Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 6 - Evidence - Meeting of June 9, 2009
OTTAWA, Tuesday, June 9, 2009
The Standing Senate Committee on Agriculture and Forestry met this day at 6:25 p.m. to study on the current state and future of Canada's forest sector.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: Honourable senators, I see we have a quorum. I will call this meeting to order.
I would like to welcome Mr. Carl Marcotte to this meeting of the Standing Senate Committee on Agriculture and Forestry.
[English]
My name is Percy Mockler. I am a senator for New Brunswick and chair of the committee.
At this point, I would ask the members of the committee who are present to introduce themselves. I ask the Deputy Chair, Senator Fairbairn, to begin.
Senator Fairbairn: Welcome. I am Senator Joyce Fairbairn from Lethbridge, Alberta.
Senator Mahovlich: I am Frank Mahovlich from Toronto, Ontario.
Senator Cordy: I am Senator Jane Cordy from Nova Scotia. Welcome to our committee.
Senator Eaton: I am Senator Nicole Eaton, a senator from Ontario.
Senator Johnson: I am Janice Johnson, a senator from Manitoba, replacing Senator Housakos from Montreal. I am happy to be here.
[Translation]
Senator Rivard: My name is Michel Rivard and I am a senator from Quebec.
[English]
Senator Duffy: I am Senator Mike Duffy from Prince Edward Island.
The Chair: The committee is continuing its study on the current state and future of Canada's forest sector. Since the beginning of our study, we have heard from many witnesses commenting on the difficulty the forest industries have in accessing credit. At the last meeting it was decided that we would hear from witnesses on that subject.
[Translation]
At the beginning of our study, we have heard from several witnesses commenting on the difficulty the forestry companies have in accessing credit.
[English]
We welcome you here today, Mr. Marcotte, from Export Development Canada, Vice-President of the Resources Group. I now invite you to make your presentation. It will be followed by a question and answer session.
[Translation]
I would invite you to please commence.
Carl Marcotte, Vice-President, Resources Group, Export Development Canada: Thank you, Mr. Chair, and thank you to the members of the committee for the opportunity to speak with you today.
Your study is timely and important, given the challenges presented by the current economic environment.
[English]
Access to credit is vital for companies of all sizes, as I know you know well. As a Crown corporation, Export Development Canada, or EDC, plays an important role in helping Canadian companies obtain additional credit and protecting their businesses against the various risks they face in international affairs. This is our mandate. It is why the government created us 65 years ago.
What does EDC do? Briefly, we provide commercial financing solutions and a wide variety of insurance products to help companies invest and export around the world.
Specifically, we provide loans to foreign companies to help and encourage them to buy Canadian goods and services. We provide working capital facilities for exporters to help them meet the terms of those contracts. We provide loans to Canadian companies to help them invest overseas or abroad. We give guarantees to banks to help them do more for exporters and Canadian companies investing oversees as well. We offer insurance to protect Canadian companies against various business risks, including nonpayment of receivables and various political risks. We provide bonding services to help Canadian companies guarantee their performance under their contractual obligations. Finally, we have a small number of equity-type programs primarily in the high-tech sector.
We do all of this directly and in partnership with our many partners in the financial institutions and Canadian banks. We do it all on commercial terms — that is very important for us — without any annual appropriations from Parliament.
I will speak briefly on agriculture and forestry in order to contrast the two.
As we all know, the forestry sector is vital to Canada's economy. It is more than 2 per cent of GDP, and some 300 communities across the country, from coast to coast, count on this industry. It is highly dependent on international trade; most of what the industry produces is exported somewhere around the world.
The current economic downturn has created serious challenges for the industry and has forced companies of all sizes, from the very smallest to the very largest, to rethink their business model and restructure. We are seeing a great of financial restructuring in all companies of all sizes. This is primarily due to the increased competition from foreign producers, from the extraordinarily difficult reduction in demand for lumber and newsprint in the United States, and generally because of weak global demand for all aspects of what is exported in the industry.
The Canadian softwood lumber industry, in particular, is experiencing a dramatic change and very difficult economic conditions as a result of the collapse of the U.S. housing market.
At EDC, the forestry sector is one of our very largest and most important sectors. In 2008, we helped 534 different forestry companies export or invest overseas, which was a 12 per cent growth over the previous year. The total value of all the exports or investments we supported was over $14 billion Canadian, across all of our various products.
This year, we have served almost 500 companies already. We will surpass what we served last year; we will do more for more companies and our volumes are on track to surpass last year's already.
By contrast, our perspective on agriculture is that the sector seems to be experiencing somewhat less difficulty. Prices for many commodities have dropped dramatically from last year's record highs but many are still generally above the long-term historical averages. EDC is very active in the horticultural industries, in all specialty crops and especially in the export of agricultural equipment and farm machinery, which is an important export sector for us. Over 400 Canadian companies in agriculture were supported last year and approximately $1.6 billion of total support was provided.
While EDC's services are needed in good times, they are especially needed in difficult times. Our view is always that we must stretch to do more, to try to support more customers, in more creative ways, especially in difficult times. That is our goal for our customers.
In Canada's Economic Action Plan, EDC was given greater financial flexibility to do more in our traditional space with our customers. In addition, our mandate was expanded for two years to allow us to offer these same loans and insurance policies to companies that operate in the domestic market. Again, that is to try to help them do more.
It is important to note that EDC operates in the commercial sphere, just like any bank. Like any bank, our customers must be credit-worthy, they must be recourse-worthy and we must believe in their business plan and understand how they will repay our loans over time.
EDC is, of course, bound by the regulations of Canada's various international trade agreements, such as the Softwood Lumber Agreement. Therefore, we cannot and do not provide any sorts of subsidies to any industry.
We feel we are doing to the maximum today what we can do for Canada's forestry and agricultural industries and, again, we are always stretching to do more. Primarily, we are helping forestry companies by helping their banks, providing guarantees and loans, lending beside those banks, providing guarantees to those banks to help them do more for our mutual customers. As well, we want to help to fill the gaps being created as foreign banks have left the marketplace. This is an important phenomenon since the crisis began last year, with a number of gaps being created. U.S. banks, especially, were required to retrench from the marketplace.
Our Accounts Receivable Insurance also provides significant cover to these exporters, providing them support for any losses in their export contracts — up to 90 per cent. While this insurance helps them sleep at night and allows them to perhaps more aggressively offer terms and conditions that are favourable to win more business and increase their sales, it also enables financing. As I am sure many of you know, companies in Canada generally borrow against their most liquid assets: Their accounts receivable. It is the easiest way for banks to finance companies. If your accounts receivables are in far-flung markets, they might not be very attractive to a banker.
If they are insured by EDC, the value and strength of those assets is significantly increased, even if they are insured by the private sector. Therefore, bankers can increase the margin and lend more against those receivables, if they are insured, and provide significant increases in working capital to those exporters.
We work closely with all our banking partners to try and stimulate this and ensure they are getting the maximum from our insurance.
As the economic downturn has taught us, Canadian companies — especially in this sector — need to diversify from our traditional markets. For the sector to remain competitive, now and in the future, they really need to break into more and new global supply chains. We are seeing many our customers doing that already and they are prospering as a consequence. We are working very closely with the forestry industry to try to stimulate their interests in overseas joint ventures and investments and to change their approach to how they work with different supply chains.
As a small example, working with trade commissioners from DFAIT this year, we are hosting a number of trade missions in Russia and Chile, which are major destination markets for a lot of Canadian forestry equipment and expertise. The goal of these missions is to introduce foreign buyers to Canadian capabilities and expertise, and hopefully stimulate some contractual arrangements.
[Translation]
We have a resources sector team dedicated to the forestry, agriculture and fisheries sector and foreign representatives located in these key emerging markets — we are well placed to leverage these relationships.
Thank you. I welcome your questions.
[English]
Senator Mercer: Thank you for being here. We are hoping that you can help us with some of the answers as we have certainly started to identify some of the problems.
The issue of diversification, what we are doing in the forestry industry, has been paramount in what we have talked about. People have been optimistic that, as we come out of this downturn, we will be better. However, I have not been convinced by anybody yet that, while we are in the downturn, we are taking the time to retool, not just at the plant level but at the sales level. It is at the sales level that our problem is located. We can produce just as well as anyone else in the world but, if we do not have people on the ground selling our products, we will be in trouble.
In our brief, you state that DFAIT and EDC are planning trade missions to China and Russia in the fall of 2009. That is important. I wish everyone well. I am more concerned, however, about the "feet on the ground" today, on a regular basis, in our embassies.
Are the people in our embassies being retrained to talk about the forestry sector in Canada in the future — not what it was in 2008 or at the beginning of 2009, but what it will look like at the end of 2010 or at the beginning of 2011, whenever it is we come out of this mess?
Mr. Marcotte: That is one of the key questions that we talk to our customers about, day in and day out. I am lucky to know most of the CEOs and CFOs of the major forestry companies and a lot of the mid-size ones. They are all customers, as you can well imagine, without giving away any secrets. We spend a lot of time listening to their needs and trying to understand where they see opportunities. We proactively work with them in those markets to uncover other ways we can provide the financial support to help make those opportunities happen.
Many of the companies are aggressively looking overseas in the kinds of ways you are thinking about. As a small commercial for the Trade Commissioner Service, every market I have been to where there are forestry activities is well informed of the Canadian capabilities, whether it is in equipment for saw mills on a smaller scale or whether it is major companies looking for joint ventures or partnerships.
I would say that the skills are there. I would say most of the Canadian companies have put a strong reliance on the U.S. market. They will admit that themselves. It is a great place to sell when things are going well and they have tended to focus on that.
Many of the West coast players have put a large effort into diversifying into Korea, China and other parts of Asia. In difficult times, they have found they have had to retrench to some extent. Many of the companies actually take full advantage of all the various market development programs that DFAIT has put into place. They have put quite a lot their own money into the efforts to diversifying and developing those markets. Many of those markets are not familiar with wood frame construction so there is some missionary work to do in those markets to help people understand how you build with lumber.
Most of the aggressive companies are doing that, but their balance sheets have been so constrained over the last few years. We have begun to realize that this crisis for them did not start last December but in 2006, as you well know. They have been trying to get through the last three years and are finding it ever more difficult.
Senator Mercer: You talked about people on the West Coast having looked at this. I want to switch you to the East Coast, where Senator Cordy and I come from. Going through the Suez Canal, the Port of Halifax is closer to the southern part of China, all of India and Indonesia than are the ports on the West Coast. When they finally expand the Panama Canal, the West Coast ports will be closer. Certainly, we are closer than other East Coast ports and closer than the West Coast ports as well.
I am not suggesting that EDC will have the answer to all of the questions but they would be part of the mix, and that is why I am asking you. Is there a coordinated effort to look at the country as a whole and begin to market lumber from British Columbia and Alberta, as well as products that are produced in Eastern Canada. We are mainly in pulp and paper but we have many other products that we can offer through Nova Scotia, New Brunswick, Quebec and Northern Ontario. We have many products and many potential products, given our resources. I am not as interested in shipping raw materials to India, China and Indonesia for manufacture and shipment of products to sell to us. I would rather see some joint ventures here so that we can add value to the process. We cannot be simply the hewers of wood and drawers of water for the world. We have to figure how to get out of this mess. Is there a master plan? Is DFAIT or someone else helping to bring everyone together?
Mr. Marcotte: In my experience, I have seen the major producers working closely on port development, for example the Port of Churchill, Manitoba, as a more direct route to Russia. DFAIT has looked at a number of investments as well as the major companies. They are working in a coordinated way. Certainly, our friends in a large family-owned company on the East Coast are aggressively and actively selling around the world. There is a lot of activity. Where it works for them is business people. I do not know that there is a consistent lobby among all parts of the industry, which is a bit fragmented in different parts of the country.
Senator Mercer: I understand the fragmentation because it is all private enterprise. I know that the family to which you referred is the Irvings in New Brunswick. They are competitive with people around the world. One of the things that "we," meaning the government, bring to the table, is a pan-Canadian view to sell lumber that might be harvested in Cape Breton, or Grand Falls, New Brunswick, or Maniwaki, Quebec.
I am concerned that there does not seem to be a coordinated effort. I appreciate the work that EDC does; and I am not being critical. However, I am looking for an answer.
Mr. Marcotte: It is probably a bit out of our ballpark.
Recently, we met with the CEOs of all the member companies of the Forestry Products Association of Canada. We attended the CEO breakfast. Of 18 or 19 member companies, 17 of the CEOs were at the meeting. While I was listening to them discuss their issues, I realized that they are quite in sync across the country. They are competitors in most respects but they have a great deal of respect for one another. They work together in certain areas where they have a common interest. I was surprised to see how much they have in common and how well they work together. I was delighted to see the camaraderie among them and their strong single voice.
Senator Eaton: Mr. Marcotte, in your presentation you explained that you act very much as a bank. In these rather tough times for the forestry sector, have you found restrictions on what you are able to do?
Mr. Marcotte: As you know, we operate with a commercial mandate on commercial terms and conditions. The area where we can add a great deal more capacity is in taking more risk and holding it for longer. We do not have to maximize profit as a private sector financial institution might have to do. We seek to maximize outcomes and to support companies and do more for them. We have such a large balance sheet and such a spread of risk that we can take more risk and hold it longer. That is the value we bring to the bankers.
Our banking partners tell us about the gaps, where we try to fill in and do whatever we can to keep the credit flowing. With the depth of the crisis that was 2.5 years in the making, when everything else hit in September, many banks found it difficult because of the way the analysts treat them and the way many people look at the banks. The sector was viewed as so risky that many banks felt they had to cut back and restrict lending. It is a necessary part of how they manage their businesses. Many foreign banks decided to disappear quickly. It was difficult for them to stay in the market place.
Generally, the goal we have this year is to work with them to find those gaps. Even though we are trying to do that, there are certain limitations we cannot overcome. The markets have been so decimated for certain products and have disappeared for other products. That is why we have seen the retrenchments of some of the factories and mills in certain areas. They have no customers and, therefore, no revenues and cannot handle such a debt load. Working with the banks and BDC, we are trying carefully to balance the needs of companies to get them through what we perceive as a significant trough to next year when hopefully sales will increase.
We are trying to get them to position themselves to be lower cost producers as markets start to return next year. Our goal with our banking partners and BDC is to try to get all of the companies with the right business plan through this trough period.
Senator Eaton: I understand that you are not there to restructure. If I am in pulp and the market has disappeared, it is not your mandate to help me to restructure.
Mr. Marcotte: That is correct. We will meet with those companies frequently and talk to them about finding the right financial adviser to help with a restructure. If they immediately need to restructure their debt, we can be there along with BDC. We meet with them and talk about it but they have to re-jig their business plan on their own.
Senator Eaton: Do you see a need for an organization like yours to help with innovation, such as university research, and help a company take it to market?
Mr. Marcotte: I used to work in the high-tech industry many years ago. There is a real sense of innovation in this industry in areas such as biomass and cogeneration facilities that reduce costs and eco-environmental footprints. There is a tremendous amount going on from what we can see. However, interesting plans had to be shelved for the interim because of this economic crisis.
Senator Eaton: It is not an organization.
Mr. Marcotte: There might not be enough capital or the timing might be wrong to invest when sales are in such a dramatic slump.
Senator Eaton: Is there an organization like yours within the federal government to help deal with access to credit, export and import if you have a good plan.
Mr. Marcotte: BDC has a significant venture capital program. For a small exporter, BDC is a great place to go, aside from the traditional private sector venture capitalists. However, I am sure that any entrepreneur in Canada would say that there is not enough in Canada.
It is probably no different in this sector, but the companies that are doing well are still investing, and I find that amazing.
Senator Fairbairn: We are very glad you are here. You are very up and ready. It seems that there is a huge challenge, but you are having one heck of a good time responding to it.
Mr. Marcotte: We are very busy. Thank you.
Senator Fairbairn: When you speak about traveling, could you give us an idea of exactly who you are traveling with? Does it include various people from different parts of our country, not just in terms of the federal and provincial and territorial government, but the kind of people who are working in it? These kinds of events seem to rise up and get going, not all the time but very often, in different areas of trade and business. No matter what the difficulties, just by getting the right people with the right attitudes and the right plans very often sends things shooting up.
Could you give us any examples of how this has been done with you and more specifically about where you are going with your groups? It is a terrific way of doing it if the temperature is right. You seem to have the attitude that, come heck or high water, you will make it right.
Mr. Marcotte: Thank you very much, senator. That is exactly how we would describe ourselves, as seeking ways to add extra value to our customers. Selling them products and services is terrific and we get high customer satisfaction scores. We seek to do as much of that as possible. It is the extra little value-adds that really lock in long-term partnerships, and we are always trying to position ourselves as a trusted adviser, trusted partner to our customers. Matchmaking, to use that word, is what we seek to do more often than not in most developing markets.
About a dozen years ago we started opening foreign representations by putting EDC employees in posts around the world, in consulates and embassies around the world. We have about 20 such people scattered about in key emerging markets, and they provide a focus or linchpin to help exporters understand the key markets better and as a way for us to develop the right opportunities to matchmake.
I will give you a couple of quick examples. In agricultural equipment, we probably work with the top 30 companies in that sector. Once or twice a year we organize simple matchmaking cocktail parties, for lack of a better phrase, with Kazakhstan, Russia and Ukraine. These are top markets for those companies because they have the same farming conditions and the countries desperately want Canadian equipment. We work with local partners and local bankers that we know well to arrange for key distributors or key buyers or up-and-coming corporate entities now assembling large farm areas to come together and meet with us. They wish to do so because they understand the type of financial benefit they might obtain by meeting us and getting to know us and buying from Canada. We simply get them together at a trade show or whatever the venue or opportunity might be and introduce them to Canadian companies.
We did this successfully for agricultural equipment in Russia last October. We invited 75 people, about half and half Russian and Canadian companies. We had 220, and we used up all the wine in this restaurant in the course of an evening. We actually had a number of livestock exporters come by as well, trying out this trade show for the first time.
Senator Fairbairn: I am from Alberta, so we want to know about that.
Mr. Marcotte: They made a number of sales on the spot. They were just thrilled.
It helps us expand our networks of contacts and provides a little extra value to the exporters to say, you can work with us and get products and services from us which hopefully will be helpful to you. We will also work with you to try to help you expand and find buyers in key markets. There is nothing official and nothing we will charge you for, but it is part of the EDC family that we will try to find ways to work with you in your key markets.
It is the same in forestry, with these missions in Russia and Chile. We know the key buyers in those marks very well. We have lent to them before because they have purchased Canadian equipment before. In Chile, we have a 30-year relationship with two of the largest players. Because of that relationship, we can pull in missions, encourage them to come to events with us. In the case of Chile, we have registered about 40 Canadian companies from across the country who make sawmilling equipment and provide professional services, things of that nature, for those industries. They are all coming down for four days, and they have a captive audience of the four largest players in Chile who have agreed to sit for a day and bring their procurement people, because they know us well. We will buy the food and organize the hotel rooms and allow them to come in for two days and give those exporters a chance to showcase what they can do.
It is the same thing in fisheries. The Boston Seafood Show or the Brussels seafood shows are the biggest in the world. Through our contacts, we support almost all the lobster exporters in Canada. We know most of the lobster buyers in the U.S., so we get them together in a room at the Boston Seafood Show and allow the smaller exporters to have a chance to meet some of the key buyers. We try to do that around the world. All industries and sectors at EDC do this on a regular basis in partnership with trade commissioners and so forth.
Senator Fairbairn: Are people from government or people from Parliament involved in that? Second, what about China and East Asia?
Mr. Marcotte: Yes, actually. China is very much a major market for this. We have some restrictions as to how much direct financing we can do onshore in mainland China. A lot of the financing we do is through Hong Kong or Taiwan, but we do as much matchmaking, if not more. Medical equipment devices and all sorts of different industry subsectors are big for us there.
Mr. Ted Menzies, M.P., was with us in the Ukraine last year, so we have had government members, and it adds a whole other flavour which pulls in many other parties as well. The more we can bring more people to the table, the more exporters will love it. It gives them a sense that people want to help them, especially the smaller exporters who may feel overwhelmed by the challenges of working halfway around the world in a different language. To know there are other Canadians there with them, especially in some numbers, they find very comforting and helpful.
Senator Fairbairn: I would assume that it is also very helpful to people in the government side too as they go to different areas that you may have a different attitude towards.
Mr. Marcotte: Absolutely.
Senator Fairbairn: You are a very uplifting person at that table. We certainly have had wonderful discussions with the people our leader brings to the table, and it has been great. We all know this is a very difficult issue now, and I must say it gives us a little ounce of hope to listen to the attitude you are putting forwards in saying we will keep on going. That is great.
Mr. Marcotte: Thank you very much, senator.
Senator Duffy: Mr. Marcotte, I would like to echo Senator Fairbairn's words. We have heard much depressing news for a while. The OECD said yesterday they think we have bottomed out and are starting to climb back. Your appearance here and the approach you are taking at EDC are most welcome.
We have heard a number of witnesses talk about innovation, and today you told us there is some element of financing of innovation at the Export Development Corporation. We heard of a thing called a house in a box: Taking some of what used to be called two by fours and, instead of shipping them in a container to a foreign destination, actually putting together value-added here and moving it overseas. In your informal context, because I know this is not your primary field of operation, do you see that kind of innovation coming ahead or has the downturn cut off the revenue that people would put into that? It seems to me that when we do come out, if we can come out and offer different products, or a different set of products, than we have been offering in the past, it will be very helpful.
Mr. Marcotte: You are definitely right. Thank you for that.
Over the years we have seen many exporters look at forms of prebuilt or prepackaged or house in a box, as you say — I have heard that phrase before — around the world. We have supported quite a lot of that, and it works. However, generally speaking, you need to have the mortgage financing for the individuals at the other end so that the builders or the investors can get the financing. We can be part of that solution in different ways.
Some of those projects have come to a halt, especially in these kinds of conditions. While you can build 20 or 100 or 2,000 houses in a community, perhaps the inhabitants cannot get the local mortgage financing they would need to buy the homes. When the economy turns down, that is a major issue, in developing markets especially. We tend to see these sorts of ideas targeted at lower-income countries, which makes sense, except that again they do not have the wherewithal to afford it. We have had some successes and some setbacks over the years, from what I have seen, in trying to support those kinds of operations.
Senator Duffy: What was suggested here by one of our witnesses was that we would take Canadian lumber, because it is straighter, stronger and lasts longer — all facts that the customers know but the general public south of the border does not know — and do this as a way of having value added, especially into the American market when it eventually comes back.
Has this been confined only to the Third World or have you seen any sign of it for the North American market?
Mr. Marcotte: I do not think we have seen anything in North America. Certainly in our recent discussions with the major CEOs, they were feeling that the U.S. lumber industry will come back much more slowly than might be expected. Generally, in the last three recessions, lumber has tended to be the leading indicator: It leads into the recession and is usually the first part out. They are feeling this time around, because of the glut in the U.S. market, it may be much slower.
I do not think I have heard any of our customers talk about that sort of thing for developed markets. It is really a less-developed market approach where they seem to try those sorts of things. They seem to focus purely as a commodity, a lumber commodity, in markets like the U.S., competing on price and quality with their competitors.
Senator Duffy: As a banker, looking ahead down the road, what is your bank's expectation — if you can give us that without violating commercial confidence — on how big the industry will be after it is restructured? Will we ever again have the glory days, or are those days over in small-town and rural Canada?
Mr. Marcotte: There is a tremendous source of opportunity and wealth in the industry across the country. Many of the companies we know today may have to be smaller by the time they come out of their restructurings. By definition, they will be smaller. Many of them took on too much debt and did some things they probably regret in hindsight. Many of them, however, did not. Many of the companies are as strong as they have ever been.
There is no doubt an opportunity for some consolidation or changes, and it may be different ownership structures, but I do not necessarily see there being less of an industry in Canada. It may just look a little different. I suspect there may be slightly fewer players and maybe some larger ones. There are opportunities for the Canadian majors and some of the mid-market players to invest more heavily in other parts of the world and maybe merge or try some joint ventures with other companies.
I think the industry will restructure. It will not necessarily be smaller. There is an opportunity over the next few years for the industry to regain its size and strength. Right now, the companies are focused on surviving the downturn and getting through this trough. However, many of them have ideas and insight for the future that would be quite positive. For now, they are not saying; for now, they are just trying to survive this period.
Senator Duffy: That is reassuring because, as you know, it is an industry that is terribly important to the country. The industry employs lots of people in many small communities, so it is nice to hear that your long-term assessment is that these small communities will not all die off.
Senator Johnson: Good afternoon. Could you tell us more about the softwood lumber industry and what your banking crowd thinks of it presently and for the future?
In terms of the United States, as you know, we have had serious conflicts with them on this front. I think it was just two months ago that the governors of all the states put out a statement criticizing our policies in this respect. Could you give us some more information on that front?
Mr. Marcotte: It is certainly a topic of conversation among our customers. Almost every time we meet with them, it is a topic they bring up.
The situation is different depending on the province. A number of provinces have chosen different approaches under the softwood lumber agreement, so it depends where your company is based.
Most of our customers understand the dynamics and the politics behind the issue in terms of the American perspective and are trying to work around it. The view I have from our customers and from the industry associations we work closely with, is that they are happy to have an agreement, at least a basic framework, even if it is not perfect. They echo those comments quite often. They want to put the conflict behind them and not focus on it too much.
This downturn is painful for everyone on both sides of the border. Our customers' view is that it is yesterday's story, to some extent. It will be an important story for us, from a government perspective, for a long time, but our customers are talking about it less and less. That is the sense we get from them, that they are moving on to other things and they are trying to diversify to some extent away from the U.S. market.
Recently I met with all of our key borrowers in Chile, who are similar to the Canadian majors. They look very much the same and they have the same diversity of breadth across paper, pulp, lumber and all wood products. However, in Chile they did not have the dependence on the U.S. market. They were more diversified in their customer base was around the world, and they have not suffered as much. They look very similar to Canadian companies except for that fact. I know that many Canadian companies look around the world and see their competitors and say: It was a bit easy for us. We have to diversify more.
Senator Johnson: Does this have to do as well with the U.S. protectionist policy that has been spelled out, although they are trying to soften it a bit now? Would that affect the attitude of our people in the industry, as well as yours?
Mr. Marcotte: I am not sure if they perceive that necessarily to a large extent. Perhaps there are some pockets here and there.
Senator Johnson: They are just turning away from where the markets might be in the future?
Mr. Marcotte: They are looking for lumber to recover. They know newsprint may never recover. Newsprint in the U.S. has dropped dramatically in each of the last three years, and that is the key problem for the newspaper makers in Canada. I do not think they are looking for the U.S. to recover, so they are looking to diversify in other parts of the world where newsprint is still growing, or at least stable.
The lumber producers are, of course, expecting the lumber industry to return, but they know it will return much more slowly. They are diversifying across different types of lumber, different grades and specialty woods and looking further afield to try to increase sales in aspects of the industry that are less U.S.-dependent.
Senator Johnson: Is there any increase in the market demand for more environmental paper, i.e., less chlorine?
Mr. Marcotte: Definitely. That is one of the big innovation areas for our Canadian companies.
Senator Johnson: Do you know what that would be in terms of our production as well as exports right now?
Mr. Marcotte: Virtually all the companies we come across in the industry are taking steps to do more than improve their environmental records here, through cogeneration plants and so forth, to lower their greenhouse gas emissions. Almost all our customers can point to cutting emissions back below 1990 levels, for example, and it is much for efficient in terms of how their operations work. Many of the products we buy at the local Loblaws are Canadian- produced and have that environmental aspect. Those products are very much in demand in the U.S. That is a defining characteristic. I suspect it will be an even stronger characteristic of the industry once the recovery occurs. More companies will be focusing on this, and the biomass side of it is also very important.
Senator Johnson: Do you think we could be innovative and move towards less white, shiny, glossy paper? How can we create a world need for an alternative product and produce it, if we are talking about innovation? Do you see that trend at all?
Mr. Marcotte: It is fair to say the companies are looking to make the sales they can, where they can, but most of them realize that the future is in more environmentally friendly products.
Senator Johnson: I am impressed that you provided "financial solutions" to 534 different forestry companies.
Mr. Marcotte: Yes.
Senator Johnson: Give me one example of a solution.
Mr. Marcotte: That comes back to the $14 billion number. It is mostly accounts receivable insurance. This provides them the certainty they will get paid. It allows them to be a little more aggressive in their terms. Rather than asking for cash in advance, which may limit their sales, they may be able to offer 7, 10, 30 or 60 day terms, which allows them to grow their sales more quickly and make them a more attractive seller. Of course, then they have the extra benefit of working with their bank and increasing their margins on their lines of credit.
That is the vast majority of what we do, primarily because these are commodity type or near commodity products that we are talking about, with relatively small margins. They really cannot afford the losses. Insurance is quite important to these companies so they are major users of our insurance services.
Senator Johnson: That is very good. Thank you so much.
Senator Fairbairn: Listening to you caused me to think of where I come from. You obviously have a lot of activity going on in British Columbia. I do not know whether you have with Alberta particularly.
Mr. Marcotte: We do.
Senator Fairbairn: As you well know, there is a bit of a problem in both those parts of Canada now. It has been very troubling for British Columbia and is becoming very troubling for Alberta, not just in the North. You know I am talking about the pine beetle. They are creeping down to the south. I have not been there to see whether they have got over the mountains and into the Crowsnest Pass yet, but they may well have.
This is a very unfortunate thing that is happening in these parts of Canada, where the forestry industry is a big part of people's lives. Has the very mention of that, with the name Canada, had any kind of a push on your business, not just within the country but beyond? Is it a "what-if" kind of thing?
Mr. Marcotte: That is an excellent question. Certainly, two or three years ago it might have been all the industry could talk about. It seemed to me a much more pressing topic. I do not know if it has actually stabilized or whether people have bigger worries, but it seems to be less of a concern among our customers. It is certainly difficult to drive up to Prince George and see incredibly large swaths of brown forever and ever.
Senator Fairbairn: This committee is both an agriculture and a forestry committee. We did a cross-country tour on rural poverty and one of the places we went to was in the Prince George area. People were trying there. There were little towns trying to take the wood that had been pulled down because of this and make something of it. We went to one place where they were actually selling and doing some very fine looking stuff, and then when we came back to try to get in touch with them to thank them and to see how they were doing, they were shut down. I wondered how much of this in the last few years has had a major impact in various parts where these little creatures turn up.
Mr. Marcotte: It does certainly do a lot of damage to those communities. They have to find a completely different way to manage their forests once that has occurred. In one area before the crisis got this much worse, back in September, we were seeing quite a large investment going in in biomass production. The beetle-killed wood lends itself quite well to that, to produce wood pellets, for example, to ship around the world. The biomass industry in all of its different facets has a huge opportunity for growth in Canada. Many of the Scandinavian countries and some other parts of the world have a head start on us in that respect, but we see quite a number of entrepreneurs looking to biomass. They are stymied a little by the extra depth of this contraction since last fall, because it means fewer companies are out in the woods cutting trees or pulling in slash. You do not have the raw material for the biomass.
However, the trees themselves, even after the pine beetle has done its work, can still be used for construction grade lumber for quite some time and even after that can be used for biomass for pellet production.
In the studies I have seen, we have looked at quite a few million tonnes a year of potential increase in pellet production, which can be shipped around the world easily. It can be used as an environmentally friendly form of heating, a heat source and energy source and very clean technology, interestingly enough. I have a jar of pellets on my desk and it is hard to imagine there is nothing else holding them together; it is simply compression, pressure and steam that holds the wood mass together. It is an incredibly efficient and clean process, from what we have understood.
I think that is something that will come back fairly quickly as the markets come back and companies increase their cutting a little bit and get back into the forests. You will see the investments coming back as well in biomass and the opportunities there. That does sounds like a great way to use some of that. You will never be able to use all the pine beetle-killed wood, I am sure. Unfortunately, I do not know what else the industry could be doing. I know B.C. in particular is working hard at developing many other cogeneration and other types of energy generation from some of this material. The carbon content is rich and can be used in some way. The last thing you want to do is let it decay in the forest floor if you do not have to.
There is a lot going on. I suspect the last 10 months have significantly decreased the tempo because of the lack of capital and the fact that people are trying to survive for a period of time, but it as an area of growth we see in the longer term.
Senator Fairbairn: What you have said is interesting. It would be helpful if there were any names that you might give us of the people who are trying to do these things you have spoken of. It would be helpful for us because we will be marching along ourselves at some point to see Canada and the industry in the different parts of Canada, some parts where it is going very well indeed and other parts where it is not. That would be extremely helpful. We have not heard anything until now that has provided the slightest bit of positive opportunity on the pine beetle side. That is very helpful.
Mr. Marcotte: We could get back to you through the clerk with some suggestions. The industry associations we have spoken to, one in particular, would be pleased to receive you and be able to work something out.
The Chair: Without asking you to reveal corporate secrets, there are certainly a few questions I would like to ask. First, the list of products that you offer is certainly applaudable. When we look at competition, what role do you think the private banks should play now with the situation that we have in the forestry sector?
Mr. Marcotte: Certainly, we feel we know them well. We have really worked hard in the last 12 to 15 years to develop close working relationships and partnerships with the Canadian banks.
We are a relatively small organization. Our numbers look big when you look at our annual reports, 1,200 employees in total, and we have a relatively small reach across the country. Our sales teams, our business development and relationship management teams really are only a few people per city across the country. We work very closely with the banks, commercial account managers, all the credit unions and every other type of boutique financial institution we can find to try to leverage their understanding of the marketplace. That is a critical source of strength for us, to help them do more for their customers. I would say that every commercial banker you will speak to wants to do more for his or her customer; any credit union, loans officer, anyone in the industry wants to find ways to do more. They do not wish to do less.
At a time like this, I think it is prudent for them to hold back a little, change some of their lending practices and adjust some of their practices. Given some the losses, unfortunately many of their customers have simply seen the revenues shrivel up and their debt loads do not go away when the revenues do. Therefore, those companies are having a hard time.
In working with the banks, we have certainly perceived a positive attitude to try to keep the companies working in the right direction. We have asked them since Christmas to give us detailed lists of companies they want to do more for. However, they feel they are held back by their lending practices from fully supporting a long-term customer.
We are working closely with them to add a little extra risk capacity or to work alongside EDC in some cases to do more. I am actually out in Vancouver next week, meeting with a number of companies with whom we have just closed some transactions to help them work better and get more support from their banks.
We feel that the banks are in the right position today. They are doing everything they can. I have never seen someone not try. It is a very difficult situation for them. I am sure we could find examples, positive or negative, in all respects. I think they are occupying an important space today in trying to do more. We are trying to help them do more and, most importantly, replace the capacity or the gaps that foreign banks have created as they have departed. They have had no choice in departing the market. However, that is an area in which the Canadian banks, BDC and we are stepping up quite a bit on.
Senator Duffy: I have a supplementary. Hearing about the debt loads of these various companies, we have seen these massive figures from the automobile makers in the United States. I am, and likely other members are, very impressed by your activist approach.
However, given traditional Canadian banking prudence, is it fair to say that, as you allow these people to expand their credit, you are not doing it to the point that the Canadian lumber industry here will end up with the sort of train wreck we have seen in the United States?
Mr. Marcotte: You are correct. We are approaching the issue with our banking partners and with our clients openly to say, "What is the right debt level? What is the right mix of equity and debt to run this business? If your markets have changed so dramatically on you, what is your plan to change or update your business — to do something different; seek new opportunities to replace sales or markets you do not think will come back?"
The vast majority of the companies we work with believe very much in their industry and in what they can do and their skill set. When you spend time with them, they want to try to find new ways to replace lost markets, sales and customers. They are innovating everywhere they can. They know they need to bring in more equity, as well as having us bring in some more debt, and they have to keep that balance there.
I would say we are working closely with all the customers who have a new kind of business plan and are seeking to do that. Unfortunately, many companies that cannot do that or which do not know how to change or adapt will go by the wayside; there is no question. I am sure that many of those restructuring today are finding it hard to find new markets and new ways of doing things.
I have seen so many companies where the workers have come together, taken a pay cut, put some money in, changed the ownership structures of the mill and actually made it work and are finding niches where they can do things differently. We have seen enough examples of these that we are quite confident that we will get through this period.
The Chair: What percentage of the 500-plus companies that are clients in the forestry sector would be in the softwood side of the industry versus the hardwood side of the industry?
Mr. Marcotte: You have stumped me on that one. That was one piece of data I did not prepare, and we may not know.
The Chair: Could you provide us with that information?
Mr. Marcotte: I certainly can.
The Chair: I would also like to add to that particular question, a question on your bad debt ratio to the forestry sector in the two main sectors, hardwood and softwood.
A third question attached to that one would be: Do you foresee a lot more bad debts in the role that you play in the forestry sector versus your other sectors? You do not have to answer now. You can send us that.
Mr. Marcotte: I do not mind trying to answer that last question.
We may have gotten through the worst of it. We are certainly not done. We have dozens and dozens of restructurings in process that we are working on with customers today.
I would say the pace of new ones coming in the pipe has slowed. Therefore, we are probably over the worst of it. That would be our quick feel of it. In talking with our customers, I think they have all found a new level of stability. I do not expect there will be a significant increase in the new ones.
We will certainly provide the detailed information. My guess would be that our bad debt ratio is actually very low. You would be surprised, perhaps, at how low it is.
From a claims perspective on our insurance book — the foreign buyers who have defaulted and for whom we have paid claims to Canadian exporters — the claims department is having a great year. The claims department has probably tripled in size and quadrupled the value of what they will be paying out this year. It is a very significant year for the claims payments and, importantly, in the industry, as well. We take seriously the need to pay as quickly as we can to get those companies the funds back.
Therefore, the claims ratio has probably increased significantly on the forestry side from the perspective of the foreign buyers who have defaulted. However, in terms of loans with Canadian forestry companies, we have had difficulties with very few. We have managed to work them through or restructure. With one or two significant exceptions, we have managed to restructure them. I perceive the ratio is changing but we will find the exact details for you.
The Chair: What would be the average interest rate you charge for clients?
Mr. Marcotte: The hardest question with the easiest answer is: It depends.
We would have every single interest rate you could probably imagine, from the lowest to the highest, because we charge market rates.
The Chair: You did not give me a figure, though.
Mr. Marcotte: There is probably no average. Each case is different.
Senator Eaton: We heard a lot of witnesses tell us that the interest rate was 20 per cent. Is that normal? Is that what you are saying — that it is not unheard of?
Mr. Marcotte: Since the crisis hit its penultimate phase in September, most of the transactions we are seeing with quality credits are perhaps attracting rates of prime plus one or two or, in a U.S. dollar/London Interbank Offered Rate (LIBOR), plus a few hundred basis points — two or three per cent. They suddenly found themselves jumping to LIBOR plus 1,000 per cent; a six or seven per cent increase in their rates. The face rate went from 6, 7, 8 or 9 per cent to 15 or 16 per cent, suddenly approaching credit card rates. It is very expensive.
From what we have seen in most industries in most parts of the commercial markets around the world, that has come back a fair bit now. In forestry, I would say most of the customers are still seeing significantly-elevated interest rates.
Senator Eaton: When you say "significantly," are you talking about 15 per cent and up?
Mr. Marcotte: I do not think so. If I were to look at it professionally and see what the average overall increase in interest rates might be, we are probably looking at 400, 500 or 600 basis points or four, five or six per cent. There is no doubt some companies are being charged 20, 25 or 30 per cent. It may be because they have defaulted or have incurred penalties and other fees that have now come into their systems.
It is probably also because many of them may have gone to factoring companies or "boutique financiers" because they cannot get the funds they need from the mainline bankers. When going to a factor or others on an annualized basis, a 10 or 12 per cent interest rate can quickly become 20 or 22 per cent, and at no fault of the industry; that is the nature of the risk.
Unfortunately, I would say that many of our customers, especially some of the smaller and mid-size ones, are now viewed to be much riskier prospects. Many people would say we have to increase rates to that level. There is very little competition for forestry business, as you can imagine, amongst lenders today. Therefore, they are probably paying, on average, higher than many other sectors.
Unfortunately, however, it is not out of line with the kinds of risks people face. The markets are so significantly depressed that it is almost anyone's guess as to when they come back for some parts of the industry. Therefore, the risks are almost unquantifiable for some lenders. They will look at that and say, "Well, if I cannot be sure, either I say no or I want 25 per cent." It would not be an unheard of conversation, I am sure. It is very difficult for smaller companies.
The Chair: On that note, thank you very much, Mr. Marcotte, for coming to the committee.
[Translation]
Thank you for your evidence and for the information you shared with us.
[English]
On behalf of the committee, I sincerely thank you for appearing here this evening.
Senators, we will meet again on Thursday at the regular time.
(The committee adjourned.)