No.
Evidence of meeting #55 for Agriculture and Agri-Food in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was debt.
A recording is available from Parliament.
Evidence of meeting #55 for Agriculture and Agri-Food in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was debt.
A recording is available from Parliament.
11:55 a.m.
President, Canadian Federation of Agriculture
It would be mostly provincial, I would think.
11:55 a.m.
Prof. Alfons Weersink
Just to interject on that, we've done some work. You had Brady Deaton in here about a month ago, and he's done some work looking at land rents and land values. The vast majority of land rental contracts are simple handshake agreements, and I think that reflects a trust within the farming community, in that if you as a farmer, as a tenant, do something unfavourable on that land, the reputation is going to be lost if you haven't paid, so you're going to have trouble finding land. I think that reflects those informal institutions in the rural areas.
11:55 a.m.
President, Canadian Federation of Agriculture
I think in this case it was only operating the weed sprayer across the road last year.
11:55 a.m.
Liberal
The Chair Liberal Pat Finnigan
Thank you, Ms. Lockhart. Unfortunately that's about the time we have. I can concur with my friends that I am also responsible for keeping that average up and I also lived through those 16% to 18% interest rates. It makes you a better person, or a tougher person, but we lived through them.
Thank you so much to the panel for being here. You've been very informative, and I'm sure it will help us when we do our report.
We shall break for a few minutes to change panels.
12:05 p.m.
Liberal
The Chair Liberal Pat Finnigan
We'll get the second part of our morning going with our new panel. I want to welcome all of you here today. We're studying debt in agriculture.
From the Canadian Credit Union Association, we have Mr. Robert Martin. Welcome, Mr. Martin.
We also have, with the Libro Credit Union, Mr. Frank Kennes. Welcome Mr. Kennes. Mr. Kennes is vice-president, agriculture and commercial.
With the Canadian Pork Council, we have Mr. Hans Kristensen, board of directors, and Mr. Gary Stordy, whom we have seen before. Welcome to both of you.
We'll start with a 10-minute introduction.
Mr. Martin, would you lead the way?
12:05 p.m.
Robert Martin Deputy Director of Policy, Canadian Credit Union Association
Thank you. Good afternoon everyone. The Canadian Credit Union Association welcomes the opportunity to brief the committee in relation to agricultural debt and its effects on Canadian agriculture. I am the deputy director of policy at CCUA. We are the national trade association for about 281 credit unions. These are credit unions that are outside of Quebec.
With me today is Frank Kennes. He is the vice-president for agriculture and commercial services at Libro Credit Union in southwestern Ontario, around London. Frank will give you a practitioner's perspective on farm debt and its impacts.
As some of you may know, credit unions are financial co-operatives that offer retail banking services to their member owners. Credit unions are 100% Canadian owned and are competitors to the big banks. We serve over 5.6 million Canadians outside of Quebec.
Collectively, credit unions employ more than 27,000 people and manage over $202 billion in member assets. In terms of market share, credit unions hold about 6.3% of domestic assets in the financial sector held by deposit-taking institutions, but we have over 11% market share in the small and medium-sized enterprise market.
As some of you may know, credit unions are the mainstay of many rural communities outside of Quebec. In many cases, credit unions that now provide services to rural communities were established by the initial investments of farming families that felt poorly served by institutions headquartered, as we know, in Toronto.
From modest beginnings, credit unions have grown, and now have about an 11% agricultural market share, outside of Quebec. In Manitoba, it is much higher. We have a 26% market share. In Saskatchewan, we have 18%, and in Ontario, where Frank is from, it's 9% and growing quite rapidly.
As co-ops, credit unions exist to serve their member owners. In an agricultural context, that means we are committed partners to Canadian agriculture, and we weather the ups and downs of the sector, along with producers. In downturns, we do not readily pull up stakes and look for returns elsewhere. Rather, credit unions share the economic fate of the communities they serve. In fact, there are now 380 communities in rural and remote Canada where a credit union is the only bricks and mortar financial institution around.
While agriculture is a cyclical sector with its ups and downs, we nevertheless view the future of Canadian agriculture with some tempered optimism. Canada has a diversified farming economy that has a strong international reputation for producing sustainable, high-quality, and safe agricultural products. We see expanding international markets for our agricultural products. As many parts of the world become more affluent, their purchasing power increases and they look for Canadian products.
That said, we recognize that farm debt has been increasing at a steady rate and has more than doubled since 2000. At the end of 2015, outstanding farm debt sat at $92 billion. This rate of increase and that large headline number have attracted attention and concern among some observers.
While we are not dismissive of these concerns, we believe that lenders and policy-makers should look beyond the headline farm debt numbers at other farm financial ratios when assessing the health of a farm or considering the sector as a whole. When we look at these other ratios, the financial health of the sector is less concerning.
First, from a liquidity standpoint, Canadian farms are in a good position to handle their short-term debt obligations. For example, at the end of 2015, farm operations in Canada had a liquidity ratio of 2.38%. That is roughly equal to the average of this ratio for the last 15 years, so it's not out of line. This ratio is useful because it compares the value of current assets, which are cash, accounts receivable, and inventory, with current liabilities, which are debt and accounts payable. A ratio lower than 1 signals that the farm doesn't have the short-term assets to cover short-term obligations, and of course, that means trouble.
Another perspective we look at is the debt-to-asset ratio. We see a similar situation, with this ratio at 15.5% at the end of 2015. This is well below the 15-year average of 16.7%. The debt-to-asset ratio indicates whether a farm would have the assets to cover all of its liabilities if those assets were liquidated. A low ratio indicates that the operation can meet its financial obligations. Admittedly, steady land value appreciation has played a role in keeping this ratio below its 15-year average.
Farms have also enjoyed a healthy return on assets. At the end of 2015, the Canadian farm return-on-assets ratio sat at 2.3%, just slightly below the 15-year average of 2.6%.
The appreciation of farmland has also been at work here with the increased land prices putting downward pressure on profitability.
To sum up, while it's important for farmers, lenders, and policy-makers to watch headline farm debt numbers, it's also important to look at other ratios that contextualize this debt. When we do this, the farm debt number is less concerning.
With that, I would like to turn it over to Frank to provide you with his perspective as a long-term agricultural lender at Libro Credit Union.
12:10 p.m.
Frank Kennes Vice-President, Agriculture and Commercial, Libro Credit Union
Thanks, Rob.
As mentioned, I'm the vice-president of agricultural and commercial services at Libro Credit Union. We're based in southwestern Ontario, serving our owners west of the GTA to Essex County and from Lake Huron to Lake Erie.
Libro has the largest credit union agricultural portfolio in Canada. Many of our founding member owners in the 1940s and 1950s were farmers, and agriculture remains a crucial part of our credit union today, as it has over the past 70 years.
We provide state-of-the-art financial services to primary producers and agribusiness in every major commodity group. Our commitment to agriculture has been unwavering throughout our history, when times were good, as they have been for the past few years, and when times were bad, such as the high-interest-rate days of the 1980s.
While we have some concerns when we look at the future of farming, we are excited about the future of agriculture and food processing in southwestern Ontario and across Canada. As Rob noted, the population of the world continues to grow and the increased disposable income in countries like India and China grow the demand for quality Canadian-grown food. Canada, with land, water, research, technology, and, most important, some of the world's most talented farmers, will have the opportunity to play a leading role in meeting the increased demand for quality Canadian food. In short, the demand side of agriculture in Canada looks very positive.
There are, however, concerns that all involved in agriculture must be cognizant of. Over the past 10 years the price of farmland has increased dramatically across the country, particularly in southwestern Ontario. It now sells in some areas for more than $20,000 per acre, so a 50-acre farm sells for more than $1 million. While this has positively increased the value of farm assets, it has also significantly increased farm debt in many cases.
Increased production, decent commodity prices, and low interest rates have resulted in some of the most prosperous years ever experienced by Canadian farmers, but we all expect interest rates to increase someday, and with much larger debt loads farmers need to be prepared to have the income to pay higher interest rates. A 2% increase in rates means an extra $20,000 in annual interest on a $1-million debt, a significant impact on cash flow.
The impact of rising rates will depend on how high they go and also the speed at which they climb. A slow and steady climb in interest rates toward their historic norms would allow farmers time to adjust and to moderate the impact of the rate increases. Of course, rapid rate increases would be difficult to manage. Although we do not see rapid rises in the near term, we at Libro encourage and coach our farm owners to manage their debt wisely, to pay down debt as quickly as possible when profits are strong, and to lock in today's low interest rates for as long a period as possible. Of course, other credit unions do this also.
Predicting the future is impossible but we do know there will always be good times and not-so-good times, but I can predict with certainty that Libro will always stand with its farmers during lean times and in times of plenty.
One last area of concern I wish to address is farm succession. While increasing numbers of young people want to return home to take over the family farm, the current high value of farmland and farm equipment and other farm assets makes it difficult for them to ever save the money for a down payment large enough to be able to purchase a farm operation if they are required to pay today's market rate for the assets to be purchased.
We acknowledge some of the work that Farm Credit Canada does to support young farmers with their young farmer loans. These loans fill gaps in the marketplace and enable young farmers to enter the market and grow. However, high asset prices, the retirement of older farmers, and young talented farmers struggling to get a toehold in the industry are still a fearsome challenge for the sector.
I don't have an answer to solve this problem today, but all of us, government and the private sector, need to work together to come up with workable solutions that will enable our bright young farmers of the future to realize their farming dreams.
I appreciate this opportunity to speak to you today. The future of agriculture is bright. Working together, we as stakeholders can make it even brighter.
We look forward to any of your questions. Thank you.
12:15 p.m.
Liberal
The Chair Liberal Pat Finnigan
Pork Council, I don't know if you want to split your time or not. You have up to 10 minutes. Thank you.
12:15 p.m.
Hans Kristensen Member, Board of Directors, Canadian Pork Council
Mr. Chair, good morning. My name is Hans Kristensen. I am a pork producer from New Brunswick and the Maritime representative of the Canadian Pork Council's board of directors.
I would first like to thank the members of the House of Commons Standing Committee on Agriculture and Agri-Food for the invitation to appear before you again this morning, this time to discuss debt and its effects in the agriculture sector. I always welcome the opportunity to talk about our industry. It's getting me to stop talking that's the difficult part.
Canada's pork industry produces more than 25 million animals a year. It creates 31,000 farm jobs, which in turn, contribute to 103,000 direct and indirect jobs across the country. Those jobs generate $23.8 billion when farms, inputs, processing, and pork exports are factored in. In 2016, as an industry, we exported over one million tonnes of pork and pork products, valued at over $3.2 billion, to 90 countries. This was a new record for our country. The pork sector relies on exports. In fact, more than two-thirds of the hogs produced in Canada are exported as either live hogs or pork products.
Over the past decade, due to the hard work of the entire industry, we have expanded to become the third-largest exporter of pork products in the world. This expansion not only supports hog farmers but also provides thousands of jobs in rural and urban communities, and supports businesses throughout the country.
As a producer, I am well aware that the sector has yet to maximize its potential and there are real, tangible opportunities to continue to sustainably grow its contribution to our economy. The recently concluded Canada-European Union Comprehensive Economic and Trade Agreement and Prime Minister Trudeau's intervention to reopen the Argentinian market are but two examples of emerging opportunities. These, coupled with a sustained global increase in protein consumption, mean that the hog sector is well positioned to play its part in growing the Canadian economy.
However, interruptions in market access affect producers. Hog prices decline when there is a threat to an important export market. This results in producers needing to extend their credit until market conditions return.
Hedging is a tool that can offset an unexpected decline in the market price. While currently producers have access to hedging on the futures market, there are barriers to their doing so. Initiatives to remove these barriers are key to making hedging a useful and used business risk management tool for our sector.
The pork industry takes every step to insulate itself from the effects of market disruptions by opening new markets. Depending on the product, if one shuts down, we want to ensure the industry has the flexibility to move the product to a replacement market on a short-term basis. This flexibility helped when Russia decided to place restrictions on the importation of pork. Overnight a $500-million market was gone. While this was challenging, the industry did manage the situation. However, this flexibility at that level does not exist should Canadian pork become uncompetitive in a high-value market like Japan, since currently Canada and Japan do not have a trade deal.
The Canadian Pork Council supports government in its work to ensure the pork industry operates on a level field to compete effectively in the global market. Opening or maintaining market access is never easy; however, it is only half of the battle. The meat industry is the most highly regulated component of the agrifood sector in this country, and every export shipment must be certified individually by the Canadian Food Inspection Agency.
Our industry is a large user of CFIA services and CPC fully supports the Canadian Meat Council's submission in the phase one consultation on cost recovery by the CFIA. CPC supports an updating of CFIA's cost recovery policy and accepts that some fees will rise over time. However, our industry has a growing concern with the ability of the CFIA and other departments to provide an adequate level of service to maintain existing markets or fully develop and benefit from new export market opportunities. The federal government could improve the trading climate and competitiveness of Canadian pork by strengthening the technical support and quickly solving the issues disrupting the normal flow of trade.
Our industry has to offer a final product that is competitively priced. It must also be extremely efficient in how that product flows through the value chain from producer to final customer, no matter where in the world that customer may be. Feed costs, the Canadian dollar, hog prices, and global economic issues beyond our control affect the competitiveness of the hog sector. Canadian hog producers are accustomed to managing the normal fluctuation of hog prices. The peaks, where prices were higher than the industry average, are not as high and do not last as long as many of our producers would like to see. The lows, unfortunately, can last longer than anyone wishes to talk about.
Producers have also been adapting, using every avenue at their disposal to remain competitive. That is why producers are concerned about a tax placed on carbon and the anticipated increase in cost to production. As price-takers, additional operating costs will not be recovered from our customers. Our success as an industry is due in part to market access and being competitive in our domestic and international markets. This may be hindered when competing directly with countries that are not implementing a carbon tax system.
While we do export 70% of our products, we have to keep in mind that we compete domestically as well with imported products.
The Canadian pork sector has reached a point where, if it is to continue to grow, it must effect a significant level of investment in both infrastructure and people. Attracting this investment will require governments to continue to partner with producers in addressing the risks that limit progress.
The period from 2005 to 2010 was economically a very difficult one for our industry. Memories of the hurt are still fresh, especially within the financial community. Attracting capital is a challenge in our industry, to say the least. Recent disease outbreaks in Canada and other countries have reminded financial investors of the risks associated with animal health.
Recently, producers have benefited from a relatively stable price over the past few years due to the PED virus that interrupted pork production in the U.S., and a rising demand for meat. But our members have told us that the increased revenue was mainly used to service pre-existing debt, to pay for increased cost of biosecurity protocols, and to adjust to other fluctuating costs.
We know that we need to work in the most efficient system possible and that this will involve the regulatory environment in which we operate. We can no longer afford to be catching up to our competitors. We need to be ahead with the most effective, streamlined, and cost-effective regulatory environment possible. This means having access to the best veterinary products available on a timely basis, ensuring grains are developed and grown for livestock-feeding purposes, and ensuring that government polices do not disadvantage livestock production. Governments have to be committed to providing the most competitive environment possible for production to succeed.
The best management tool is a strong market, and producers would prefer to rely on the market for a return on their investment. However, there are times when the market does not work this way. The current business risk management suite is essentially a three-legged stool on AgriStability, AgriInsurance, and AgriInvest. These three programs work in concert to support individual producer actions to manage market risk. Unfortunately for hog producers, two of the three legs provide little, if any, support. One of those is AgriInvest, which has not been of high value to our sector. The second is AgriInsurance. While this is not a novel program, and has, after all, seen decades of success with crops, it is not available to the livestock sector. Losses of productive assets in the hog sector are not adequately covered, putting the sector at risk and compounding when production losses are coupled with market losses.
The repercussion of several years of difficulty in the hog sector is the availability of credit. Federal programs such as the advance payments program will help, but will not help the construction or improvement of buildings. Government can help producers become more efficient by partnering with producers to invest in the construction of new and efficient barns and on-farm upgrades. High-performance facilities can improve animal performance, reduce environmental footprints, and decrease the impact of seasonal variabilities through unit design, construction, control, and monitoring.
A modified Canadian Agricultural Loans Act, CALA, program would be extremely helpful in this regard. The program is designed to increase the availability of loans to farmers and can be a mechanism to further strengthen the hog industry. However, the program's utility is limited and, as a result, has not been extremely useful to our producers. The current limitations to loans are constricting and are not reflective of current farm business practices and sizes. An updated CALA program should reflect commercial farm sizes and more complex farm structures.
Once again, thank you for the opportunity to appear before you today and speak on this important subject. I would be happy to answer any questions on behalf of our producers.
12:25 p.m.
Liberal
The Chair Liberal Pat Finnigan
Thank you, Mr. Kristensen, and to our panel.
We shall start our questioning round now. We have Mr. Anderson for six minutes.
May 4th, 2017 / 12:25 p.m.
Conservative
David Anderson Conservative Cypress Hills—Grasslands, SK
Thank you to our witnesses today.
Mr. Kristensen, I just want to ask you to follow up on one thing. You talked about hedging and we recognize that as a tool that can be used to protect against debt and financial instability. You suggested that initiatives to remove these barriers are key. What are you suggesting needs to be removed? Also, why don't you tell us a bit about where we can make some recommendations in that area?
12:25 p.m.
Member, Board of Directors, Canadian Pork Council
Hedging is a very useful tool for producers. Unfortunately, unless there's a program in place to help us offset the cost, it comes with the risk of rising prices for producers in the ensuing cash calls that can be had on the market. Therefore, we can be in a position where we would hedge 75% of our production, yet prices continue to appreciate. Then we get a cash call from a broker that again, puts us in a working capital crunch, so any type of program that would help us ensure that we offset the cost of that margining would be beneficial.
12:25 p.m.
Conservative
David Anderson Conservative Cypress Hills—Grasslands, SK
Are you talking about some sort of loan program or are you talking about taxpayers taking on producers' debt? What are you suggesting?
12:25 p.m.
Member, Board of Directors, Canadian Pork Council
We're talking about some type of hedging insurance program that would help offset the need of that protection against rising market prices.
12:25 p.m.
Conservative
David Anderson Conservative Cypress Hills—Grasslands, SK
I'm from Saskatchewan, so obviously credit unions are very important. It's the one institution that's actually stayed in a lot of our rural communities.
I took a look this morning at some of the numbers on farms. For gross farm receipts of $500,000 plus, there's only 11% of the farmers who are in that situation. That's growing a bit, but 68% of gross farm receipts come out of that 11% or 12% of producers. I've been on this committee a number of times and I think the percentages probably haven't changed. We used to say that 30% of farmers are viable full-time commercial operations, 30% are people who are working part time and trying to get to that point where they're sustainable, and then 30% are hobby farmers or people who are expecting to work full time and farm. I think it's probably stayed pretty close to those averages.
That leaves me wondering, do we need different approaches for different economic levels in the way that we're dealing with farm debt? We're going to be making some recommendations. Do you have any ideas on that or should we just be treating people who want to get into farming as if everyone deserves to farm and they all should be treated the same? Is that realistic?
12:25 p.m.
Vice-President, Agriculture and Commercial, Libro Credit Union
No. I know that it's a big challenge in our area. I was trying to think of an example. Mr. Shipley, my MP, knows the area that I come from. It's the town of Parkhill and Ailsa Craig. I grew up on a farm there and it's about a 10-mile stretch between the two towns. When I grew up in the 1960s, there was a family farm almost every 100 acres, so every farm was maybe 100 or 200 acres. I was counting up this morning how many main farm operations there are on that 10-mile stretch and it was hard to come up with five, so it's changed a lot. The commercial farmer has become very large in Ontario. Certainly, it's not when compared to Saskatchewan, in terms of the number of acres, but the average farm in Ontario is probably 500 or 600 acres of land, whereas 30 years ago, it was maybe 100 acres, so things have changed a lot. With $20,000 an acre—that's the top end, but even at $15,000 an acre—that's millions of dollars of value in farmland right now.
For someone who wants to start up a small farm, it's impossible. I really don't know how they can do it. Therefore, that is a big challenge that's being faced by all of us, but in the end, there are really two types of farmers. There's a commercial large farmer and a small hobby-type farmer, where one or both of the partners work off the farm in jobs to make ends meet.
12:30 p.m.
Conservative
David Anderson Conservative Cypress Hills—Grasslands, SK
How do you approach the smaller folks who come and they have a niche market that they may be able to fill? How do you measure risk when you're lending to people like that?
12:30 p.m.
Vice-President, Agriculture and Commercial, Libro Credit Union
We try to take everything into account, so the income that can be earned by doing the niche farm operation and their off-farm income to see if, between everything, we can make a go of it. We look at all the different avenues possible to try to help someone get into farming, but it's really difficult for people. Especially for those who don't have a family behind them to help them get started, it's almost impossible.
12:30 p.m.
Conservative
David Anderson Conservative Cypress Hills—Grasslands, SK
Can I just change direction a bit here?
Exchange rates have changed. Six months ago we wouldn't have expected to see what we're seeing right now. We're starting to hear some extreme suggestions of where we might end up. I'm wondering if you have your prophet's hat on and can give us an idea of where we might end up. When should we start getting concerned about exchange rates, or is it still so simple that if we export, we're doing well, and if we're importing, we're not going to do well at this, but it doesn't really matter? I'm interested in your perspective on that.
12:30 p.m.
Vice-President, Agriculture and Commercial, Libro Credit Union
I've seen both sides of the coin. When our dollar is very high and the commodities that we sell become expensive, it's been very hard on a number of farm-related operations and just plain primary producers as well. When our dollar goes down, obviously many farmers benefit from that. We all have to be cognizant that those exchange rates change constantly, and we should not become dependent on a low Canadian dollar being what makes us profitable.
12:30 p.m.
Conservative
12:30 p.m.
Vice-President, Agriculture and Commercial, Libro Credit Union
I have no idea. It's like predicting interest rates. We've talked about interest rates going up for the last five years, and that hasn't happened, so I'm not going to make predictions on those.
