Thanks to the chairman and committee members for inviting me to present.
Before I get into comments, Alfons was sitting on the banker side of the desk in the 1980s. I was on the other side of that desk, and I think it gave me a real understanding of how policy changes could impact the farm. The figures are embedded in my head: we had an $85,000 loan, we expanded the farm from 1985 on. It was supposed to be a five-year term, at one point, I was making the $1,600 a month payment, and the principal was going up $400 a month. Things like that make you think about what the impact is of debt, interest, and repayment abilities. The situation in the 1980s isn't the same as it is now, but I think there are some lessons to learn from the policy side during the 1980s that have some importance today.
As has been said earlier, rising farm debt in itself isn't necessarily a problem. Producers' demand for credit tends to increase with asset values, and it can provide an important source of proactive investment in productivity, risk mitigation, and to capture emerging opportunities. Meanwhile, the availability of credit in the sector speaks to increased financial health and low interest rates. As we have seen in the recent ambitious growth targets set by the Barton report and the most recent federal budget, there is optimism in Canadian agriculture and its future potential.
In fact, one area we believe needs to be looked at more closely is the influx in capital toward assets like farmland that this optimism has generated. While relatively modest to date, we need to take steps to ensure that farmers maintain control of strategic assets like farmland, and that when farmers invest in their operations they are building long-term equity. Nonetheless, we need to look beyond relatively high debt-to-asset ratios when examining farm financial health. These ratios provide insight into the current state of farm solvency, but years of double-digit increases in farmland values—particularly in places where farmland value increases have outpaced farm income—illustrate why they can be a bit deceptive when looking at overall financial health.
Producers managing debt first have to monitor their cash flow and its sensitivity to interest rates. With increased input costs, generating enough operating capital can be a real challenge. This is particularly true for young farmers or those looking to expand. The advance payments program provides critical assistance in this regard, but increasing farm sizes and rising costs require that the advance limits be increased and indexed to inflation to keep pace. In addition, beginning farmers should have access to greater interest-free advance limits to help them address the unique operating capital constraints involved in getting a business up and running. Producers also need to understand how debt affects profitability. Understanding your return on assets is critical to making informed decisions about debt or future investments. Ultimately, a key measure of debt servicing capacity is farm income.
The historic highs we've seen in commodity markets are declining, leading to a dramatic reduction of farm income in the United States. So far, Canadian farm incomes have avoided the brunt of these declines due to favourable exchange rates. With prices declining and asset value growth beginning to moderate alongside ever-present weather and market volatility, investments in productivity and innovation are critical for long-term growth.
With a global population exceeding nine billion estimated for 2050, Canadian agriculture faces a unique opportunity to define itself as a global leader in sustainable production. Capitalizing on this opportunity will require considerable investment on the part of Canadian farmers and will, for most, unavoidably involve taking on more debt to do so. Effective business management skills are essential to ensuring that this is the case. CFA continues to work with Farm Management Canada to promote a comprehensive, strategic approach to risk management, but believe more must be done by industry and governments to promote business management skills in the sector.
Despite the wealth of opportunities we see for the industry, agriculture continues to face a unique range of risks that in many instances are increasing in their frequency and extremity, while climate change and changing dynamics in the industry continue to pose new risks. Some of these can be managed and adapted to through strategies or new technologies, but others undoubtedly extend beyond the capacity of on-farm management.
Investing in increased productivity, sustainability, and farm business growth requires access to business risk management tools capable of navigating risks beyond their control. Canada's current risk management programs have been around for 10 years now with the basic structure of some dating back multiple decades prior to the emergence of these risks and the investments needed to address them. At this point, we believe it's critical that government and industry step back and do a more fundamental review of whether these programs are effectively contributing to the management of risks that producers face today.
The investments made by current businesses are essential to the growth and continued development of the sector. However, young farmers and new entrants are critical to the long-term success of Canadian agriculture. Young farmers provide new ideas, skills, and energy to the sector that are going to be instrumental in demonstrating Canada's global leadership in sustainable agriculture. The young farmers I meet continue to amaze me with the level of education and business acumen they bring to the table. Not only do they introduce innovative approaches, they are also more likely to invest in growth and expand their operations. Yet they must now contend with record farmland values and increased debt loads associated with today's larger, more capital-intensive farms, making transitioning the farm more challenging than it ever has been before. The steep costs associated with taking over a farm are among the primary challenges for young farmers and new entrants when trying to get started in the business.
Estimates suggest that up to $50 billion in farm assets will be transferred over the next decade. Just using a rough estimate with a debt-to-asset ratio of around 16% and approximately $100 billion in total Canadian farm debt, $8 billion in debt needs to be dealt with in these transfers. We believe effective succession planning is paramount. Developing a plan that ensures the financial viability of both parties requires getting started years in advance, maintaining communication, and bringing expertise to help. However, Canada's Income Tax Act has not kept pace with changes in the sector, such as increased incorporation, larger multi-family farming operations, and reduced gifting of farms from one generation to the next due at least in part to the increases in farm debt. To ensure sustainability of family farms, the provisions of the Income Tax Act originally designed to assist with family farm transfers must be reviewed and amended to ensure they still remain accessible to today's farmers.
Finally, the increased capital tied up in farming operations means access to capital poses a critical hurdle for many new entrants who lack the credit histories or capital available to purchase or launch an operation. At the same time, young farmers looking to take over the farm are increasingly expected to pay more for operations than ever before and the associated farm debts that have in some instances accumulated across generations. Farm Credit Canada offers support to young producers, as do some private lenders, but current programs do not fully satisfy the need. We strongly support FCC's offerings in this area and encourage continued exploration of how it can expand its scope in this area. With the next policy framework approaching, the CFA also encourages governments at all levels to develop and adopt multiple flexible programs in order to ensure they offer assistance that is relevant to a range of situations confronting new entrants. In addition to new capital, new entrants also require assistance in accessing land and knowledge in order to launch their new endeavours.
In conclusion, Canada's rise in farm debt reflects an industry that's seen record prices and incomes alongside historically low interest rates. The sector is primed for further growth, but we cannot assume the same favourable conditions. To position the sector for continued success, we have the following recommendations.
One, we recommend better collect data on outside ownership of agricultural land to inform potential policy responses.
Two, we recommend increasing advance limits to assist with operating capital constraints, particularly for young farmers.
Three, we recommend having industry and government further promote business management skills development.
Four, we recommend taking a look at whether BRM programs meet modern risk management needs required to facilitate investments in future growth.
Five, we recommend updating provisions of the Income Tax Act designed to assist with family farm transfers to ensure they remain conducive to family farm transfers.
Six, we recommend ensuring there's access to a wide range of programs providing new entrants and young farmers with access to capital, land, and knowledge.
Thank you again. I'm looking forward to your questions.