play a little bit more than in agriculture. Those things are their reality but not ours. I think there are some subtle differences, and long-term thinking is a big thing.

[The Chair, Liberal, Pat Finnigan]

Thank you very much.

Ms. Brosseau, you have six minutes.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Thank you, Mr. Chair.

I would like to thank all the witnesses here as part of this very important study.

I would like to start with a question for you, Mr. Gervais.

A report from Farm Credit Canada explains that the increase in the value of farmland has again slowed in 2016, both in Quebec and in Canada as a whole.

The UPA said that the growth in value is not keeping pace with growth in incomes, and that a bubble is growing and creating a barrier to the transfer of businesses, which is basically damaging the long-term profitability of the agricultural sector.

Would establishing rules to govern land transfers, transactions and locations be a good way to reduce land value growth and agricultural debt?

[Jean-Philippe Gervais]

Indeed, the growth in land values is largely related to the increase in incomes. In some cases, as in Quebec and Ontario, land value growth has outpaced the increase in income values. On the other hand, in the Prairies, the ratio of land value to farm income is much closer to the historical average.

I say all the time that we do not know, at FCC, what the ideal ratio is when we talk about land value in terms of farm income. However, we know what the average is for the last 25 years, and even for the last 50 years. We know that the ratio will vary over time, but that it should approach the longer-term average.

That said, there are different rules. Ownership and transfer are provincial issues. So there are different rules in Quebec, Ontario and British Columbia. There is a whole range of different rules.

We've never really studied it. As far as we're concerned, we have to serve our clients, no matter what the rules are. So we are designing the best possible products to ensure that these businesses can grow.

However, it is true that in Quebec and Ontario the ratio of land value to incomes has somewhat exceeded the historical average. In that sense, we could say that land has a somewhat higher value in these parts of the country, because revenues did not exactly follow the increase in the land value.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Some producers in Quebec have more and more concerns. The presence of non-traditional buyers can, in fact, contribute to raising prices.

Could you comment on that a bit? I know the opinions are shared.

[Jean-Philippe Gervais]

Yes, absolutely.

As Mr. Hoffort said earlier, in the most recent report that came out yesterday, basically, we are seeing that the vast majority of transactions are still between producers. It's true that we can't deny this trend where what I'll call non-traditional buyers are increasingly interested in the agricultural land market, whether as investments funds, pension funds or something else.

However, the vast majority of transactions that we are observing are between producers. In fact, we are in a situation where our eligibility criteria are such that we can lend money only to farmers. That said, we still have a good knowledge of the market. The fact is that the vast majority of transactions are still from producer to producer. I would say that is the case for 95% of transactions.

Indeed, in certain localities or regions, whether it is in Quebec, British Columbia or Saskatchewan, it is true that the presence of non-traditional buyers can increase the demand for agricultural land and, as a result, help to increase the land's value or the price paid. However, this is still a very limited phenomenon at the regional level.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Recently, my colleague from Rimouski-Neigette—Témiscouata—Les Basques introduced a very important private member's bill intended to facilitate the transfer of family farms. There is currently an injustice, in the sense that it is sometimes more profitable for farmers to sell the farm to a stranger than to one of their children, even if the child wants to buy it to keep it in the family. Unfortunately, the bill was defeated. However, it had aroused significant interest and support across Canada. The bill was defeated by only 12 votes. We would have liked to have at least referred it to committee. In fact, we think this measure could have facilitated the transfer of farms in order to keep these businesses in our regions.

Moreover, the parliamentary budget officer tabled a fairly worrisome report. We are talking about some misinformation from the Department of Finance. It was anticipated that this bill would cost between $126 million and $249 million. The government argued that this bill would cost $1.2 billion.

A bill like this could have facilitated the transfer of family farms.

Could you comment on the importance of correcting this injustice?

[Tom Rosser]

As we said in our testimony, programs and services are in place, particularly at FCC, to help young farmers. The federal government is also administering programs to facilitate the intergenerational transfer of farms.

That said, we are open to suggestions for improving programs and services, as well as for working better with the provinces and the department's partner organizations to facilitate this transfer.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. Rosser and Ms. Brosseau.

Mrs. Lockhart, you have six minutes.

[Alaina Lockhart, Liberal, Fundy Royal, NB]

Thank you to each of you for being here today.

I wanted to start by speaking about Farm Credit Canada. I appreciate your testimony in talking about how FCC is in, no matter whether agriculture is robust or not. As far as the parameters for lending are concerned, how do they differ from other commercial banks?

[Michael Hoffort]

In terms of our lending practices, we have our own policies and processes that we establish based on our knowledge and expertise in the industry. In some cases, they differ slightly from the banks. With our young farmer loan, we've intentionally gone with a lower down payment than would be traditional to try to make sure we're supporting some of these new entrants. The upfront payment or down payment is almost as important as what you might do with the structure of the loan and the interest rate after, given the rates we have today.

Our premise of going to market is to be very knowledgeable about our customers and to understand what they're trying to do, and in a sense, establish a debt structure, or that side of their balance sheet that makes sense for them so they can achieve what they're trying to do from a business perspective. We'll do that very deliberately, and on farm is where we do our business.

From a lending practices' perspective, our target is “all agriculture, all sizes”. Over 80% would be in that small and medium-sized category. From a mandate perspective, we think that's where the country needs us quite specifically. On paper, you might look at their policy and our policy and say that these look consistent—25% down for a farmland loaner, or whatever it might be. How that gets implemented, the time you spend, and the target sector you're after in terms of service, we serve all.... I think you might find some differences more in implementation that you might find in policy in terms of that practice.

If somebody does get into challenges from an organization's perspective, in our special loans area, our special credit area, their target is to get people back into operating and help work them through that challenge so they're back in a viable position.

I can't comment on whether everybody would put in that time and effort we would in terms of how we'd operate if someone were to have a challenge, not only on the upfront, but down the road. We pride ourselves in being able to really work with customers to get them back on track. You might find it as much in that area as anywhere.

[Alaina Lockhart, Liberal, Fundy Royal, NB]

One thing we've heard from farmers is the cost of land for newcomers. When you have new entrants, it sounds as if what you're saying is there's some consideration for that. How do you balance the fact that there's not a lot of credit history there; there may not be the amount of capital needed on the front end?

[Michael Hoffort]

That's a great question.

One reality is that 95% of new entrants typically are connected to an established farm. A really nice number of new entrants are getting into agriculture; it's just as you'd want it to be. Whether those are intergenerational farms—many times three generations are in a farming operation—or multi-family, brothers, sisters, cousins working together, you draw on some of that from a credit history perspective. It's not uncommon for that established farming operation to offer some of their assets as security to allow the new entrant to get in. In many cases that's the way we would look at it.

The other side is that if you're starting very much from that greenfield operation and growing your way in, typically they would also hold an off-farm job, would have a good credit history, and would size up in a reasonable amount of time that would allow them that. You would draw on some of that as well, their off-farm, their credit experience, their behaviour, and all those things to allow you to make a good judgment that they'll be successful.

[Alaina Lockhart, Liberal, Fundy Royal, NB]

Thank you.

Mr. Gervais, I had some questions for you about the debt-to-asset ratio. I understand that here in Canada it's about 16.5% for farms. Has there been a calculation to look at what would happen to that ratio if interest rates increase? That is, if and when, because they will eventually.

[Jean-Philippe Gervais]

Yes, an increase in interest rates would probably have an impact on the amount of debt that farms would be willing to take on, as well as, perhaps, even the asset values. If the demand for assets is weaker because of higher interest rates, because it's a little harder to make a good business plan to purchase a piece of land and turn a profit on it, then perhaps you'd see the demand for asset values slow down.

We haven't done any analyses that would look at the farm debt-to-asset ratio, in terms of what would happen if interest rates go up. I would suggest that, perhaps, it's not going to come up very fast. As I said, that would have an impact on asset values as well as an impact on debt. The two would probably balance out and somewhat cancel out. I would probably see a slight increase in debt-to-asset if higher interest rates come up, but I don't think it would put the financial situation of Canadian farms in a difficult spot.

[Alaina Lockhart, Liberal, Fundy Royal, NB]

Are there any sectors that might be more susceptible to that pressure?

[Jean-Philippe Gervais]

The sectors that are more capitalized or that are a bit more intensive in assets would probably be feeling a little more of the crunch, especially given that maybe asset values on that are high or wouldn't climb as much as in the past. The farms that carry a little more debt because of the stability of revenues would be, perhaps, dairy and poultry farms, which historically have had a more stable flow of revenues. They would perhaps see a little more challenge on the debt-to-asset part of it.

Again, when you look at it from a lending perspective, income is the primary driver of debt repayment, and we emphasize that quite often to our customers. It's not the asset values; income is the primary driver of debt repayment.

[The Chair, Liberal, Pat Finnigan]

Thank you, Ms. Lockhart.

Thank you, Mr. Gervais.

Now we move to Mr. Longfield. You have six minutes.

[Lloyd Longfield, Liberal, Guelph, ON]

Thank you.

Given the connection between Canada's strategic objectives of getting to $75 billion of exports by 2025 and some sectors that we're focusing on within agriculture, how closely do you match your strategic policy around debt to the strategic objectives of the government?

[Tom Rosser]

Certainly we are in the midst of asking ourselves how all our policies and programs enable the attainment of the target for 2025. The attainment of the target, the growth in the value of our exports, will require significant amounts of capital, both in the primary agriculture industry as well as in the processing sector. As part of a broader consideration of the role of government in enabling the attainment of the target for exports, certainly access to capital is an important consideration.

[Lloyd Longfield, Liberal, Guelph, ON]

That's a very good answer.

I was hoping that was where we were heading, but I'm also thinking along the lines of Ms. Lockhart. With the proportion of debt that's tied up in land, you can be asset rich and cash poor if you're trying to invest in new technologies or enter new markets that maybe you've never farmed in. Is there something around the mix of land debt to debt for innovation, let's say?

[Tom Rosser]

Certainly when we look at the data, it's true. I think somewhere in the order of 60% or 70% of farm assets, if memory serves, are in land and buildings, but in recent years we have seen significant capital investments in machinery and equipment.

Part of the debt that we have seen the agriculture sector take on over the past couple of years wasn't simply to buy land. A significant portion was in productivity-enhancing investments, in machinery and equipment and other things.

As for innovation and market development, that too is an area where we as a department, in partnership with provincial and territorial colleagues, have a suite of programs to help the farm sector, as well as its associations and the institutions that serve it, so the sector can innovate and enter new markets, etc.

[Lloyd Longfield, Liberal, Guelph, ON]

Thanks.

Let's look at the young people. From your testimony, it sounds positive.

I've heard of a dairy farmer down in Niagara whose son is now splitting off, starting up, and putting in new equipment. His son's friend is down the road and also splitting off. Three farms are getting created down in Niagara around dairy, which is very capital intensive.

How difficult is it for youth to come forward? Do they need to have the parent beside them? I'm thinking in particular of the buddy of the son who is opening up a farm down there.