When the Union des producteurs agricoles was invited to take part in this consultation, our thoughts rapidly turned toward the reasons that cause agricultural producers to incur debt. With a particular focus on the new generation and those who will be passing on their farms, I will present the results of our reflexion, together with the potential solutions we identified.
First of all, our economic sector has its own particular characteristics that could be grouped under the theme of “the farm problem”. It is made up of inelasticity in demand, and an offer made by multiple sellers to a few buyers. The agricultural sector works with living beings; we function with fixed assets that are production-specific. The weather is also an important factor. New risks have appeared these past few years, either involving markets, climate change or biosecurity.
Among these characteristics is the strong capitalization of the agricultural sector, as compared to the income derived from the production. In Canada, $8 in assets are needed to generate $1 in agricultural revenue. In Quebec, according to our research, we estimate that up to $15 in assets may be required to generate $1 of income in some productions.
In addition, another characteristic of the sector is that 67% of young Quebec farmers have taken over existing enterprises, whereas in all economic sectors combined, that proportion is only 10%.
Currently, the financial situation of Canadian farms is good. The debt ratio has remained low for several years. It was 15.4% in 2015. As the representatives of Farm Credit Canada explained in a previous meeting, the low interest rates, the projected revenues and the leeway farms currently have mean that they can manage their financial risks.
Our analysis of the last few years also allowed us to determine that total assets have grown at the same rate as average net income per farm, if you compare 2001 and 2011. However, since the number of farms has decreased, average assets have more than doubled, mainly because of land value. This means that the average acquisition cost has increased by about a million dollars as compared to 2001, for the new generation that started up in 2011, in a context where income has not matched the growth in the total value of assets.
In Quebec, 43% of young farmers who began farming between 2006 and 2011 started their own farm, that is to say almost as many as those who took over their parents' farm. This new generation cannot necessarily count on assets that are already adapted to their market production. This means that the initial investment can be large, even if the farm is small.
We also wanted to look at what was happening among our competitors. As an example, debt has been historically lower in the United States than in Canada. However, as opposed to our situation, the value of assets and the net revenue in the U.S. is declining, while debt is increasing. In France, farm debt is currently about three times higher than in Canada. The crisis in the livestock sector and market prices do not allow producers to cover their production costs.
We can consequently say that the financial situation of Canadian farms is generally good, and revenues are interesting. However, we must remain vigilant. For the young generation of farmers, access to production assets is increasingly difficult. It is this last factor that concerns us.
We asked ourselves other questions in order to further our analysis. We wondered, among other things, why farmers went into debt.
The reply to that question is that several indicators point to agricultural land. When we analyze available data, we see that the value of the land and the long-term liability increase much more rapidly than the value of other assets. Agricultural lands represented 81.5% of agricultural sector assets in Canada in 2015, that is to say 12% more than 15 years ago. That is a very high percentage.
Concerning the reasons behind Canadian farmers' debt, we feel there are several. The main reasons given for purchasing, by 50% and 27% of Quebec farmers respectively, is to ensure the sustainability and succession planning of farms.
By the same token, more than one Quebec farm out of four in a transfer situation diversified by adding a new production, a processing activity or an agro-tourism activity. New farmers have no choice but to incur debt. What is worse is that in almost all of the simulations done by the Union des producteurs agricoles and the Fédération de la relève agricole du Québec, borrowing capacity based on farm revenues and the aid measures that exist, was insufficient. The down payment or donation required are disproportionate. I invite you to consult the brief we presented to the Quebec Minister of Agriculture in October 2015.
Farmers invest to improve their productivity and competitiveness. In fact, several factors are involved in the success of entreprises: adapting to climate change; improving production techniques; managing risks; improving lands; improving animal genetics, and several others.
Producers must also acquire or update assets in order to comply with industry standards, government regulations, and consumer expectations. All of these regulations and measures, in addition to creating an additional workload, often mean an increase in production costs that are not offset by the market, or distribution. This situation requires continuous investments to meet the demands of the market and the state.
As an example, a 2016 Nielsen survey showed that 43% of citizens everywhere in the world think that GMO-free food is very important, but only 33% of them are willing to pay more for GMO-free food products. In short, Canadian farmers work in an extremely fluid environment, where they must invest significantly in order to adapt.
Following these observations, we asked ourselves what could be done to limit debt or to amplify its leverage effect. The first effective action would be to provide increased support for risk management. Currently, for some, the context is not optimal. Supply management is under daily attack, and risk management programs do not adequately meet the sector's needs.
In order to support farmers in the face of these challenges, it is essential that we protect supply management, and review and improve risk management programs. Access to production assets, particularly for the new generation, is another front where action is urgently needed. In this regard the acquisition of agricultural land by investment funds has a significantly adverse effect on the sustainability of our agriculture, because a young farmer's financial capacity cannot compare to that of an investor. The media have reported several examples in Canada of speculation and its effect on the value of land, and the adverse consequences of this speculation.
In Quebec, the transactions of the past few years have been such that we would only need 560 investors like Pangea, the largest among them, to replace the 28,000 farms in the province.
It is imperative that we establish a detailed picture of the situation, and devise a mechanism to follow these transactions; we must also ensure that the provinces protect agricultural land consistently, for instance by urging them to use regulatory tools, and we must put patient capital at the disposal of young farmers.
Other measures need to be considered to help the young generation acquire production assets, in a context where their value is increasingly disconnected from the revenue that can be derived from them. For instance, the small costs of risk management programs increase liquidities and borrowing capacity by eliminating certain expenses, and improving programs would help to increase and stabilize the incomes of young producers.
The Union des producteurs agricoles also believes that it is crucial to support farmers so that they can make the required changes in their business environment. Currently we see that assistance by way of subsidies to acquire assets is evolving and being replaced by loans at preferential rates. It is important that you adequately support the agricultural sector in its attempts to adapt and innovate, through programs to support investment assistance.
Finally, in the majority of cases, the farmer who is leaving production counts on the sale of assets to fund his retirement. That situation can easily be compromised. Aside from increased support for transferors, and implementing the measures presented above, which would reduce debt and facilitate the transfer, further actions could be taken.
For instance, there could be a refundable federal tax credit on the interest paid by the new generation to the vendor in vendor-borrower agreements, or an amendment to the Income Tax Act. In fact, section 84.1 of the act penalizes both the transferors and the buyers, and jeopardizes the survival of some family farms.
In conclusion, the Union des producteurs agricoles feels that the reduction of farm debt has to be approached proactively and not in a reactive fashion. The agricultural sector and the economy need to be supported by a better income safety net, by protecting supply management, through solid risk management programs, measures against the takeover of agricultural lands, and measures to help the new generation acquire the necessary assets. We also need investments in research, in knowledge transfer, in consultant services, subsidies to help farms adapt, and measures to help those who want to transfer production prepare for retirement.
These are the measures that will allow the agricultural sector to adapt to changes in its environment and develop in a sustainable manner, through the work of the new generation. With that type of support, rather than being held back by their liability, agricultural producers will be able to continue using debt as a lever to increase their profitability.
We hope that the advice and recommendations we've provided will be useful to your reflection on farm debt and the measures needed, such as those to ensure the transfer of assets to the next generation.