Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 27 - Evidence
OTTAWA, Thursday, December 6, 2001
The Standing Senate Committee on Agriculture and Forestry met this day at 8:34 a.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: Good morning, honourable senators. We are here to examine international trade in agriculture 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. We are very pleased to have the Canadian Bankers Association with us this morning. Farmers always need the banker. We are pleased to have an exchange with you this morning, and I hope that exchange will go both ways. Welcome, gentlemen. We will hear your statements and then go to questions.
Mr. Terry Campbell, Vice-President, Policy, Canadian Bankers Association: Thank you very much, Chairman and senators. On behalf of the Canadian Bankers Association, we very much appreciate the opportunity to be here today and have a discussion with you. It is a very important topic, and we do appreciate it. My name is Terry Campbell and I am Vice-President, Policy, of the Canadian Bankers Association. On my left is Mr. Bob Funk, Vice-President of Agriculture at Scotiabank, and on my right is Mr. Peter Kleinschmidt, National Director of Agriculture and Agribusiness at Royal Bank. We will make a very short presentation, as we would like to get into questions and answers fairly quickly.
Let me start off with a simple statement - that agriculture is very important to Canada's banks. It represents a substantial portion of the commercial banking book of our member banks, accounting for nearly 8 per cent of the outstanding bank business loans. That importance is growing. Member banks' outstanding loans to agriculture have grown steadily over the past five years, from $11 billion in 1996 to nearly $17 billion currently. Loan authorizations have grown along with them, reaching over $23 billion today.
Even more telling is our overall participation in agriculture. Over the past 10 years, the percentage of total Canadian agricultural lending that banks accounted for has grown from 39 per cent to 47 per cent. Our overall participation is growing.
As the committee well knows, Canada's agri-food industry continues to navigate through some difficult and challenging times, and recognizing this, Canada's banks have been changing as well. We are trying to meet the changes that our clients are facing and to grow with them. All-in-one loan facilities, multiple-term mortgages and bundled product packages are some of the innovations we are trying to bring forward to our customers in product services. We have mobile account managers, Internet banking and ATMs in non-bank retail stores. These are some of the changes in our services package that we are trying to bring forward in harnessing technology and meeting the evolving lifestyle and business needs of our clientele.
In addition, the way we evaluate investment opportunities in agriculture is also changing. Some of the most important assets never make it on to the books. When banks assess agricultural financing, they must look beyond the balance sheet. More and more, in our increasingly knowledge-based agriculture and agri-food industry, banks also have to look at the quality of management.
In addition to being strong supporters of agriculture, Canada's banks continue to play an important and central role in rural communities and small towns across Canada. Canada's banking sector has one of the most extensive branching systems in the world. We have 2.73 branches per 10,000 people. That compares very favourably with some of our leading competitors. In the United States, the ratio is 2.36 - considerably lower - and in the U.K., it is 2.18. We are expanding the ways in which we can provide service to customers by expanding their options for access to banking service, enhancing Internet and telephone-banking capabilities and establishing relationship banking on a face-to-face basis.
There are some real challenges and issues in the marketplace that require a dialogue among stakeholders. We are very pleased to have that dialogue. The CBA has been an active participant in the dialogue in recent years. Each year, for instance, we meet with the federal Minister of Agriculture and Agri-Food to exchange ideas, impressions and concerns about the marketplace and the health of the sector. On these occasions, and many others throughout the year, we meet regularly with representatives of farm groups across the country.
Today's discussion with this committee, on agriculture and future opportunities, is a very important part of that dialogue. We are keenly interested in being involved. The mandate of your committee is very broad and you have a range of very important issues to consider. We understand that you have invited input from a wide variety of organizations with expertise in specific areas of your mandate. Our particular area of expertise and interest is in the provision of financial services. We hope that some of the information and the perspectives that we can offer this morning will be useful to you as you proceed with your deliberations.
With that very short set of remarks, let me again say how very much we appreciate the opportunity to discuss this issue with you. I would invite you to ask your questions, and we look forward to the discussion.
The Chairman: Thank you for that statement. You mentioned service. I suppose you are well aware that farmers like to walk into the bank and say, "Give me all the figures." They are not too keen on the green card, the blue card or any card. They like to sit down with bankers. They like them to do their income tax for them, if they will. That is changing quickly.
There is a lot of centralization in banking and farmers are quite concerned about that. We are probably the last group of people to move with society when it comes to banking. Have you noticed that problem? For instance, in my area, a lot of our banking service is now starting to come out of Edmonton or Regina, as opposed to the small town of Estevan. That is a concern for our farm group.
Mr. Campbell: We understand that. Let me respond to your question on a couple of different levels. Let me talk about the broad picture first, and then we can get down to more of a community focus.
It is important to remember, when we talk about the range and the network of branches in Canada, that the number of branches has grown. We have more branches in Canada now than we did 10 years ago; we have more branches in Canada now than we did five years ago. Ten years ago, there were about 7,300 branches; now there are about 8,300 branches. The number is growing.
Per capita, we are ahead of our U.S. and U.K. competitors, and we are adding new styles of providing service to customers on a regular basis. There is the electronic side, so we try to have face-to-face relationship banking as well.
You commented that the industry is changing. The branch network will remain a very important part of the way that banks deliver services. In our industry, like virtually every other - certainly every other retail industry - the marketplace is going through changes, and that will have an impact on the branch network.
When there is a reorganization or rationalization and branches do have to close, wherever possible, we try to work with our customers to maintain a relationship with them. We try to work with them in the transition to new alternatives. We try to maintain that relationship, wherever possible, on a face-to-face basis. Different banks have different approaches on this, because they all have their own different business strategies. Sometimes the approach will vary from community to community, because the circumstances change.
There are some examples of how we try to provide alternatives. Some of our banks, for instance, will offer mobile banking, where the banker brings the services to the customer. One of our banks has what it calls a "field relationship manager," where the banker has a car, cellphone and laptop. He or she will go to the customers and deal with financing issues right there.
Other banks will have arrangements with third-party suppliers. They will have arrangements with retail stores, grocery stores, to increase the range of options for bringing banking services to the customers. It is a different approach to services, although still face-to-face. Mr. Funk's bank has an arrangement with Canada Post to bring services to rural communities in Newfoundland. There are different ways to do that. Some of our banks will also have arrangements with vendors, with suppliers, so that farmers, producers and small-agribusiness people can get their financing through the vendor.
All in all, the marketplace is changing. The branch network, though it will remain, will go through changes as well. We are trying to help our customers with the transition and provide them with alternatives, wherever possible. It is a work in progress, obviously, because the marketplace does not stop changing. We are trying to provide those alternatives.
The Chairman: Thank you for that. I just want to emphasize that the personal touch is very important to farmers.
Senator Wiebe: Gentlemen, welcome to our agricultural committee. I understand that you are having lunch with the task force at noon. I hope you will forgive me for not joining you. I am hoping I can ask all my questions here this morning and leave things open for other members of the task force.
I would like to follow up on Senator Gustafson's question about bank branches. You say here that you have 2.73 branches per 10,000 people, but you do not say where they are located. Senator Gustafson and I come from the province of Saskatchewan. I can see that in rural Ontario, where there is a much more concentrated population in the rural areas surrounding cities, yes, banking services are made available through branches. However, that is not the case in Saskatchewan.
A three-day rural conference was held in Saskatchewan two weeks ago. Dr. Roger Gibbons, who is a professor at the University of Alberta and also the President of the Canada West Foundation, made a presentation at that conference. To sum up, he more or less said that governments should start doing what business is doing, in that people will live within a 50-mile radius of a larger centre. That is where the concentration should be. Governments should not be spending money on the infrastructure of small communities; rather, it should spend that money on the infrastructure of the larger centres.
Part of the committee's mandate is to study rural Canada. Since it was held in Saskatchewan, there was quite a negative reaction to that statement from attendees at the conference. It appears this is what our banking institutions are doing; this is what our railway companies are doing; this is what our elevator companies are doing - this is what pretty well everyone involved in the business world is doing. Is this, in your mind, a trend that we will have to live with?
Mr. Campbell: I will ask my colleagues to pitch in, if they have some perspectives to add. You rightly point out that the marketplace is changing. The banking industry is not alone in having to face an increasingly competitive and global marketplace. It has to make decisions about how best to proceed on that basis.
Our customers are our business. They are very important to us, wherever they live. Increasingly, Canadian consumers, whether on the agriculture side or in other sectors, are looking for a variety of ways to access banking services in addition to and beyond the traditional branch structure. The traditional bank structure will still be important, even though it may look different in the future and a different set of services may be provided out of branch networks.
We are trying to provide different options for people to take advantage of based on their own circumstances. We are moving increasingly to provide a lot of services over the Internet and through telephone banking. That is not for everyone and not everyone can take advantage of it. However, where there is an interest in that, it can be a very attractive option because it eliminates distance. It provides access 24 hours a day, seven days a week, and if you are a small-business person, you can do a lot of that work by those means.
On the other side, where a traditional branch may not make sense from a business point of view in the future, we try to provide other alternatives. There are other providers in the marketplace as well. There are credit unions and so on. In the banking industry, we do try to provide service wherever we can. We either have the banker go to the individual or have different ways of offering traditional branch services, but outside the context of an actual branch. Retail-store outlets are beginning to spring up across the country, where you can get a range of services. As I said to the chair, it is kind of a work in progress, but the bottom line is that our customers are important to us.
We need to serve our customers and work with them, and the methods will differ from bank to bank.
Senator Wiebe: In reality, the banks, and the other companies that are talking about it, have made the decision that there are two ways of looking at it: agriculture as a business and agriculture as a way of life. Those who treat agriculture as a business are hooking up to the Internet. Those farmers are moving with the changes times. Many who resist that change will have to start looking at agriculture as a way of life. If that is the case, they will have to adjust to those standards. It is a difficult decision for them to make, as it is for an elected politician. Senators may be afforded the luxury of telling it more as it is, rather than what we would like it to be. That certainly coincides with what you were saying.
When I started farming in 1959, all I required with my banker was 10 per cent equity in my farm. I used the banks over the years and I noticed that equity growing. Fortunately, I was able to farm through some good times and have not had to use banking services in recent years. What would be the equity requirement today for a young farmer, or even an older farmer, who wants to expand an operation or take out an operating loan, for example?
Mr. Bob Funk, Vice-President, Agriculture, Scotiabank: We would probably not see the same ratio hold between any two farms or any two sectors. If you are a dairy farmer, the equity requirement might be less or more than if you are in crops, and so on.
In developing policy packages with which to approach the industry, we have tried to evaluate the business cycles, their timing, depth and how much variation producers face, then put a package together that indicates what this operation can look forward to from the standpoint of pricing at the end of a cycle and put that against what we know to be the costs of production. That lets us work out how much equity we would require people to have.
We would like these businesses to be able to grow, and we know that too much strain on the ability of a business to generate cash flow slows down growth. That is why there is a requirement for equity. It keeps the senior generations of these businesses in the picture when the transition to the next generation occurs. It has been one of the strengths of agriculture, over time, that the senior generation has provided not only equity, but also the experience, management support and guidance to the younger producers as they enter those businesses.
There are certainly circumstances where 100 per cent of a purchase can be financed. However, it will be looked at in the context of ensuring that the financing and the debt-load drag on that business will not exceed its capacity to service the loan.
Senator Wiebe: If I can read between the lines, you would put some value, in relation to equity, on an individual's experience, track record and the potential for success. Would that be correct?
Mr. Funk: It is not a cookie-cutter process. If someone comes with a great deal of management experience, a track record of generating good production and managing the cost of production and so on, that gives us some comfort and allows us to stretch things a little further than with someone who cannot maintain the same cost of production or who does not have the same experience.
Senator Wiebe: One of the difficulties that the agricultural industry will face in the next 15 years is a tremendous transfer of assets. The average age of farmers today is anywhere from 55 to 58, depending on which organization comes up with these figures. That means that within that period of time, if we continue to bring young people into the business sector, there will be a huge transfer of assets from father to child, or from retiring farmer to another individual who wants to get into the business. Are you looking at different ways and means to assist in that transition? That is coming, and will place a bigger demand on our banks than they have faced in the past.
Mr. Pieter Kleinschmidt, National Director, Agriculture and Agribusiness, RBC Royal Bank: We agree wholeheartedly that this changeover is coming. When you try to understand it, you realize that there are many elements involved in a farm succession. The financial services part is only one of the issues that farmers face when they go through this changeover. Clearly, we are all looking at this issue and trying to develop solutions. The interesting thing is that when you get "under the hood" of financial services, there are many options in terms of trusts and a variety of investment options for the retiring farmer or one who is handing over a business. If one adds those to the more traditional financing or lending services, one can create an array of solutions to help the farmer and the succeeding generation through the changeover while trying to meet everyone's needs.
It is clear that the current tool kit is quite broad in the financial services industry. It is definitely a focus of interest. Coming from a farm family myself, I know that all farmers would like to have at least one or two of their children enter the farm business in some way. There are also challenges when some of the siblings do not want to join the business. You have to be innovative and use a broader array of financial services in trying, wherever possible, to be fair.
Senator Wiebe: Particularly in Western Canada, and I am sure it applies throughout the country, farmers' retirement packages are their investments in their farm. When they decide to retire, they hope that they can sell the assets in the farm to provide themselves with a new home in the city or in town, and enough income to retire with dignity and grace. In cases where the burden will be so great that they will have to put up their assets in order to finance the transition to the child, are you looking at developing programs that would allow retiring farmers to say, "Yes, I can retire with dignity and also provide some means for my child or someone else to take over my operation"?
Mr. Kleinschmidt: We do not all offer cookie-cutter packages. When you actually deal with families on a case-by-case basis, you find that every situation is a little different from every other. A predefined package does not suit those circumstances. There is the issue of trying to create a viable operation for the son or daughter entering the business and the transfer of the equity between the generations over time. If you use the broader array of financial services that we are able to offer, such as trusts and annuities - there is a variety of investment options for the farmer - then you are much more capable of facilitating this transfer.
Senator Wiebe: The main reason for my question was to reassure myself that the banks are doing some research now to make sure that they will be players in that field. My concern is that they do not make the decision, "We will not be players in that field. We will turn that over to government or someone else." Can I have the assurance that you people are doing research and studying the issue so that you can be players in that field?
Mr. Campbell: Succession planning will be a very important part of the future business of our banks.
Senator Chalifoux: Welcome, gentlemen. I am very pleased to have you here so we can discuss a couple of things. Several months ago, I read in The Financial Post that the major Canadian banks are slowly getting out of small-business and personal banking and moving more into the international markets. That article also said that small businesses and individual consumers would be encouraged to go to the credit unions and other small financial institutions.
I am a credit union person. I have not dealt with banks for many years because I found that they discriminated against single women, and especially working women with families. I turned my back on the banks and joined a credit union. However, there are a lot of businesswomen, especially farm women, who really need the services. I would like to hear your comments on that article.
Mr. Campbell: It is fair to say that 95 per cent of our customers on the business-lending side are small businesses. The retail customer is the core of our business. There are different players in the Canadian banking industry with different business strategies. The United States is clearly a growth market. At the same time, however, there are banks that specialize in small-business lending here in Canada by making it a key business strategy. We are seeing a variety of strategies as the marketplace becomes more competitive and more complex.
The numbers are strong in terms of lending to small businesses, farm clients and agricultural clients. In fact, it is growing. While you can take a global view and see that, as is happening in other countries, our banks are looking for opportunities everywhere, the Canadian market remains very important.
Senator Chalifoux: This was discussed when we were talking about bank mergers and getting into the international markets. That is when all this came about. Articles were floating around at that time that talked about how the major banks were going to do that and encourage the consumer to go to the credit unions.
My other question concerns interest rates for farmers and for small business. In rural and farming communities, a lot of women have their own small businesses. It appears that the interest rates are still quite high. I would like to hear your comments on how you are regulating interest rates in the small-business area.
Mr. Campbell: Interest-rate decisions are based on the marketplace and are made by individual banks. I will make two general points: first, it is important to remember that Canada's banks are large and important players in the Canadian marketplace, but they are not the only players. It is increasingly competitive. You mentioned the credit unions, and there are also the caisses populaires in Quebec.
Over the last few years, we have seen an increasing variety of new providers coming in to Canada to provide a range of services, whether it is different kinds of credit cards, business financing, asset-based financing or leasing. The number of new competitors coming in - many of whom are unregulated, incidentally - is quite astonishing. It is an increasingly competitive marketplace.
Canada's banks are important in small-business financing, but we account for only 50 per cent of the marketplace. There is a whole range of other institutions out there that provide those services; there is a range of products; there is a range of financing vehicles. In many ways, the customer is increasingly in the driver's seat. It pays to shop around and take advantage of that competition.
Mr. Funk: If I could add one comment to what was said, our organization has established a small-business department that is specifically charged with the responsibility of building products and services to expand our reach into small businesses, whether agricultural or agriculture-related or otherwise. We acknowledge that 52 per cent of small businesses are either owned or co-owned by women. We are definitely working on ensuring that everyone has an equal opportunity to access the financing packages and services that we offer.
Mr. Kleinschmidt: Over the last few years, the Royal Bank has had a special emphasis on understanding the needs of women entrepreneurs and making sure that our account managers, both in the small-business and in the agriculture arena, understand that women are a tremendously important part of that environment. We have a good track record, at this point, of improving our services and our understanding of the important role that women play in business in Canada.
Senator Chalifoux: It is interesting that you say that. Less than a year ago, I had two women entrepreneurs, farm women, come to see me. The banks said they could lend them money only as a personal loan and not as a business loan. It is interesting that you make that statement. Thank you very much.
The Chairman: Senator Chalifoux has opened up many subjects here. I would like to slip in one question on that whole area of diversification of banking and monetary policy, because I have noticed that a lot of the machine companies today are themselves financing the purchase of large farm machinery. When you are talking $200,000 or $300,000 for one piece of equipment, and farmers are operating two or three of them, you are talking big money. Banks tend to take on loans when the government backs them with security, but not as high-risk loans as the machine companies. Do you have a comment on that? Have you noticed that happening? I am sure you have.
Mr. Funk: One thing we notice is that financing farm machinery is often not driven by traditional rules of financing because the machinery manufacturers have a vested interest in making sure their products gets sold. As a result, they themselves put together many innovative financing packages that perhaps affect the gross margin that the company realizes on an individual piece of machinery to make that financing appealing to the farmer.
Another structural issue in Canada that has enabled the machinery manufacturers to take a leading role is that the number of requests for financing via leasing has greatly increased over the last 10 years. The legislation on leasing farm equipment in Canada does not enable banks to easily enter that business. As a result, we are working with individual provincial departments and provincial governments to explain our position and our interest in participating.
The Chairman: I will venture to suggest that we may be heading in a direction where farmers will no longer even own the machinery. This has been happening with custom combiners. They will trade combines twice a year. They roll them over, bring in five or six more combines to sell back in Canada and break the dealers. This is moving very quickly. The move to rental or leasing has already happened in the car industry, for instance, and with half-ton trucks in the oil industry. I do not think anybody buys trucks any more. They all lease them. Is the government going to have to move in with certain protective regulations here, or are the large, global finance companies going to take over everything?
Mr. Funk: The issue here is demand response, in that much of the leasing in farm businesses is driven by someone's perception of the advantage of that relative to a purchase. My brother looks at it differently from my father. My father used to say, "If I do not own it and have it sitting in my yard, I cannot get out and do my job." My brother says, "As long as I get 300 hours out of that machine this spring, I will happily co-own it with someone." Some of that philosophy is occurring in the generational transition. It has to do with, "How do I get my costs down and meet the service level at the same time?"
The Chairman: It is a changing world out there. There is no question about that.
Senator Hubley: The agricultural industry perhaps has many risks, not all of which are under the control of the person running the operation. In other words, there is weather, diseases and things of this nature. Agriculture should receive special consideration for that reason, and because Canada without its farmers would not be as happy a place, let me tell you. Agriculture must receive special consideration from financial institutions and many others.
To follow up on what Senator Wiebe was speaking about, we are certainly concerned about how young people will be able to get into the business. We have heard distressing information about how young men and women are going to agricultural school, but when they are finished and facing the current agricultural climate, they decide it is not for them. If we do not develop programs and special considerations to ensure we get these young people into agriculture and keep them there, we are losing that resource.
Young farmers and new farmers are a special group with special needs. The same thing applies to farmers who are trying to diversify in some way. They are pushed into that diversification. It is something new to them. They are trying to establish a niche market, for example, in organic farming. Many people are trying to make that transition. Does the banking system have that appreciation for the agricultural industry and the people who are trying to survive in it? I am thinking mainly of the young farmers.
Mr. Kleinschmidt: It is clear that agriculture is an important market for the banks. I hold my position because the Royal Bank recognizes the need to understand agriculture as a market with unique characteristics. You mentioned there are risks inagriculture, and farmers know this well. You have droughts, you have cycles and so on. These have been around for as long as the agriculture industry has been around. It is incumbent on everyone involved in the industry to understand that, and that policies need to be able to respond to its vagaries. The banks' specialized focus on agriculture is in collaboration with farmers, to try to do things that take those unique characteristics into account.
As to young farmers coming into agriculture, I know from my experience of visiting many farms that there are a lot of young ag-grads going into the business, most often through the succession that we discussed earlier. We are trying to do innovative things to help young farmers build equity with their parents, so that in 10 years, they will be in a stronger financial position to facilitate the transition. We all recognize that, structurally, it is a challenge for us to work with that high cost of getting into business in the agriculture industry. The land prices are high, the quota prices are high, and we are all doing the best we can with that market reality.
We have to balance our desire to facilitate people getting into the industry with a responsible approach to making funds available. We do not want to lend money to people when there is a high risk that they will not be able to repay their loans. This is a balancing act. I mentioned the use of trusts. I am seeing more and more people rolling part of the assets into a trust, and then using that to enable the new generation to enter the business. Clearly, it is an important issue for all of us.
Senator Hubley: Do you think young people who would like to go into farming would be able to if they did not have the family farm behind them?
Mr. Kleinschmidt: The reality is, it is very difficult. We all know that. We are trying to help people be innovative. I have seen young people go to work, not necessarily with the family, but with other farmers in the region to help themselves get going.
Often, they will rent land rather than try to buy it when they start out. Individuals are doing various things to try to get into the business.
Senator Hubley: I have another question about the number of women now involved in agriculture, and in new business. Do your small-business loans reflect that? Do you have a percentage of businesses headed by women to which you have made loans?
Mr. Kleinschmidt: I do not believe that we are actually tracking that as a distinct part of our portfolio. Certainly, in the case of the Royal Bank, it is very rare. In fact, in most parts of the country, the business fundamental is that you need to take a family approach. We have an ever-increasing number of highly qualified women heading farms. While I cannot quote you a statistic, I know from my personal experience that the transition is happening, and I am proud of it.
Increasing numbers of female agricultural graduates are becoming the relationship account managers for farmers. That diversity brings a greater value that we can provide to our clients.
Mr. Funk: If I may add a comment on that, we are seeing development in agriculture proceed along two general streams. In the one case, there are operations already of a commercial size that are seeking to grow. They, perhaps, use the same kind of succession structures as any other larger corporation. People own shares and you invest them with additional shares. It is a corporate model.
At the other end of the spectrum, there are smaller operations that the banks recognize will continue to be a significant part of Canadian commercial agricultural production over time. We are increasingly seeing a development structure that involves partners, and it is driving how the banks are putting products and service packages together. In the past, if there were a husband and wife partnership, or other partnership of two or more people, trying to get involved in agricultural production, the banks had no package and no system whereby non-farm income could be acknowledged in a way that would enable the business to be properly financed. Now, when we are developing system products, we fully recognize that non-farm income contributes not just to the revenue of the farm, but also to its net income.
We are trying to acknowledge some of these operations. The business owner wishes to say, for example, "I want to be in a position of not having to take anything out for personal living." If one of the two partners is a school bus driver or an accountant or a nurse at the local hospital, that becomes the farm living unit that pays for the groceries, the clothing, or sends the kids to school. That leaves the entire farming revenue to support the farm.
Over the years, the banks have had some difficulty with how to build that into the systems. We certainly recognize that those who want to become agricultural producers have done much innovative thinking about processes that can help those business start-ups. We are trying to be as flexible and as encompassing as we can about financing, on the basis of all the sources that they are using to help themselves move forward.
The Chairman: I have a comment on that. The understanding is that the people who make that sacrifice work hard at their off-farm job, and then they work at the on-farm job at home. The various relevant groups should understand that: the banking institutions, financial and taxation institutions.
People who work those kinds of hours and find that they are not getting ahead will become disgruntled with life. Many on the smaller farms who are doing that out of necessity are faced with tremendous emotional strain. There are young farmers going through that.
There needs to be recognition of that in some helpful way, because they are paying a high price; there is no question about that. It is happening in Europe and elsewhere around the world.
Senator Tunney: Welcome, and congratulations, Mr. Campbell. I like the report in today's paper on your annual financial statement.
Mr. Funk, I fully agree with almost everything you said earlier. It used to be that farmers complained that banks did not care for them and did not want to be in the business of farm credit, especially not for farm start-ups. The entire situation has come full circle; you just have to wait long enough. I remember when I started in the 1950s, my banker told me to borrow as much money as I could for as long as I could. I totally disagreed with that and did not follow the advice. That decision served me well. I heard you talking about leasing big, expensive pieces of farm machinery. I know that at one time, bank credit advisers were encouraging this, but not any longer.
There are twice as many tractors and combiners in Ontario as our agricultural land would dictate. Farmers do not always buy machinery because they need it. Many buy it because they want it. I have to worry sometimes about farmers. I do not worry about the banks so much, because they are generally doing better than farmers.
Suppose a farmer stretches his credit, and then finances a new tractor, with cabin air-conditioning, with the farm machinery dealer. That puts you in some jeopardy, and it puts the farmer in total jeopardy. He is either before the Farm Debt Review Board or declaring bankruptcy, and has just realized the situation.
We have not been well served by OMAFRA in the closing of virtually all of the agriculture offices in each county - 54 of them in total. In most cases, they had a good credit adviser - someone to whom farmers could go if they were contemplating a capital investment, an expansion or a renovation. However, they are no longer in place.
I suppose that may fall to you. I am not sure that farmers do not need an individual credit adviser. I think we do. Farm Credit has a system of advisers and they are doing very well. I would like to hear your view or perception of Farm Credit.
I have been in the dairy business, and it has certainly served me well. It does not make me feel good to know that cash crop farmers are having so much difficulty when dairy farming is quite profitable and buoyant.
Mr. Funk: The question was specifically on the role of the Farm Credit Corporation previously, now Farm Credit Canada?
Senator Tunney: Yes.
Mr. Funk: There was a time when there much discussion of what their mandate ought to be. I think way back, when they began, it was quite specific and narrow. Then, over the years, two things were recognized. One is that perhaps Farm Credit Canada could not reach all the people that their sponsor, being the government, wanted them to. Second is that the agriculture industry is turning somewhat from being a commodity industry into an end-to-end process industry, where agri-businesses supply farmers and processors are taking and processing farmers' products. The decision was taken to expand that mandate.
Given that the mandate has expanded, the role of the banks is to find ways to work together with Farm Credit Canada. I know we can each cite examples and circumstances where we have worked together on one part or the other, perhaps not the whole thing, of a younger operation, or a large operation seeking to bring in a new partner or whatever the case may be. I think each of us has developed relationships where we can say to FCC, "If you provide part of the credit, we will provide part."
I suppose our response in the industry is that we know it is there. We know it has a mandate that is at least partly driven by the government's wish to provide support to producers. We spend quite a lot of time internally figuring out how to make that benefit both the industry and the individual producers.
Senator Tunney: In addition, it is beneficial to the bank.
Mr. Funk: That is always a focus.
Senator Day: I guess we are all asking these questions in recognition of the comment that Mr. Campbell made earlier, that this is an industry in transition. There is much adjustment to be done.
Before I get into my questions, Mr. Campbell, could you tell me who are the members of the Canadian Bankers Association? Is it just Schedule A banks?
Mr. Campbell: All the banks in Canada are members of the Canadian Bankers Association.
Senator Day: Are there any credit unions involved?
Mr. Campbell: The credit unions have their own organizations. They have their provincial centrals, and there is Credit Union Central of Canada, which in some ways operates similarly to the Canadian Bankers Association. It is a liquidity pool as well. Our members are the domestic and the foreign banks in Canada.
Senator Day: Also the foreign banks?
Mr. Campbell: That is correct.
Senator Day: Those that do not have retail branches, but are involved in banking activities of one type or another, are members of your association?
Mr. Campbell: That is right. It is interesting to note that many of the foreign banks do have retail operations. HSBC and IntesaBCI Canada have retail operations. Many of the foreign banks deal more on the wholesale side than on the retail.
Senator Day: I was thinking, as the questions were being posed, that it is interesting that representatives of the Royal Bank and the Bank of Nova Scotia should be here with you. I come from a small town in New Brunswick that was basically a service centre for the surrounding rural and farming community. The bank was one of the focuses for the community. It was a place where some of the bright individuals who had graduated from high school would start working their way along. Many prominent people from the Royal Bank and the Bank of Nova Scotia started out there.
That type of banking activity has gone. The local bank manager used to be around for a long time and did not just apply objective rules when deciding whether to make a loan to an individual. There was also a subjective test. Now you are a much larger corporation, where people aspiring to become the chairman of one of the major banks will not stay and work their way up. They move around a lot more. We all recognize that.
We are all trying to figure out how to adjust. You talked about two interesting things that you are doing. I see many banking machines in grocery stores, and in other places. That is one way to adjust. Are the banks doing other things to help the community, and particularly the rural community, to adjust to this change?
Mr. Campbell: We spoke earlier about the different ways in which services can be provided. You have mentioned several of them now, such as the different arrangements with non-bank retailers and the effort to maintain relationship banking through mobile bankers. I also talked about moving into electronic ways of providing services. There is a range of things.
In terms of supporting rural communities and helping them to adjust to the transition, again, there is a range of things that will vary across the spectrum, because individual banks will have their own individual strategies. The circumstances will vary from community to community. Banks are doing a range of things to support rural communities, on a business level, an economic development level, and more on a community level.
On a banking level, they have been very active in community economic development funds. One example comes to mind. Three of our banks have invested in the Niagara Growth Fund in the Niagara Peninsula. It helps local industries, including the wine and grape-growing industries.
Banks have been very active in the Community Futures Program. That is at a community economic development level.
On more of a community level, again, different banks will have different focuses. Mr. Kleinschmidt's bank provides extensive support for 4H clubs. One of our banks provides 4H scholarships. Another has a scholarship fund for young, ambitious people who are facing some disadvantages. They may well come from rural communities.
Other banks, in looking to the future, invest a lot in research. One of our banks supports research programs at the University of Manitoba, in agriculture, nutraceuticals and that sort of thing, to lay the base for future growth.
Banks do a range of things in communities in addition to offering different ways and alternative means to provide services to customers.
Senator Day: Mr. Funk, I think the compliment related to the profit statement was directed to you.
Does it help in any way to maintain rural branches when non-farmers move to rural communities? There is population growth in many rural areas, but the newcomers are urban workers or retirees. Does that growth sector help in any way to maintain your rural branches?
Mr. Funk: One of our challenges is that over time, there have come to be fewer towns with fewer people. The short answer to your question is yes. As people move into these towns to run small businesses or provide services, they strengthen the business base in the community. We are seeing that small businesses need not necessarily be established in a large centre. As a result of access to the Internet and other electronic communications media, they can do a lot of business without being in the heart of a major city, and that is good for rural communities.
We have tried to ensure that there are as many "touch points" as possible between the bank and its customers, and prospective customers. In the last eight months, we undertook an initiative with United Grain Growers to provide credit to their customers. The objectives were twofold. UGG wants to serve its customers, but found this a stress on its capital position. The number of accounts receivable they were being asked to finance was growing. By taking that problem off their hands, we enabled them to tend to their own business. We worked with their territorial representatives to provide the credit in such a way that the farmer would see no change in the process. The farmer would still deal with the territory sales representative of UGG. That linkage turned the UGG customers and territory sales representatives into additional touch points. They do not do our banking job for us, but they have become ours ears to the ground.
When you are working in a large geographical area with a widely dispersed population, such as in the Prairie provinces, there cannot be bricks and mortar on every corner. The goal is to get to as many people as possible as easily as possible.Our goal is to achieve some face-to-face interaction while still utilizing technology for banking as much as possible.
Mr. Kleinschmidt: We recognize the emergence of the hobby farmer as a very important part of the rural fabric. When I speak of "hobby farmers," I am not talking about the traditional farmer who now has off-farm income. I am thinking, rather, of the person who has traditionally lived in town but wants to move to a rural home with a larger lot.
As Mr. Funk mentioned, our ability to use a variety of service methods, which includes more than just technology, definitely supports the rural branches. It is a very important part of the rural fabric.
I have a counterpart at the Royal Bank who is the national manager of farming and lifestyle agriculture. That is inrecognition of that emerging trend. Mortgages for those folks do not quite fit the pattern of a residential mortgage or a traditional farming mortgage. We are developing a product specifically for their needs.
Senator Tunney spoke about expertise and financial advisers for farmers. Our experience has shown that the hobby farmer has quite a different set of needs, in terms of advice and counsel, from what we think of as more traditional farmers. We are building expertise to meet both of those needs.
Traditionally, the OMAFRA representative would have had an agriculture degree, a farm background and knowledge of farm finance. For many years, it has been the bank's deliberate strategy to hire those kinds of people to advise farmers, as well as be bankers focused on agriculture.We are finding that hobby farmers often move in different circles and have different needs. Succession and investment advice is important to them as well, and is therefore a very important part of the business.
The Chairman: Senator Day raised a very interesting subject in the regions of the country. In Saskatchewan, and probably to some extent in Manitoba, many farmers move to Kelowna, B.C., Vancouver or Calgary when they retire. They take with them their pension savings and the profits from the sale of their farms, which may be as much as $250,000, and that goes into the bank in the community to which they move.That is a major drain on Saskatchewan.
That is good for business in the communities to which they move. They are probably the only people who pay cash for their homes in Vancouver or Kelowna. That is a tremendous outflow of capital from a province like Saskatchewan and a tremendous benefit to British Columbia and Alberta. I do not think much of that capital flows east to Ontario, although probably a little does.
Have you observed that? Of course, we would not want to infringe upon their freedom to move, but it is a factor to be considered.
Mr. Campbell: That is part of the much broader picture of the demographics and social trends in Canada generally. I cannot comment on the specific situation in Saskatchewan, but it is part of a much broader social trend.
Mr. Kleinschmidt: One fortunate aspect of the fact that we are structured as national organizations is that the capital flows - the "retirement dollars," if you like - are able to move freely around Canada as people pursue their interests. To take the Saskatchewan example, that would never enter into the decision of how much to lend in Saskatchewan because it is a national pool. We can allow the money to flow freely to where the needs are. We can fund pockets of the country that are growing much faster relative to their peers without any constraints. It is a great benefit. I appreciate that there are issues in the social context you are looking at, but in the provision of financial services, we are fortunate to be structured in such a way that that migration does not impede what we do for our customers.
The Chairman: On the positive side, I saw statistics some time ago showing that Saskatchewan people save more than anyone else in Canada. You may want to comment on that. I do not know whether it is true, but I did read that. It is probably because we are used to a tough life and are a very strong people.
I want to make a statement about the global changes that we are seeing that I think are very important to agriculture. As a good corporate citizen, you have at least a partial responsibility for where Canada is going in agriculture, and I am talking about food security. There has been a lot of talk about security since September 11.
We tend to take agriculture for granted in Canada. If you visit Europe, Europeans will say, "Canadians do not have any appreciation for food because they have never been hungry." As we move faster into a global society - faster than governments and so on can keep up with - we have to be concerned about food security, land use and the environment. The farmer alone cannot be expected to carry that entire load. If the farmer does not have the financial wherewithal, then he often does not use good farm practices that protect the environment, as he should be doing, because he is pushing to try to get every nickel out of it. There is an overall failure of our corporate citizens - the bankers, the governments and the people who make decisions - to recognize these things. I think we will have to take a look at that. That is a pretty broad statement, but I did want to inject it here.
Mr. Kleinschmidt: You are speaking about something that is very near and dear to my heart. If I could give you an answer by describing an example of something that we are doing, it may be helpful. We watched the terrible outcomes of foot-and-mouth disease for farmers in England. Canada is in the very fortunate position of being able to look at their experience, and then at the infrastructure, the rules and the processes we have in place today and think about what we should do about them.
A couple of months ago here in Ottawa, I was invited to a special forum to give a banker's view of the issues. There is definitely an interest in, and some very relevant issues for, the provision of financial services to agriculture. However, the moment you get into the area, you realize that the solutions go way beyond just financial services. We are definitely an important stakeholder. You saw the numbers that the banks are lending to agriculture. We have a huge vested interest in bio-security.
Flowing from that initial conference, which was hosted by the CFIA and Agriculture Canada, we have struck a multi-stakeholder committee which includes: the Canadian Animal Health Coalition, which is an aggregation of livestock producer associations; the Canadian Food Inspection Agency; the processing industry; Agriculture Canada; and a number of other players. We are collectively sponsoring an economic impact assessment of various scenarios in a foot-and-mouth outbreak. The objective is, after we understand the economic impacts, to be able to make very good decisions about the infrastructure of which we are all part to mitigate the risks and understand the costs and the benefits of the solutions and the trade impacts - all those different factors involved in making Canadian agriculture more secure.
We like to think we are good at the provision of financial services, but we are actively trying to work with multi-stakeholders to enhance the readiness of Canadian agriculture for such an outbreak. Foot-and-mouth disease is one example. You have also read about mad cow disease. There is a lot of interest in a number of others. I have been involved in and have heard quite passionate discussions about readiness and the things that we can do.
Senator Day: My two short questions relate to a comment you made earlier about the Internet. I am sure you are aware that it is government policy to try to introduce the Internet into rural areas by expanding broadband capabilities. We are hoping there will be a continuation of that initiative in the budget next week. Assuming it is not delayed, do you think the expansion of broadband will have an impact on banking activities in the rural areas? Secondly, have you found that the farming community has embraced the Internet to the same extent as other sectors of our Canadian community?
Mr. Campbell: It is fair to say that, generally speaking, Canadians have been early adopters of Internet technology. From the moment that Internet banking was introduced in the mid-1990s, it has continued to grow. There is a different take-up according to the demographic breakdown. However, it is popular and it is growing.
Internet banking is not for everyone, of course, but increasingly, we are finding that more and more Canadians wish to avail themselves of that option as well as a whole range of others. People like to have a variety of ways to access those services. On the small-business front, including, obviously, small agri-business, Bob mentioned earlier that there has been a considerable take-up of the Internet because you can do your purchasing online.
Online marketplaces make it considerably easier for businesses to do their day-to-day purchasing and carry on their day-to-day business operations. We think there will be growth there. The Internet is expanding and more and more communities are coming online. We will see that continuing trend in the economy.
Senator Day: Specifically, do you find the farming community is embracing the Internet more or less than other segments of our society?
Mr. Funk: My specialty being agriculture, I do not spend too much time looking too to see whether we are doing these things more than others. I do know that far and away the majority of our customers who have growth goals and expectations see electronic channels as a medium to enable them to get information more quickly, undertake financial transactions on the spot rather than having to drive to town, and keep in touch with their suppliers, processors and producer associations. For example, the cattlemen can talk to the Canadian Cattlemen's Association and get information from Calgary quickly. I am seeing much of that, and it is not by accident. It is not haphazard. It is driven by the management need to know and to do.
Mr. Kleinschmidt: Looking at agriculture versus small businesses, and specifically at the use of online banking, I know that within our organization, the usage rates are comparable, and in some cases, higher in agriculture, if that is helpful as an answer.
Senator Day: That is helpful. I am taking your comments to mean that you are supportive of the government initiative to expand the availability of broadband Internet service, which is much faster and more convenient, to rural communities.
We have talked about many different programs. You are a for-profit corporation with shareholders who demand that you make the proper kinds of investments and do not take too much risk. You also have many people asking for your services, who, for one reason or another, you are not able to help. For example, Senator Chalifoux asked questions about single women looking for loans. Are you satisfied that you have good input to the decision makers in various government departments to assist in developing policies that will take account of these special situations and allow you to participate where you might not otherwise be able to?
Mr. Campbell: We do make an effort, both in this field and across the other areas of our banking operations, to be in contact with policymakers in government, so that they will better understand banking operations and we will understand their needs from a public policy point of view. One of the key goals of the Canadian Bankers Association is to understand the public policy environment, understand what governments need, understand their objectives and work at that kind of two-way communication with the industry.
Broadly speaking, yes indeed, we do make that effort. As I mentioned upfront, we try to keep in touch with the federal Minister of Agriculture on a regular basis. I know we are actively dealing with provincial agricultural departments.
Senator Day: Just as a follow-up to that, Mr. Campbell, we would like this to be a two-way process and your participation is part of that. We ask pointed questions because we want to understand what you are saying, so that we can then help influence policy. We would like you to think that you not only have that opportunity to understand government policy, but to influence it.
Mr. Campbell: I quite agree. I appreciate that.
Mr. Funk: I can give you a specific example of how the Canadian Bankers Association group of banks involved in agriculture is participating in making sure we have the right information and that we understand what is happening in the industry. We all had the opportunity to sit down with Larry Martin, of the George Morris Centre, of whom you may be aware. He has been aware for some time of a need expressed by a farm group called the "Agricultural Odyssey Group." They wanted to discuss where our marketplace is going, how pricing is established in the agricultural community, and given the alliances and partnerships forming among processors, producers and input suppliers, whether there should be some changes to the information we use to make financial projections and establish pricing. We have all contributed to the funding of a project, together with the Odyssey Group, to enable that to get to the first stage. I hope that indicates to you that we are aware of the need for information. We know we do not have it all. We know some of it has to be researched. We have been playing at least some part in investing in and supporting its development.
The Chairman: The head of the Bank of Canada, Mr. David Dodge, was recently before the Banking Committee. He told us to please let him know if we come up with any answers to the slide of the dollar. That was not too reassuring for the senators.
At the same time, I understand fully, as an exporter and a grain farmer, the advantage of a low dollar in selling into that world market. On the other hand, there are some negatives. I am just wondering how aware you are of that. For example, in Saskatchewan, right on the border, my neighbour sold five quarters of land at $55,000 a quarter. Across the 49th parallel at Crosby, North Dakota, land sells for US $100,000. That puts his farm at US $32,000. Saskatchewan has legislation against foreign investment, to which, I understand, the province is considering some changes next spring. On the other hand, looking at the other side of investment by Americans, ConAgra, ADM and Cargill are building plants one after the other, and we have just seen the takeover of what were the Alberta and Manitoba Pools and AGRICORP. ADM owned 48 per cent of United Grain Growers. They now hold, I believe, 25 per cent of AGRICORP, and they want a bigger share. Canadian companies like Saskatchewan Wheat Pool are, quite frankly, possibly facing bankruptcy. I am hearing rumours that in fact, some of the ConAgra people have already been working with Saskatchewan Wheat Pool. There has been a major takeover through American investment, at least in the grain industry. That has some positives. I suppose they see a good future for grains and oilseeds, or they would not be investing that money in Canada.
On the other hand, when you look at the dollar, you have to ask yourself, how will we ever fight our way back? I can remember when the dollar was $1.10 in favour of Canada. We all used to go and buy our jeans in the United States. I would like to hear your comments on all of this. Through your operations, you must have a deeper insight into what is happening in commercial real estate across the country. Will we soon only be using the American dollar? What is happening?
Mr. Campbell: You have put your finger on one of the biggest public policy discussions in Canada right now, namely, why is the dollar where it is? Mr. Dodge was looking to you folks for guidance on this and on the larger issue of should there be a common currency, should we adopt the U.S. dollar, or should we maintain the Canadian currency? All of our banks factor in the level of the dollar on a daily, even hourly basis in their business decisions and business practices. Clearly, they have all the mechanisms to be able to do that. On the larger question, our sense is that this debate still has some way to go. There is still lots and lots of discussion on this. People within the banking industry and in the broader community have very different views on why the dollar is where it is and whether or not it should be maintained. Today, I cannot offer you anything more than to say that the debate is ongoing. It will rage for a while yet. In a business sense, my colleagues may have some commentary on what it means for agricultural lending practices.
Mr. Kleinschmidt: I do not think I am qualified to help you understand the big picture. However, I can tell you what it means in the day-to-day life of a farmer. I can talk about my own experience, but this is applicable across the banks. We all have products that help farmers hedge against currency moves. If you think in terms of the grain industry and of "feedlot alley" in Southern Alberta, a big part of the risk in those operations is currency fluctuation. We all have products, options, features, whatever, that help mitigate and manage those risks. As the need for those products grows, we are also developing agricultural expertise within the financial institutions. In the Royal Bank, for example, in Dominion Securities, we have a vice-president who is focused on providing hedging products purely for the agriculture and agri-business market. It is not a solution, nor does it answer your broader question, but there are things that can be done to help manage those risks.
The Chairman: These are short-term answers to the problem. In discussing this with Senator Dan Hays, our Speaker, who is very well informed about the cattle industry in Alberta, he told me that the feedlots there are expecting to lose now, with the drop in cattle prices in the U.S., probably $200 a head. That is a pretty serious blow, but it certainly brings to our attention the importance of where the dollar is in the whole game and where our exports are. In the cattle industry, for instance, if we lost our exports to the United States, we would be out of business.
Mr. Kleinschmidt: I think we all know the importance of exports to Canadian agriculture. The industry is a huge exporting asset to Canada. The current crisis in the feedlot business, the cattle business, is clearly part of the cycle.
The Chairman: It is a cycle, there is no question about it.
Mr. Kleinschmidt: This is why understanding the unique characteristics of the industry are important. We do have a cycle and it is coming down the other side. It is like a slow train coming. A lot of those feedlot farmers have worked with their financial providers to mitigate the risks as best they can. We try to anticipate these cycles, look at the operator, the depth of management and the financial position, and set up policies to endure these cycles. There is a currency fluctuation thing at play, but the broader dynamic in the feedlot business right now is just a part of the cycle.
Mr. Funk: We acknowledge that the cycle is there. We built our policies relative to the beef industry, and to the others as well, to acknowledge that cycle. At this point, we are ensuring that our account managers in the field understand that business as well as possible. If you have a $200-per-head loss on animals sold today, as was cited in the example, to how many other animals that the producer will sell will that apply? How long will it take before that operator is able to average down the cost of the cattle that are brought in to be fed in the next round, and so on? We are ensuring that we, and our staff, understand the industry. AsMr. Kleinschmidt indicated, we are then developing a range of tools for them to mitigate the risks out there as much as possible.
The Chairman: The cattle industry has been one of the strongest in Canada. They have had their good days, as you say, in the cycle. They have had days when they were making good money. I do not want the bankers going out there and cutting off their credit. The fluctuation in the market is a concern; there is no question about it.
I want to thank you for appearing here this morning. This has been a good discussion and exchange. We appreciate your coming and would certainly like to have you return some time, because there are some important factors here for Canada in these areas. Thank you.
Mr. Campbell: Chairman and senators, thank you very much for the opportunity. We really enjoyed the discussion. We hope it was useful for you.
The committee adjourned.