Agriculture Committee on May 9th, 2017

[The Chair, Liberal, Pat Finnigan]

Good morning. I call this meeting to order.

Please take your seats and we'll get going. We're already short on time.

I'd like to welcome our first group of witnesses. Mr. Marcel Groleau is the chair of the Union des producteurs agricoles du Québec. He is accompanied by Ms. Florence Bouchard-Santerre. We also welcome Ms. Peggy Baillie, executive director of Local Food and Farm Co-ops.

Welcome to you all.

You will each have a short period of four minutes to make your presentation. This will give us more time for questions.

Mr. Groleau, you will have the floor first, for four minutes. You may share your speaking time if you wish.

[Marcel Groleau, Chair, Union des producteurs agricoles]

Good morning, everyone. Thank you for having us.

[The Chair, Liberal, Pat Finnigan]

I'm sorry; you have 10 minutes each. It is the question period that will be four minutes long. You may take up to 10 minutes for your presentation.

[Marcel Groleau]

Fine, thank you.

While I was thanking you, I was thinking about how we are going to do this.

So, good morning to all of you, and without further delay, may I thank you for receiving us and for giving us the opportunity of speaking on the issue of debt.

I am going to ask Ms. Bouchard, who is accompanying me, to summarize the brief we tabled on this topic.

[Florence Bouchard-Santerre, Advisor, Agricultural Research and Policy – Economics, Union des producteurs agricoles]

Good morning.

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.

Thank you.

[The Chair, Liberal, Pat Finnigan]

Thank you, Ms. Bouchard-Santerre.

I now give the floor to Ms. Peggy Baillie, from the Local Food and Farm Co-ops.

You have 10 minutes.

[Peggy Baillie, Executive Director, Local Food and Farm Co-ops]

Hello, bonjour, aaniin. Thank you for inviting me to speak with you today on behalf of the co-operative food sector. This is my first opportunity to speak to any federal committee, so I am truly honoured.

In coming here today, I would like to explain to you, from the co-operative food and farming sector, the state of agriculture and how it is translating into the impact on the co-op sector as a whole. Linked to that, I would like to share with you how co-operatives are addressing challenges raised by agricultural debt through co-operation.

Local Food and Farm Co-ops is a second-tier co-operative that supports the growth and development of co-operatives with the shared purpose to increase production, sale, and marketing of local foods. We work with more than 90 businesses, from farms, to stores, distributors, and processors. All are unique, but all share the common purpose to support local food producers.

As a result, my work in the food and agriculture sector has been mainly involved in the subsector of crops produced for human consumption. It is from this perspective that I will speak to you today.

As you well know, there's been an increasing demand for regionally produced foods across North America in the last 10 years. This increase has been confirmed as not only a trend in consumer spending, but also a change in consumer patterns as people become more aware of the impact of food on the health of themselves, their families, and the planet.

In response to this increasing consumer demand, we're seeing farm start-ups and transitions to direct marketing of food for human consumption, which is a positive reflection of growth in the ag sector. However, there are a couple of key challenges that exist, which put these new businesses at risk.

We are seeing many new entrants starting up these farms coming from non-farming backgrounds, many coming from an urban upbringing, with non-related post-secondary degrees and pre-existing debt. While we encourage the entrepreneurship of these new farmers, they come to the sector at a disadvantage due to a lack of business management knowledge and weak financial start-up as they purchase and develop their farm enterprises.

The second key challenge is that access to capital and financing for these new entrants can be very challenging or impossible due to risk assessments of non-commodity-based food and agriculture ventures. New models of agriculture are not tracked and valued in the same way as commodity markets, leaving them to be assessed as high risk. Therefore, new entrants are forced to pay large down payments on land with high values and use high-interest financial vehicles, such as credit cards and lenders, to finance their expansion. This lack of access is compounded by pre-existing debt. In a sector with small margins, this creates a challenging environment for sustainable business growth and development.

I think it's also important to note that these new entrants are not always accessing the business start-up resources that are available to them. This includes business guidance and advice, management training, advisers, business mentorship, and programs. As agriculture is a unique field of work with specific risks and constraints, a lack of knowledge around best management practices puts these new operations at risk.

Unless new entrants are coming into the sector with pre-existing business management knowledge, there is an increased likelihood of developing financial management practices that may not be in the best long-term interest of the farm, including acquiring debt.

The third key challenge is that the middle infrastructure that supported food-producing farmers in previous decades has degraded due to the import-export-focused food industry. This infrastructure included distribution channels, wholesale markets, and value-added processing. Since this middle infrastructure isn't present, these enterprising farms are forced to develop these channels, while also producing food, which can result in the farm business being spread thin as they try to find the appropriate market channels for the volume of food that they need to sell to be at a scale that is financially sustainable.

Therefore, pre-existing debt, compounded with a lack of access to financial capital and middle-market infrastructure, creates an environment for risk for new farmers and expanding entrants into the food and value-added agriculture sector.

How does this relate to co-operatives?

Co-operatives are developing across the country to strengthen these farm enterprises while addressing these three factors: lack of knowledge, lack of finances, and lack of infrastructure. Food and farm co-operatives are developing at such a rapid rate that the subsector is the fastest growing co-operative sector in the country.

Co-operatives are playing an important role as they allow members to pool resources to have accumulated capital, including social and financial, for shared value. This can translate into the development of shared infrastructures such as storage and processing, land ownership as we're seeing in farm worker co-operatives, and market, such as retail and distribution co-operatives. These new co-ops are responding to community needs of farmers, and are doing so in a structure that reduces risks and increases long-term sustainability of the business models, as co-ops have a higher rate of success compared to any other business model.

The development of co-operatives allows farmers to avoid taking on debt to service these business expansion needs of their businesses by pooling resources. An example of this is the development of a new grain storage and handling co-operative in the Algoma region of Ontario, where farmers are jointly investing in storage infrastructure that will meet all of their needs at an economy of scale rather than individually purchasing small-scale, high-cost infrastructure for their own farms. By jointly investing, they have the scale-appropriate infrastructure that will allow the regional sector to expand; whereas, should they work independently, the regional economic impact may not be as great purely due to the fact that the farms have to access debt to finance their expansion, and that return on investment would be over a longer period.

Food and agriculture sectors across Canada are also developing financial co-operatives to create pool loans specifically designed to meet the needs of food and farm enterprises to address those who have a lack of access to capital. FarmWorks Investment Co-op in Nova Scotia is an investment vehicle for Nova Scotians to invest in regional food enterprises through loans that are disbursed by FarmWorks. In five years FarmWorks has disbursed $1.4 million to over 60 businesses at favourable interest rates.

The value of financial co-operatives in rural communities is important as they may be serving not only as an economic driver, but also as a moderately priced lending mechanism. As financial co-operatives are not profit-driven as banks or investors, they may be able to offer lower interest rates than other agencies. For farm and food enterprises, this is important.

Another advantage that co-operatives have in supporting these new enterprises is the embedded philosophy to educate their members. Through working within a co-operative, farmers are able to learn from each other through business learning initiatives. This allows them to learn as many businesses together, reducing isolation and improving regional sector capacity.

As these co-operatives are developing to meet the needs of their communities, it requires the tenacity of their members to overcome the barriers to establishment. Co-operatives still face many barriers through the life cycle due to a lack of common understanding of the co-operative model. This creates challenges in incorporation, reporting, government relations, and access to matching capital.

We have seen through the co-operatives that have been developing over the last 10 years, as well as those long-standing co-operatives that have continued to serve the sector for over 50 years, such as Federated, FS, Arctic Co-ops, and many more, that co-operatives can play an important role in supporting farm enterprises to store, process, market, and finance their businesses. Without the appropriate supports, co-operatives are less likely to develop. In the province of Quebec, we are seeing a strong growth of food and agricultural co-operatives due to strong support by the provincial government as a means to increase economic sector growth. Through appropriate supports within government and regional development agencies, we can encourage the growth of co-operatives to meet the needs of communities and farmers.

Looking forward, to support the financially sustainable start-up and expansion of farm enterprises, co-operatives can play an important role in increasing community wealth, mitigating risk, and increasing economic stimulation through shared assets. If we look at how to increase the knowledge of the co-operative model within regional economic development agencies and to support the development of co-operatives through programs, supports, and funding, we will see an increase in these initiatives that will improve the well-being of communities across Canada.

I look forward to any questions from the committee. Thank you. Merci.Meegwetch.

[The Chair, Liberal, Pat Finnigan]

Thank you, Ms. Baillie.

I want to welcome two committee members, Mr. Eyking, who's a past chair, and Mr. Casey from P.E.I.

We'll start the round of questioning.

Mr. Gourde, you have four minutes.

We'll go with four minutes.

[Jacques Gourde, Conservative, Lévis—Lotbinière, QC]

Thank you, Mr. Chair,

Let's get straight to the point. What factors could influence farm debt? For instance, in Quebec we often hear about the fact that the cost of land has increased tremendously, but are there also other factors that may have an impact?

[Marcel Groleau]

Equipment now costs much more than before. Equipment has to be updated, and robotization and seed also cost more. There has been a decline in competition among the main seed providers. I would say that in the past 10 years or so, the cost of seed has more than doubled. The cost of fertilizer fluctuates. The cost of potash had increased considerably, but that has come back to more normal levels. Those are the main factors.

As mentioned several times in our brief, the current value of agricultural lands has an important impact on the debt level of farms that are going through consolidation, or just getting started. Our colleague also explained that. The value of land has an impact, and is in fact the most important factor.

[Jacques Gourde, Conservative, Lévis—Lotbinière, QC]

I think that in the case of a farm transfer,taxation also plays a major role.

[Marcel Groleau]

Yes.

[Jacques Gourde, Conservative, Lévis—Lotbinière, QC]

The transferor often has to cede part of his land, whether the buyer is related to him or not. When farm assets are being sold separately, the farmer's family often chooses to try to obtain a maximum amount from the sale of his lands. However, when the farmer is transferring the farm to a family member who wants to farm the land, part of it has to be ceded. Tax that must be paid on the part that is ceded.

Can something be done about that?

[Marcel Groleau]

I believe a bill was introduced by the NDP. Its objective was to see to it that the measures that apply to vendors related to buyers would not disadvantage the family, as compared to a situation where the farm is being sold to a stranger. Currently, the thinking is that when you donate something to a family member, the purpose of that donation—perhaps, I don't know for sure—is to try to make things easier for the buyer; whereas if you give a stranger a gift, it is certainly not to provide an advantage to that person, since he or she is not a family member.

Perhaps those tax measures could be amended, and we would improve the opportunities for intergenerational transfers.

[Jacques Gourde, Conservative, Lévis—Lotbinière, QC]

You are raising the issue of dividends and capital gains. When the farm is transferred to a family member, there is a dividend, but would a decrease in capital gains be beneficial? Would we eliminate the first part of the problem?

[Marcel Groleau]

Regarding a decrease in capital gains, no. Exemptions for capital gains are important in the case of a transfer because as you heard, you need $8 in assets in Canada to generate $1 of revenue. In certain cases in Quebec, it even goes up to $15 in assets for $1 in revenue. If you eliminate the capital gains exemptions, you will complicate these intergenerational transactions a great deal, and even those between parties that are not related.

[The Chair, Liberal, Pat Finnigan]

You have one second left.

We will hear the next speaker.

Mr. Breton, you have four minutes.

[Pierre Breton, Liberal, Shefford, QC]

Thank you, Mr. Chair.

I thank the witnesses for being here today. Their testimony is greatly appreciated.

If we consider the average farm debt between 2011 and 2015, we see that there was a significant increase both in Quebec and in Canada.

However, the value of assets also increased significantly. A little earlier you were talking about land values. The representatives of Farm Credit Canada who testified here also spoke of an interesting increase in farming incomes. It seems that everything is going rather well in the agricultural milieu and that the future looks good. The agricultural sector will in fact be one of the five pillars of the economy in the course of the next years.

Of course risk is always inherent in debt. Interest rates are low right now and this encourages investment. That is a good thing, because we need it. We know that farms want to be more productive, and there is a lot of opportunity.

Did you analyze interest rates? What could protect at-risk agricultural producers? Low interest rates are a good advantage, but it wouldn't take much for things to be upended.

Mr. Groleau, I would like to hear what you have to say. Ms. Baillie, I would also like to hear your thoughts afterwards.

[Marcel Groleau]

It would not take a very high increase in interest rates for many farms to find themselves in a difficult situation. This would particularly affect the businesses that started up in the past few years, because their debt level is normally higher than that of businesses that started up 20 or 25 years ago.

We have not done any studies to determine what type of interest rate increase—one, two or three percentage points—would tip the balance. Every farm's situation is different. It is interesting to note that the value of agricultural assets has increased, like their size. Assets leverage borrowing capacity, but the capacity for reimbursement is always the fundamental element in the profitability of a business.

Often the young people who start up a farm do not have assets to allow them to acquire credit, and it is difficult for them. An enterprise that is a going concern and has accumulated assets has easier access to credit, but that is more difficult for someone who does not have assets. That is why we speak of “patient capital”. If we want the new generation of farmers to continue farming, we have to find a way of providing patient capital to them so that they have a chance to constitute farm assets.

It's a cyclical situation. In 1969, my father started a dairy cattle farm. He had to decide whether to stop or keep going. He obtained a 39-year loan from the Quebec Farm Credit Bureau, at a guaranteed interest rate of 2%. That was patient capital. This is what allowed Quebec agriculture to take off in the 1970s. The mechanisms they had at the time worked well.

[Pierre Breton, Liberal, Shefford, QC]

Do you make this suggestion, Mr. Groleau?

[Marcel Groleau]

I often say that, for young people, having patient capital is really the key to launching a farming business.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. Groleau.

Thank you, Mr. Breton.

Ms. Brosseau, you have four minutes.

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

Thank you, Mr. Chair.

I want to thank the witnesses for participating in this important study.

Again, we're talking about the bill tabled by my colleague, Guy Caron. The bill was important and would have made it easier to transfer family farms. I want to point out that the Liberal members on the Standing Committee on Agriculture and Agri-Food supported this bill. However, sadly, it didn't even reach the stage of an extensive study in committee.

I now want to address a current topic. We've been talking a great deal these days about the Pangea company, whose business model consists of buying farmland and working in partnership with producers to share assets and expand production. Pangea's goal is to create joint ventures, of which 51% of the shares would be issued to farmers and 49% to Pangea.

What do you think of Pangea's business model? Is the model positive, or does it undermine the transfer of farmland?

[Marcel Groleau]

It's not an agricultural development model. It's a business development model. Franchise owners, meaning producers who acquire a franchise from Pangea, obtain 51% of the shares of a company whose destiny they don't control. In Quebec, the producers must own 51% of the shares, because their companies can therefore qualify individually for La Financière agricole du Québec programs. If the company owned only 49% of the shares and Pangea owned 51%, Pangea would be considered an aggregate company, meaning a group of companies. The Financière agricole programs would then be less beneficial.

The business model is built for people to derive the maximum benefit. However, based on this model, producers really have no control over the choices and destiny of their company. That's why I'm talking about the “franchising” of the farming business. We certainly don't want to see this model develop. Also, the model is based only on grain production. There's no livestock, because people want as few assets as possible. They don't want barns. The model won't help our rural regions develop.

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

Could the rules be changed to better regulate transactions and land allocation?