Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 5 - Evidence
OTTAWA, Tuesday, April 24, 2001
The Standing Senate Committee on Agriculture and Forestry met this day at 7:02 p.m. to examine international trade in agricultural and agri-food products, and short-term and long-term measures for the health of the agricultural and the agri-food industry in all regions of Canada.
Senator Leonard J. Gustafson (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, I see a quorum.
I apologize to the witnesses for the long wait. We appreciate your patience. Please proceed.
Mr. John Ryan, President, Chief Executive Officer, Farm Credit Corporation: Honourable senators, we are very pleased to be here. Despite the delays, we appreciate any opportunity to appear before the Senate.
I will give an overview to address a couple of key areas - who we are and what we do today, as well as what we are seeing in the agriculture sector overall, insofar as the health of the economy is concerned, then we will answer your questions.
The Farm Credit Corporation is a national farm credit organization, 100-per-cent focused on agriculture. We are owned by the federal government, as you are well aware. We have been around since 1959 so we have had opportunities to support agriculture for more than 40 years. We have seen the ups and downs and the cycles. We have some 44,000 customers across the country. We have a network of 100 field offices and some 900 staff employed throughout the country.
The majority of our staff members were born and raised on the farm. Many of them remain active in farming, either on their own or in partnership with a family members. I continually hear positive feedback from our clientele about the way their account managers do know about agriculture.
As an organization, we are customer-focused. Our goal is to build long-term relationships. I also hear positive feedback about how account managers, in the vast majority of cases, remain in their particular field offices for years and years. That means individual customers need not repeatedly apprise new account managers on what is happening in their areas.
In the past, the question has been raised: Is there a need for a special federal Crown corporation focused on agriculture? I respond to that question in several ways: First, we were established in 1959 by the federal government to provide a consistent source of financing, in good times and bad, throughout all economic cycles. That need was relevant at the time and it remains so today.
Second, we are the largest agricultural term-lender in Canada, so we act as somewhat of a stabilizing force for the industry as a whole. That role has been important in the past. As we look at the changes in the financial institutions today, that stability is particularly relevant for rural Canada.
Third, we have a track record of serving as a catalyst, attracting other financial institutions to invest in agriculture. We spend a lot of time developing new products and services. Over the last few years, we have seen other organizations copying some features from our product line. We see that as flattering in the sense that we must be developing the right products and services to meet the needs of our customers.
Some people may not be aware of this but Farm Credit Corporation does not rely on annual appropriations from government. The federal government did provide us with a capital base some years back, but we do not get annual appropriations now. We operate on a self-sustaining basis. In addition, we borrow all our money on the open market through our treasury function. Our profits are re-invested into agriculture.
The Government of Canada has given us a mission to enhance rural Canada by providing specialized financial services to the family farm and to small- to medium-sized agri-businesses. We believe that the more we invest in agriculture, the more economic benefits we can contribute to rural Canada.
In terms of the size of FCC, I want to talk about portfolio growth. Despite the serious problems seen in certain sectors recently, the Canadian agriculture industry continues to grow. If you look at the last number of years, Canadian agriculture has been a success story, overall.
In the material we handed out, there are some charts which show that six years ago, in 1995, we had a portfolio of about $3.5 billion. Today that has almost doubled to $6.8 billion at year-end March 31, 2001. In 1995, we had 24,000 customers; today we have 44,000 customers. We are seeing considerable growth there.
Last year, we authorized $1.7 billion in new financing to the agricultural community. That is a record for the corporation and approximately $100 million higher than the previous year. Each year we continue to grow. We see that $1.7 billion in new authorization as a true investment in agriculture.
Statistics Canada`s latest figures are for 1999, and they show total debt outstanding in the farm community at $35.8 billion. Farm Credit Corporation carries about 17 per cent of that overall debt. That includes short- and long-term financing. You can take away one slice because we do not do short-term or operating credit. Just looking at long-term financing, then, FCC carries about 31 per cent of the overall debt in agriculture. If the Farm Credit Corporation did not exist, who would be providing that financing? If there is a gap in access to capital today, particularly in rural Canada, that gap would be considerably higher without Farm Credit's perspective.
In terms of a sectoral overview, our corporation is involved in all sectors of the agriculture industry. Perhaps in the question time we can get into more details about that involvement.
We spend a lot of time these days looking for the true needs of agriculture and asking what role FCC should be playing. As we develop new products and services, the best approach is to listen carefully to our individual clients and to our industry group. We work with our customers and with industry to help them identify their own issues and challenges, then we try to provide products and services to assist with those individual challenges - or perhaps more appropriately, opportunities.
I will give some examples of how farmers have helped in our product development. We had discussions with the Canadian Federation of Agriculture, with the Canadian Young Farmers Forum and with the UPA in Quebec. Their messages were loud, clear and consistent: Young and developing farmers need access to more financing options. In response, we introduced the AgriStart family of loans back in 1998. That program provides flexible payment options to help young farm families build successful operations. As a result, we authorized in excess of 1,300 loans totalling more than $134 million.
Last March, we introduced another innovative program called AgriSuccess in partnership with seven private- and public-sector organizations to provide a series of seminars and some on-line information to help the agriculture community with long-term business planning. We are acting as a catalyst because we need to increase access to business planning services for the agriculture community. We look at it from a small business perspective and say it represents many opportunities, but we do not see the same opportunities to put forward in order to help our agriculture community in terms of business planning services. It would be beneficial for the beginning or developing farmer, but it would also help with the major issue of the intergenerational transfer of the farm.
We introduced several products over the last few years. One was the Plant Now-Pay Later program, which came as a result of an approach by the Ontario fruit growers. They asked us to look at financing that would help them expand and upgrade their orchards by giving them a period of time to expand the orchards to achieve a cash flow. We put the loans in place and allowed them to upgrade their orchards. They start making payments three to five years later when they have a cash flow because of the investment in the orchards. In simple terms, we are matching cash flow with scheduled terms of repayment, and that has gone well.
Another good sector-specific project that we launched is the Flexi-Hog Loan. We had a customer in Brandon, Manitoba, who asked for a product that recognizes cycles, so when the cycle is in a downturn and profitability and prices are not there, payments do not have to be made. We have developed a loan program whereby customers decide when they might take postponements of payments, for example, at the bottom of the cycle. The loans are made over a 15-year period, but over that period the customer decides when to postpone the payments. Postponements can be made for 12 months at a time, and at three different times.
Those are some illustrations of our talking to customers, understanding their needs and then adjusting our programs and services to fit those needs.
In Quebec, very recently, the provincial government had a subsidy program to help producers adapt manure-handling facilities and improve current environmental standards. We designed a program called Enviro-Loan to help producers make the upgrades and pay off the loan once they receive the subsidy from the government. However, the government would provide the subsidy only after the project was complete, so someone had to supply the bridge financing for it. We introduced a bridge finance program, and if there are still dollars left outstanding after the subsidy is received, we extend an amortization period to give the producers five to seven years to pay off the balance. We started out in Quebec with the Enviro-Loan and have since introduced it to other parts of the country.
Another area in which the corporation has been more active in the last few years is the agribusiness, or the value-added side of things. Our belief is that the future of farming is directly linked to the strength of farm-related businesses on the input and output side of primary production. We have been lending in that field since 1996, and presently have approximately 1,000 loans or customers in the farm-related business with a portfolio of about $400 million. More and more, the line between primary production and value-added is becoming blurred, and we look at it from a continuum perspective when we think about farming and the value-added side. The more we can do to support the value-added side, the greater the strength that will provide to the primary producers by helping on the input side, and creating market opportunities for their products on the output side.
By focussing on the agribusiness side, we feel we are actually strengthening rural Canada. If agribusinesses are developing in rural Canada, there is job creation, and from job creation, there is economic growth over all.
That gives you an outline of the products, services and some of the changes taking place. Next I will provide you with highlights on how our portfolio is addressing some of the problems in the agriculture industry. On a national basis, the portfolio has not changed much, year over year. For example, on March 31, 2000, we had $35 million in arrears, involving 2,600 customers. On March 31, 2001, we had $35.7 million, involving 2,300 customers. In that area we are basically holding our own. There has been no major change one year over the other.
You should not automatically conclude that arrears are painting a particular picture because arrears are somewhat of a lagging indicater. Things will happen, but it may be some time before the account would show up in arrears. Our customers have been working extremely hard to keep their payments current, and it is a testimony to their fortitude.
In terms of where the difficulties are, I will turn my attention to the cash crop sector. Those arrears are actually down slightly there also. Last year we had $22 million in arrears in the cash crop sector, that is, in grains, oil seeds, fruit and vegetables. As of March 31 this year, that $22 million has become $21 million, again, just about even year over year. If you look at the cash crop sectors in Manitoba and Saskatchewan, primarily on the grain side, they have decreased slightly from $9 million last year to $8 million this year.
I want to draw some conclusions from the point of view of arrears. Approximately 40 per cent of our portfolio is in the cash crop sector, but about 60 per cent of the arrears, the $20 million off the $35 million, is in cash crops. If we want to draw a conclusion from the arrears, the problems are in the cash crop sector. The hog sector, which had problems a few years ago, has rebounded nicely, and our arrears actually dropped from $2.2 million last year to $1.4 million this year.
Earlier I said that the arrears are a lagging indicater and do not necessarily show a full picture. We do work closely with Farm Debt Mediation Services. Recently we were in contact with them with respect to their applications over the last year.Farm Debt Mediation Services received a total of 1,393 applications this past fiscal year in comparison to 1,369 the year before. We are seeing an increase there. Quebec was noted as having an increase largely due to the pressures in the maple syrup industry. Saskatchewan continues to receive the largest number of applications, almost exclusively in the grains sector.
With respect to bankruptcies, last year there were 213 versus 243 farm bankruptcies in 1999, which is not a very heavy indicater because, in our experience, most farmers do not go bankrupt. They do certain things long before they get to bankruptcy, either moving out of farming altogether or selling assets, but they do not go through the official route of declaring bankruptcy. I do not see that as a very strong indicater overall.
With respect to the arrears within the corporation, it is not my intention to leave you with the impression that all is well in the agriculture industry. There are pressures and problems, but we do not see a universal problem in all sectors of the agriculture industry. In some cases the problems are severe, and it takes a lot of work to bring producers through some very difficult times. Producers struggle with prolonged low commodity prices, high input costs and, in some cases, trade bans and barriers, particularly in the Province of Prince Edward Island.
As the federal crown corporation, we make every effort to show flexibility and to work with producers through market downturns and climatic disasters. When times are tough, it is important to demonstrate our long-term commitment to industry. We have taken a consistent, simple approach in addressing the situation. We spend time with our customers to hear first-hand from them about the problems, what they anticipate in the future and what role we can play to overcome those problems. For example, last fall we worked with farmers in southern Alberta to help them through their severe drought conditions. Last month, we contacted our customers in the potato industry in Prince Edward Island to indicate that we understand the problem and are prepared to talk about restructuring payments to provide relief until we see, on a long-term basis, what the outcomes might be.
In summary, our goal at Farm Credit is to act quickly, to look at the challenges and then work with individual customers on a customer-by-customer basis to see what the outcome might be, or what we may possibly do to help them through their individual difficulty.
Perhaps to put things in perspective, over the course of the last year we authorized in excess of 600 postponements to our customers. That is, postponing payments until a later date. Essentially, we lift the payments for a period of time that could be anywhere from three to six to twelve months and put those at the end of the term.
Mr. Chairman, I would conclude my presentation by making brief remarks on some changes being proposed to the Farm Credit Corporation Act. As you are aware, we tabled new legislation on April 5. After it works its way through the House and committees, we expect to be back here to talk about that new legislation and the benefits that will accrue to agriculture. I will not get into a lot of detail now, but we are seeking those amendments to ensure that we are in a position to have that commitment to serve agriculture in the long term. Any producer will tell you that the marketplace has changed dramatically over the course of the last several years and will continue to do so. The last time we had a change in our act was 1993, which is approximately eight years ago.
The corporation's focus will continue to be on the primary producer, and that is clearly spelled out in the proposed new legislation. We do feel that the new legislation will position us to have a greater contribution to grow agriculture overall and to help producers with a variety of options, including what we can do in terms of new products and services from the start-up stage all the way through to completion and retirement. In addition, we fully expect the new legislation will help us promote further investment in rural Canada.
We will be coming back later to provide you with more details on the new legislation, but I just touched on it here this evening in the event that there were questions.
Senator Sparrow: Mr. Ryan, I have a number of questions. I would like to know how much actual agricultural land you hold, and how that has changed in a given period of time.
As well, how do you establish interest rates? On what basis do you establish them? Do you charge more when the industry is at high risk, as the banking industry does? When there is more risk, they raise the interest rate. Do you do that, and how much does that vary? Do you have a variable interest rate at the beginning so that some farmers are charged more than others? On what basis do you do that?
Do you have a mission statement as such, or is it contained only in the legislation? Do you have a mission statement that says what you will do, and has that changed since 1959? I suppose at some point the federal government put in money to cover losses and so on, and the mission statement must have changed whereby they told you that you had to operate on your own without federal assistance. I would be interested in knowing when that change took place.
If the mission statement is that there is no government involvement as such financially, then how are you different from any other lending institution such as credit unions? What do you offer that other lending institutions do not? Is your loss more or less than that of other private lending institutions to the agricultural industry?
We do get complaints - and we always will - of the Farm Credit Corporation having turned the screws on the borrowers to keep their arrears low. I appreciate that someone says the agricultural industry is in pretty good shape because our arrears have not increased or they stay the same. Well, that can be for several reasons. One is that the economic situation is good in the agricultural industry, and another is that the screws are tightened. The economic situation, certainly in some facets of agriculture, is that some have been suffering and under great stress. It seems unusual that the low amount of arrears is an indicator of something other than that the farmers are paying back their loans.
Mr. Ryan: You have a number of questions there, and I will try to handle them one at a time.
In terms of lands held, at one time we peaked at about 1.5 million acres, if I am not mistaken. We are down to about 120,000 acres now. Over the course of the years it has continued downward. The vast majority of that land has been returned to the original owners. That is not so in all cases, but in the majority of cases the original owners have been able to buy back the property.
In terms of interest rates and how we set them, basically we have a treasury operation that borrows the money in the open market, so those are our costs. To that, we add a mark-up to cover our overall costs and a provision for losses sufficient for profits so that we can reinvest back in agriculture and finance our growth, and that is what we charge to our clients. It is truly a function of what our costs are to borrow the money, and what our costs are to run the overall operation.
Senator Oliver: What is your standard mark-up?
Mr. Ryan: Today it would be about 2.30 to 2.40 over the cost of the funds.
Senator Oliver: What is the cost of funds today? Five and a half per cent?
Mr. Ryan: It would be about 5 per cent versus 5.5, or in that range. That puts us into the 7.5 or 8 per cent range.
One of your questions was whether we charge an additional, higher rate for risk. We do very clearly price according to risk. If there is a higher risk proposal, we charge a higher interest rate. If it is a lower risk proposal, we charge a lower interest rate.
One of your questions related to what the corporation is trying to achieve. Basically, it is self-sustainability. The corporation is growing its portfolio by about $600 million a year on a net basis. We have debt-to-equity ratios that would suggest - not suggest, they are legislated - that we have a debt-to-equity ratio of 12 to one. That means we have to generate profits in the range of $50 to $60 million a year to be able to finance our growth on a go-forward basis.
To put it in perspective in relation to other financial institutions, we are generating a return on equity of somewhere between 8 per cent and 10 per cent before tax. The other financial institutions are generating 16 to 22 per cent after tax. Our goal is clearly not to maximize profits but to be self-sustainable.
Going back to the senator's comments earlier in terms of the mission of the corporation, when we received the capital infusion from the federal government in 1993 to the tune of about $900 million, the act clearly stated that we should move forward on a full cost-recovery basis. I do not think that necessarily means we could never have a loss, but more that, intentionally, we needed to be going into the project looking at eventually being self-sustainable as a corporation overall. Do we have variable rate financing? Yes, we offer interest rates that are fixed at 1 per cent, 2 per cent, 3 per cent and so on. We can also offer interest rates based on a variable rate.
In terms of the mission itself, it changed within the corporation in 1959. I would like to have Ms Neveu comment on the earlier years. I can relate to the last three and a half years since I have been with the corporation, but it would not be fair for me to comment on the years earlier.
Ms Louise Neveu, Executive Vice-President, Chief Knowledge Officer, Farm Credit Corporation: I would suggest that even though I was there in 1959,the premise of the Farm Credit Corporation has not changed in all those years. The words have changed, and some additions have been made in terms of our expansion. It is usually from the preamble to our legislation that we draw our mandate. The mission is for us to be devoted strictly to agriculture. Words have been added to augment our role in rural Canada, but basically it has always been that this Farm Credit Corporation exists to serve primary production.
Mr. Ryan: In terms of the government involvement on an annual basis, we do submit a corporate plan to our minister that is approved all the way through the process and tabled. In that corporate plan we outline what the future direction of the corporation will be. At that time, or any time in between, our board of directors, which is appointed or nominated by the federal government, has an opportunity to say that we should be shifting in this direction or in that direction.
I have not personally seen significant changes over the last three and a half years that I have been there. As Ms Neveu indicated, the mandate has been consistent for some time in terms of enhancing rural Canada by providing specialized, personalized financial services to the agriculture community.
In terms of the question about the level of arrears, everything is fine because the economy is great. We have not put the screws to our customers. I was trying to illustrate that one area we look at in terms of arrears is that the whole industry is not having problems. If we look at it from the points of view of the dairy, poultry hog or beef industry, all are significant components of our portfolio. The health of those industries is strong these days. If we have problems, it would be in the crop sectors, as I indicated earlier. Twenty million of our $35 million in arrears is in the crop area.
In giving you examples of what we do in terms of helping our customers, we are sincere. We do want to sit with them and help them with their problems. I will be honest: one of the worst things that we could do would be to ignore the fact that arrears are building, and permit our customers to reach a level from which they could not recover. We want to try to work with them, but at the end of the day we would not be doing them any favours by ignoring the arrears and assuming that it would all get better.
It is important for us to become involved in the early stage and try on work through whatever particular problem the individual producer is having as compared to being out to collect money for the sake of collecting money. Our only focus is on agriculture. We have been in that field for over 40 years. We clearly feel comfortable stating to you that we are into this business for the long haul.
Those are the key points that I made note of during your questions. If I have missed anything -
Senator Oliver: Could you tell me a bit about your security in terms of personal guarantees, mortgages and other security? What is your standard security and how often do you foreclose?
Ms Neveu: The security is definitely mostly in mortgages. Those have been our bread and butter. We went into personal property loans only after 1993. Thus, we have a significant number today that would be more personal security, but it would probably be in the neighbourhood of a 70-30 split, mortgages to personal property, in terms of the types of security.
Recoveries are very rare for us as an organization. In most instances, an accounting difficulty will be assigned to specialized people in the company. They will usually sit down and try to work out a plan with the customer so that they can figure out if assets could be sold. They would attempt to find a way to manage the problem without having to go through a legal process.
We do not look at our recovery actions as being indicative necessarily of problems. It is only in the extreme cases that we will have actual legal recoveries where we will have to sell the properties.
Senator Oliver: You take assignments of accounts receivable and do personal guarantees. What other securities do you take for the advancement of a $500,000 loan?
Mr. Ryan: It depends on what we are financing. Generally speaking, it would be the land, buildings and possibly equipment, for financing equipment. We would be unlikely to take receivables on inventory. That is generally assigned to the banks for operating credits.
Ms Neveu: We take chattels.
Senator Oliver: Are you a lender of first, last or middle resort? Where are you?
Mr. Ryan: We are not a lender of last resort. We were a lender of last resort prior to the 1993 legislation. A conscious decision was made at that time not to be a lender of last resort on a go-forward basis.
I do not want to call us a lender of first resort. I know that we are not a lender of last resort. We tell a client what we have to offer, and they must make the decision.
We do not offer subsidized rates. From the perspective of other financial institutions, you would likely see our interest rates from five-and-a-half to 10 basis points, as high or higher than other financial institutions.
Senator Oliver: Neither of you has said anything about personal guarantees. If a husband/wife farm were to bor row $500,000, do you insist on taking a personal guarantee from them for the entire amount?
Mr. Ryan: If it is on a personal basis, and we have their name, we have their personal covenant.
Senator Oliver: As a corporation, the husband and wife are the president and vice-president. Must they sign a personal guarantee for the corporate loan?
Mr. Ryan: It would be unlikely that they would sign a full personal guarantee. We would review it and determine the value of the prime security. If there is a shortfall in the prime security, if we felt that from their perspective that they were light on equity, we might require a personal guarantee. I would think - and correct me if I am wrong - that it would be very unlikely that we would be looking for full personal guarantees.
Ms Neveu: In our primary production, what we call "farm financing," which is basically our traditional lending, it would be very rare. In agri-business, in the value-added sector, it would be much more common.
Senator Wiebe: I would take this opportunity to welcome you to our committee tonight. I sincerely apologize for having invited you to appear before us and then have you wait one hour and a half. I hope that it never happens again. I wish to assure you that I will certainly be raising that with the leadership in the Senate tomorrow. I would like to assure you that the fact that you were required to wait was no fault of any member or staff of this committee.
Let me begin by congratulating the Farm Credit Corporation for the leadership that it has shown in the farm lending business throughout this country. Your report certainly indicates that. I was pleased to hear of the ability of the Farm Credit Corporation to adjust programs to fit the needs. I have a number of questions, but I would like to ask them individually, if I could.
When asking farmers to adjust to the critical situation in which they find themselves, I have concern with your request that they go into other areas of production. This would be a tremendous leap of faith by some farmers because of their lack of experience, age and that sort of thing. The flexibility in loans by FCC is certainly commendable in your attempt to help farmers make that leap of faith.
Land is not such the tremendous capital investment today that it was years ago. The largest capital investment now for farmers seems to be equipment and buildings. It is my understanding that the Farm Credit Corporation does make loans available to individual farmers to club together and buy a combine, for example. Four farmers could share the cost of a $250,000 combine harvester.
How receptive have farmers been to that program? What kind of success rate are you seeing? Farmers of my age have a tendency to be far too independent.We want our own combines, and we want to get the crop off when we decide to do it. I am hoping that our younger farmers are not tied into that sentiment. Are they more willing to share the capital costs?
Ms Neveu: Senator, I think you are referring to what used to be called the Farm Syndicate Loan Act. Over the years, that program actually had a very low take-up rate. It was rare to find groups of farmers who would work together. In the latter years of that act, we found that three or four family members, who would probably have naturally borrowed together, would come forward. The program was never very successful, no matter how well it was promoted.
Senator Wiebe: Do you hear requests for that program now?
Ms Neveu: No. We can encourage and try to persuade, but I do not think the psyche has changed dramatically since you started farming. If I might offer my opinion, it may be worse today because land holdings are far larger in many instances. There is a great hesitation to put one another first or second, or perhaps last if it rains on your scheduled day. Farmers still want to own their own machinery and set their own timing.
We have had projects around custom operators and a few farmers will book for those custom operations. We anticipated more dramatic response, but there has been little increase.
Senator Wiebe: I am rather sorry to hear that. We need to search for solutions and we can certainly cut capital costs down in that area. We all know what the problems are. I would like to see more emphasis on solutions to the current problems.
Do you have access to research people who can suggest new areas or explore the viability of new ventures for the FCC from ideas that farmers may - I do not want to use the term "dream up" but which farmers may envision?
Mr. Ryan: We have research in a couple of different areas. In the corporate office, the "new product development" group has sole responsibility for working on and developing new products. We tend to rely heavily on input from our partnerships or working relationships with the industry. We ask about their most current needs and how we can adjust our programs or services to assist.
The Canadian Federation of Agriculture spent some time with us before we developed the AgriStart loan program. Their members provided feedback on some of our proposed initiatives and told us that our ideas were right but could be tweaked here and there to make the program more receptive to producer groups. Individual customers also give us input. It is rare today to develop products or services without spending a lot of time with the appropriate industry groups.
We also have the advantage of employing individuals in our field offices across the country who are living and breathing agriculture every day. They constantly give us new ideas. I made reference earlier to AgriStart, to the Plant Now - Pay Later program and to Flexi-Hog. All those programs are examples of how we continue to make new tools available to producers and agri-businesses.
Senator Wiebe: I want to go back to the idea of high capital costs. Suppose governments were to encourage individual farmers on small, uneconomical units to work together, either through the Cooperatives Act or the Corporations Act, to devise a system of farming together to cut down on capital costs while still providing a good living for each family involved. Would the current farm credit legislation need to be changed to allow FCC to lend in such a situation?
Mr. Ryan: I do not believe so. If we are talking about primary producers, then we have the capacity under today's act to do that. If we are talking about agri-business or value-added producers who may also be farmers, then we would have a problem. We do not have the legislative capacity to do that today. The new legislation tabled on April 5 would allow us to overcome that particular hurdle.
Senator Tunney: I congratulate you on your presentation, Mr. Ryan. I am an old dairy farmer and a new senator. I hear that a neighbour and friend of mine is your new chair.
I am also a former member of the Farm Debt Review Board where we dealt a lot with farm credit, with almost 100 per cent success. I understand your comments about doing your best to work with the client to make the work successful. Farmers are inclined to do that. I am a former client and a beneficiary of farm credit.
What kind of consultation do you have with clients who are in some financial difficulty? You probably had not even started school when I was involved with a program called CANFARM. That provided an excellent side benefit because it not only helped you but it certainly helped the client. The client never realized until he was taught that it was so beneficial to keep running records of his operation.
I am happy to hear about deferred mortgage payments. I met this morning with a group of people who were unaware of this deferred payment option when I asked them. These people were from the Prime Minister's task force and they will be delighted to hear what I have just heard from you. I am not on the task force myself but am acting as a kind of consultant.
My neighbours are not in supply management; they are cash-croppers who cannot realize their cash costs this year because of the current grain prices. We have not yet seen the full impact of the low grain prices, and you should be prepared for that. I do thank you for appearing here.
Mr. Ryan: On the financial consultation side, I will respond in two ways: First, we work very closely with the Farm Debt Mediation Services when the clients have problems. When we come to the table, we want to determine if there are potential solutions. It should not be just, "You are not making your payments, and you are out of the farming operation." What is in between? That is the first thing we try to do. Long before we get there, the individual account managers and the Farm Debt Mediation Services are working one-on-one on the file.
If we roll the clock ahead further and start talking about some future legislative amendments in our bill tabled on April 5, the corporation wants to make available to the agricultural commun ity much more of the financial or overall consultation or planning services. We truly have seen over and over again a need for planning services. There are opportunities. Are the management and skill sets there? That is not always the case. We would not necessarily be looking at doing all this ourselves. Our goal will be to say, "Here are particular needs. Who are the best people out there to partner with who would be able to take the service?" We can act as a catalyst to get things rolling and spearhead it, and bring others into the picture who can help on planning services.
I will ask Ms Neveu to respond on CANFARM.
Ms Neveu: Farm Credit was one of the founders of CANFARM, along with Agriculture Canada and the University of Guelph. We expended a lot of energy to use the system with our borrowers. In hindsight, you could say that because it was free, it may not have been valued to its just measures, but it was also a very onerous system. In those days, we were still all paper. All those accounts had to come in, and that took a while. There was a lag time in terms of getting the accounts back to the customers. We had huge journals. The principles were sound. It was an excellent system. The people who used it religiously got a lot of benefit from it. However, it was very hard to convince people to go from the traditional shoebox to this very complex system. It might have been of greater value to have taken smaller steps to get along that route.
More recently, our account managers will sit down with our clients when we look at what their deficiencies might be in terms of how they manage their financial results and how they put their numbers together. I am sure you can appreciate that there can be a slight conflict when a lender starts advising on record-keeping, especially if it is the same person making both those decisions. If we get our legislation to enable us to provide this service, we would be able to start as a separate business unit, probably with partners, and be much more active.
I would suggest today, of course, that there are far simpler and more available systems electronically, as you well appreciate, that have been developed by a number of companies across Canada and that are extremely well used, but there is still difficulty in getting everyone to do good financial record-keeping.
Senator Tunney: My high-tech system was a little calculator, when they first came out.
Mr. Ryan: As a final comment relating to the cash-croppers not having generated sufficient income to cover expenses, it is acknowledged that all our arrears are a lagging indicator. We will see in time.
The Chairman: I would not want to have this committee leave the false impression that there is not a lot of farm stress out there. There is. It is very severe. A farmer can owe a couple of hundred thousand dollars against six quarters of land, and that is still his land, even if it is not worth $200,000. Farmers live pretty close to the soil. There is a lot of stress with that, and a lot of family stress. It is very difficult. I just want to make that point.
You mentioned intergenerational transfer. I am somewhat aware of the tax implications of the intergenerational transfer. My understanding is that you can roll the land over to the third generation who is an active farmer, and you can roll the machinery over, but you cannot roll over the produce. Either that, or my accountant does not know what he is doing.
Having said that, how does the intergenerational transfer work tax-wise? If the senior farmer needs the money and does not have the wherewithal to look after himself without selling that farm, then the junior farmer will certainly have a tax problem. There is no loophole there, is there?
Mr. Ryan: I am not an expert on the tax side of things, and would not want to position myself that way.
I spoke earlier about the program called AgriSuccess where one of the focuses was on the intergenerational transfer of farms. We partner with private and public sector organizations across the country and will be able to have the farming community attend seminars with experts across the country to address that subject. We would be getting out of our league if we tried to address the specifics of that matter. However, we have the wherewithal and the network within the community as a whole to identify the right people, get them into the room and let them take it from there.
The Chairman: The intergenerational transfer may well be the survival of the farm and farmers in Canada. If a young farmer has to go out and buy back whatever the average size of a farm is, 15 quarters, 20 quarters, and the equipment, he will not make it. The math just is not there. I am pleased that Revenue Canada understands that at this time, and it would be a very serious mistake if that were ever changed.
The other thing facing our farmers is input costs. It seems that even with the government payments that have been forthcoming, the fertilizer companies and the machine companies and the spray companies are the beneficiaries of such programs. You probably have quite a bit of input to government in looking at the overall picture. I think it isportant that we send the right messages to government in regard to the situation of agriculture, especially in the grains and oilseeds area. With that, I will hear your comment.
Mr. Ryan: The intergenerational transfer of the farm is a major issue. We did a study three or four years ago on this subject. The number one issue facing farmers was how to get their equity out. I do not disagree with you in terms of that being the number one issue facing the farmers exiting, because that is their retirement income. New farmers going in cannot afford to acquire all of that at one time. Our goal or objective is to work with the experts to see how to make this happen. It has been talked about year over year for several years, and I do not think we should give up on it. We should continue to work and find ways. I do not have a solution today, to be very honest, on the intergenerational transfer.
Senator Tkachuk: When they ask how you get your equity out, does that mean you cannot sell it?
Mr. Ryan: If they want to pass it on from themselves to a son or daughter, then yes, they want to get their equity out. They have a ready buyer, being the son or the daughter, but the son or daughter cannot afford it and does not have the down payment or, in many cases, the wherewithal to acquire the amount of debt that would be needed to buy out the parents.
Senator Tkachuk: Do we not have an intergenerational transfer of land if a young farmer buys the land who is not a son or a daughter?
Mr. Ryan: Yes, very much so.
Ms Neveu: Our program allows that. It does not have to be someone related to you to qualify under what we called our AgriStart programs. We can have non-relatives participate.
Senator Tkachuk: I hope so, otherwise we have a very strange country.
Ms Neveu: There are buyers for everything put on the market today in Canada. We do a report on farm land values semi-annually, and we have not shown farm land values decreasing except by half a point in Saskatchewan, and Saskatchewan only, in the last six months that we have evaluated. Land prices have gone up everywhere else.
Senator Tkachuk: In other words, farmers can get the equity out. They may not get it out the way they want to get it out, but that is certainly not a hindrance to them getting it out. That is only a problem that they have, that they want their kids to have it but the kids have no money.
The Chairman: Outside of the third generation, the tax break does not apply.
Senator Tkachuk: Sure it does. A farmer gets at least half a million dollars tax free before paying capital gains. It does not matter if I buy it or your kids buy it, which is a pretty good deal for farmers.
The Chairman: My understanding is that you can give $2 million-worth of land to your children in an intergenera tional transfer.
Senator Tkachuk: You can give it to them, yes, but then do not ask for equity.
The Chairman: As an example, yesterday I was standing beside a fellow who bought a $62,000 seeder. This man is not broke. When he starts bidding, he bids. He is 75 years old. As he was paying his bill, I said, "Leroy, you will never sell that farm or your machinery. You will use the intergenerational transfer." He said, "My lawyers have not told me about that."
This is not typical of many farmers, but his farm would be only a small portion of his assets, which of course makes it quite complex. He was not even aware of a generational transfer. There are cases like that.
Mr. Ryan: There are many cases like that, and I hope that as we move into the business planning services we will be able to increase the awareness level significantly. That will certainly be our goal.
Senator Sparrow: Senator Tunney, was CANFARM the bookkeeping system you spoke of?
Senator Tunney: Yes.
Senator Sparrow: Did you suggest that you were looking at that again?
Senator Tunney: Oh no.
Senator Sparrow: I see. I was about to say that if you were, you could get some of Agriculture Canada's AIDA forms to simplify the process.
Is there any provision for money from your agency to be returned to the Consolidated Revenue Fund? Do they handle your money or do you handle your own money?
Mr. Ryan:For a long time the money that we lent came from the Consolidated Revenue Fund. As that debt is paid off, we pay that back to the Consolidated Revenue Fund. Up until a year ago, we had access to the Consolidated Revenue Fund for short-term financing. We do not have access to that any more. The only funds that would flow back to the Consolidated Revenue Fund now would be debt that we would have borrowed to look after financing that we did some years ago.
Senator Sparrow: What would happen if you had high profits?
Mr. Ryan: The corporation has a policy to provide dividends back to the federal government if we have high profits. That policy calls for us to pay 10 per cent of our net profit after tax, excluding one-time gains. In certain years we have paid dividends back to the federal government. It is at the discretion of our board of directors.Some years we have agreed to make a dividend payment to the government; other years we have used the equivalent amount of money in some other way. Last year, as an example, we made a conscious decision to invest in AgriSuccess, the intergenerational transfer of business planning overall.
Senator Sparrow: What is the largest dividend you would have paid in one year?
Mr. Ryan: That would be $6 million or $7 million.
Senator Sparrow: Thus the federal government sometimes makes a bit of a profit on the operation?
Mr. Ryan: It could. Our financial statement does not show that we are a taxable entity. However, because of the losses that we experienced in the late 1980s and early 1990s, we are not paying tax today. Those tax credits will run out in 2004-05. If we remain a taxable entity at that time, about 50 per cent of everything we generate will go back to Ottawa in income taxes.
Senator Sparrow: Mr. Chairman, something that bothers me about the banking institutions as well as the Farm Credit Corporation is that when agriculture is in a high risk mode those institutions raise their interest rates due to that high risk. As soon as they raise the interest rate, the risk becomes higher. Therefore, we are not really accomplishing the intended goal.
You say you are not a lender of last resort, but when you raise that interest rate because of the high risk, the chances of pay-back become slimmer. In order to really help the agriculture industry, the interest rate should be lowered. I appreciate that collection costs may be somewhat higher, but we are trying to develop and maintain an industry, not trying to get rid of it - at least I hope not.
Mr. Ryan: We are certainly not trying to get rid of some of our customers. As I indicated earlier, we have increased from 24,000 customers to 44,000 customers. In terms of interest rates, in contrast to other financial institutions, we do not review our interest rates every time the risks change. When we provide financing to a customer who is acquiring equipment, purchasing land or whatever, we assess the viability that we see and the degree of risk, and we set the rate at that time. With other financial institutions, that can change on an ongoing basis. Ours may change at renewal time in five years, if it is long-term mortgage financing, for example.
I do not want to leave you with the impression that we increase a 7 per cent interest rate to 10 per cent, 12 per cent or 15 per cent. The adjustment on a risk basis would be half a point to three-quarters of a point, and not even in all situations.
Recently I spent some time in Ontario speaking to some of our customers. An equal number of customers expressed agreement with adjustment of rates based on risk as expressed preference for one rate for all.
Senator Sparrow: Has the number of your customers increased from 24,000 to 44,000 because the industry is in trouble?
Mr. Ryan: I personally do not believe it is because the industry is in trouble. We have seen a lot of growth in the industry over the years. Senator Tunney spoke of the dairy industry. That has been a very strong industry for us. People continue to buy quota, to buy cows, to expand their buildings and to buy equipment.Those customers contribute to the growth in the number of new customers. The development of new products which meet the specific needs of particular geographic or industry sectors contribute to that growth as well.
We have made a conscious decision that, as a federal Crown corporation, we must raise our visibility in order that people will understand what we do and how we can assist them. It is a combination of a number of reasons, as opposed to saying that it is tied to the agriculture industry being in difficulty.
Senator Wiebe: I have one comment and two questions. The comment goes back to Senator Sparrow's question on the huge increase. It also goes back to my first comment that the Farm Credit Corporation has done an excellent job in adjusting programs to fit the needs of the customers. That is reflected in the number of farmers who have gone to Farm Credit for assistance.
I should know the answer to my question, but I do not. Does Farm Credit offer second mortgages?
Mr. Ryan: Yes.
Senator Wiebe: A father could have the first mortgage, and Farm Credit would take the second mortgage. The first mortgage would cover the down payment or equity that is required for that young person to start?
Mr. Ryan: Yes.
Ms Neveu: We are getting close to the family farm loan. That is one of the ways in which we approach it. First of all, we require less equity from the junior person coming into the deal. At the same time, we try to figure out how much the retiring owner needs to be able to move off the farm. In that way, we can strike a deal where the parents or the older generation will take first position or second position, depending on the requirements, and then we will come behind. Over time, we will increase our loan as the older generation is paid off.
Senator Wiebe: I must say that CANFARM, in my mind, was one of the best programs that I have ever seen. As a young man starting farming, I was involved in CANFARM with my grain operation. When I diversified into a farrow-to-finish operation, I put that on CANFARM, too.It was onerous. It took time but the information and knowledge that we gained from that program did wonders as far as my farm operation was concerned.
It is unfortunate that that program was discontinued. It was introduced because we could not afford computers. Shortly after the demise of CANFARM, computers became accessible to more people.
I would certainly like to encourage the Farm Credit Corpor ation to continue that leadership in providing those kinds of farm management programs to our farmers - no matter whether it is the husband, operator or spouse who is involved with that farm management program on a computer. It is vital for the success of farming today. Many of our farms operations existing now that are not suffering quite as badly as some others have developed a tremendous farm management program. That is key. As one of the major financial farm lending institutions, I would certainly encourage you to continue in that direction to enable you to provide that kind of assistance or guidance to young farmers starting out.
I have nothing but praise for CANFARM. It did a wonderful job for me and for many farmers with whom I associated at that time.
Senator Sparrow: I belonged to that program myself and was very happy with it. They said that they were not going back to it. That was the question. I merely said that if they did decide to go back to it, they should check with AIDA, to learn how to develop the proper forms.
Senator Tunney: I have two items to raise: First, I have a question about whether you are getting applications from urban transplants coming out to the country thinking that they want to be, and should be, farmers. It is more for fun and interest on their part than an ambition to run a profitable operation.
My other item is a comment. I never missed a payment on my mortgage. When the credit advisor set up my account, it was a 29-year mortgage. I said that I do not need 15 years to pay it off, and I want to pay it like this. I want a deduction from my milk cheque every month going into the Farm Credit account so that the money is there in June and December when my twice-yearly payment was due. In fact, they paid me some interest. That accumulated interest paid the last two and a half years of my payments. I was a happy person.
Ms Neveu: We call that a pre-approved payment, and we definitely encourage all our borrowers to be on a pre-approved payment system because it is easier for the borrower and for us. As you will appreciate, not every industry will be regulated in the same way in terms of from where the cheque will come. However, we definitely have greater flexibility today than we ever had in terms of accommodating payment dates.
We do work with whatever sector the borrower is or will be in to try to accommodate those payment dates for when their cash flow will be there. We have even bi-weekly payments if that is preferred.
Returning to your first point on urban transplants, we have not found a way to identify them quite in that way yet, but we do have a product called a "pay day loan." It's under the umbrella of our intergenerational transfer program. It allows people to work off-farm and to be contributing to a farm operation in terms of how they get started and how they get organized. In so many instances it may be an issue that people are urbanites moving into the country, and it can be perceived in that way. We note from the work that we do with these people that their sincere intentions are to be farming, to be doing something in rural Canada.
Our program does not limit those people from participating. We do not lend for a housing project, but if someone is legitimately purchasing a small farm operation and is contributing with off-farm income while they do that, we would lend money to them.
The Chairman: I saw something the other day that said that in Saskatchewan 82 per cent of the farmers had off-farm income. Have you any records on that?
Ms Neveu: We do not keep records in terms of being able to determine where people's income comes from in a different stream. I would suggest that it would probably be easier to have time to earn an off-farm income in a grain operation. If someone were in a production that is seasonal, it would probably mean that there would be income that comes from another kind of job. If a farmer has an intense dairy operation or large cattle operations, the rate of off-farm income would not be as high.
Data is not collected in such a way as to differentiate the source of the income unless the loan is specifically like a pay day loan. That is a very small product.
Senator Sparrow: Does your corporation lend money to the Saskatchewan Wheat Pool, as an example, for someone to go into the hog industry?
Mr. Ryan: Our existing legislation allows us to do that. However, our mission talks about small to medium size, so that would not be the size that we would be targeting to be able to provide support for the value-added side. It is conceivable that that could occur if there were particular subsidiaries within the Saskatchewan Wheat Pool, or any other large organization, which approached us on an independent basis. However, it is not our focus or where we expect to be going on a long-term basis. It is much more targeted to the small-sized and medium-sized operation.
Senator Sparrow: Are there loans to the Saskatchewan Wheat Pool currently?
Ms Neveu: We have loans to Heartland Livestock. We work with them in feeder financing for their customers. Thus, it is a pass-through type of operation.
We definitely could have loans to partners in some of the hog operations because, through Heartland, Saskatchewan Wheat Pool will own shares in the consortium or loop. We may be lending to an individual farmer in that same loop. However, we do not lend to the corporate entity. The wheat pool is a cooperative, and it is more difficult for us as lenders to be involved.
Mr. Ryan: Heartland is a good example of us working with partners. However, the benefit we provide goes to the producer in terms of livestock.
Senator Sparrow: Heartland is owned by not only the wheat pool but by the Manitoba -
Ms Neveu: Agricorp.
Senator Sparrow: Yes, Agricorp.
The Chairman: If there are no further questions, I would like to thank you for appearing here. This has been a successful meeting. I again apologize for the long wait. We appreciate your attendance and would welcome you back.
Mr. Ryan: I thank you all for your time and attention tonight. From your questions, it is clear that you are close to agriculture and that it is important to you.
The Chairman: Honourable senators, we have other matters with which to deal.
Senator Tkachuk: Last meeting I was a little rude to Senator Tunney. Usually when I am rude to a Liberal I wait an hour, and if I still feel badly I know that I have truly been rude. In this case, I telephoned Senator Tunney and apologized to him. It was not fair of me to do what I did, although I may do it again sometime.
However, I do apologize, and I want that on the record. I called him so that I could go home peacefully at Easter, being a Catholic and having to confess on Good Friday. He was kind and gracious, and there is no problem.
The Chairman: That is on the record.
Senator Tunney: I want to tell Senator Tkachuk and the meeting that I accept his apology without question. I want to remain friends with him as much as with any other of my friends here. We will have lunch some day and we will not talk about this incident but rather about agriculture - western agriculture in particular. I need to know more about that so I will be tapping into the knowledge of my colleagues here.
Senator Tkachuk: I promised Senator Tunney that I would educate him about the free market as compared to the quotas of the dairy system.
The Chairman: The next item on the agenda is the rule 94 declaration. The clerk will speak to that.
Mr. Daniel Charbonneau, Clerk of the Committee: Rule 94 was passed last October by the Senate. It is a rule regarding personal financial disclosure.
A copy of the motion that will be considered by the committee has been circulated. Each senator is to look at the order of reference and decide if they have a particular personal financial interest that is relevant. Once you have done that evaluation and completed the form, the declaration is to be forwarded to me. I will keep a file, which will be open to the public for normal consultation.
I have some information for you to assist in determining what would be considered a personal financial interest for purposes of the declaration. I have been advised that my role, and that of the law clerk, is very limited in this. Each individual senator is to consult his or her financial advisor or legal counsel to determine what is a financial interest.
There are some guidelines in various speeches, but it is up to the individual senator to determine and declare interests. My job is essentially that of a mailbox. I will receive the declaration and make it public if anyone requests it.
There is a motion in the package sent to each senator. I do not know if you want to deal with this now or wait until we have more members present.
The Chairman: We should wait until we have full representation.
The next item on the agenda is scheduling the business of the committee. We should move in camera.
The committee continued in camera.