Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 34 - Evidence - Meeting of May 2, 2013
OTTAWA, Thursday, May 2, 2013
The Standing Senate Committee on Agriculture and Forestry met this day, at 8:04 a.m., to examine and report on research and innovation efforts in the agricultural sector (topic: funding of innovation and research in the agriculture and agri-food sector).
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: To the witnesses, thank you very much. We will introduce you officially as we progress, but I want to thank you for accepting our invitation to the Standing Senate Committee on Agriculture and Forestry. My name is Percy Mockler. I am a senator from New Brunswick and chair of the committee, and I would now like to ask the honourable senators to introduce themselves, starting with the deputy chair.
Senator Mercer: I am Terry Mercer from Nova Scotia.
Senator Tardif: Good morning. Claudette Tardif from Alberta.
Senator Merchant: Hello. Pana Merchant from Saskatchewan.
Senator Plett: Welcome here. I am Don Plett from Manitoba.
Senator Frum: Linda Frum, Ontario.
Senator Eaton: Thank you for coming. Nicole Eaton, Ontario.
[Translation]
Senator Maltais: Welcome, madam; welcome, gentlemen. I am Senator Ghislain Maltais, from Quebec.
The Chair: The committee is continuing its study on research and innovation efforts in the agricultural sector.
[English]
The committee is continuing its study on research and innovation, and today we are focusing on the funding of innovation and research in the agri-food sector in Canada. The order of reference given to the committee by the Senate of Canada authorizes us to examine research and development efforts in the context of developing new markets domestically and internationally, enhancing agricultural sustainability and improving food diversity, security and traceability.
This morning, honourable senators, we have the Canadian Bankers Association. Thank you very much for accepting our invitation to come here and share your expertise, views, vision and recommendations to the committee so that we can continue to make Canada the best country in the world. As witnesses this morning, from the Canadian Bankers Association, we have Mr. Alex Ciappara, Director, Economic Analysis; Mr. David Rinneard, Director, Agriculture and Agribusiness, BMO; Mr. Darryl Worsley, National Director, Agriculture, CIBC; Ms. Gwen Paddock, National Manager, Agriculture, Royal Bank of Canada. We also have Mr. Peter Brown, Director, Agriculture, Scotiabank; and Ms. Stacey Schrof, Manager, Agriculture Policy and Process, TD Canada Trust.
To the witnesses, we are honoured that you are here this morning with us. I have been informed by our clerk that Mr. Ciappara will be making the presentation, and it will be followed by questions from the senators.
Alex Ciappara, Director, Economic Analysis, Canadian Bankers Association: Thank you very much, chair. Good morning, my name is Alex Ciappara, and I am the director of economic analysis for the Canadian Bankers Association. I am joined by representatives of the five largest banks in Canada, and we are pleased to be representing the CBA, our 55 member banks and over a quarter million employees in the country. We appreciate the invitation to speak to the committee as part of your study on the research and innovation efforts in the agricultural sector, with the focus today being the financing of farms.
The bank representatives sitting here with me today have experience sitting on both sides of the lending desk; working now as bankers, they all have unique agricultural backgrounds. Given this wealth of experience, I will keep my comments brief. I will, however, take a moment to outline how banks work hard to serve farmers, agricultural and rural communities.
Banks recognize the important role they play in supporting farmers and rural communities through their financial products and services. Banks provide deposit and operating accounts and insurance and investments, in addition to operating, term and mortgage loans. Banks also provide the AgriInvest account and the Canadian Agricultural Loans Act program and support the Advance Payments Program, also known as the APP. Banks provide advice to farmers on matters such as farm loans, economic forecasting, farm business planning and general farm management. Banks also work with producers on succession planning to ensure a viable transition to the next generation. I will speak more about this in a moment.
Banks understand that supporting farmers means having to be flexible to fit their busy schedules, particularly during the planting and harvesting seasons. Banks supply products and services through roughly 2,100 rural and small town branches across the country. Mobile bankers drive to farms to provide on-site banking assistance, and farmers can access many of these products and services on their smart phone apps, online and through telephone banking.
On the personal side, banks help rural customers save for their children's education and for their retirement, and they provide specialized advice, lines of credit, loans and mortgages, as well as everyday banking needs, such as chequing and savings accounts.
Agricultural and rural customers have the same access to products, services and prices as customers in Canada's largest cities. Indeed, a recent Industry Canada survey showed that rural small and medium-sized enterprises had a higher approval rate for the debt financing requested than urban SMEs, and when it came to obtaining financing, rural SMEs ranked it as the least problematic external obstacle to growth.
Bankers understand the importance of access to credit for agriculture. The sector forms an important part of banks' business lending portfolio, with agriculture lending representing 16 per cent of total funds loaned to SMEs by banks. Bank credit represents about 36 per cent of the total farm lending market. In addition to the over $25 billion that farmers have borrowed from banks, close to $12 billion in additional credit is available to farmers without any additional application. The five banks represented at this table compete vigorously with one another, with credit unions, caisses populaires and finance companies, as well as FCC and provincial government agencies.
Canada's banks pride themselves on prudent lending standards and risk management practices. This has resulted in a reputation for safety and soundness that is internationally recognized. It is this approach that fosters financial discipline and contributes to the financial security of the economy, including the agricultural sector.
Banks work with farm clients on an individual, case-by-case basis, assessing a number of criteria, such as their cash flow requirements and capacity, time horizon, business prospects, customer base and available equity.
As a result, bank credit has expanded in line with the agricultural sector's growth. Between 2001 and 2011, the authorization for bank credit was consistent with, and appropriate for, growth in the agricultural sector. This mainly reflects the point that a fairly large proportion of the banking sector's lending is for purposes of working capital and operating lines of credit. This type of financing requires the bank to truly understand its customers and to work closely with them over time.
Banks have a long-standing commitment to the agricultural sector and know what it means to assist farmers through all stages of their life and business. The banking sector is a major sponsor and supporter of programs and events that attract youth interested in farming and young farmers themselves. Individual banks have been long-time members, proud partners and financial contributors to 4-H clubs for more than half a century at the national, provincial and local levels. Banks are also sponsors of programs such as the Canadian Young Speakers for Agriculture series, Canada's Outstanding Young Farmers' Program, Ontario's Farm Family Awards, as well as scholarships offered through the Agricultural Institute of Canada Foundation. Banks sponsor showcase events that attract the next generation of farmers, or individuals simply interested in farming, such as the Calgary Stampede, the International Plowing Match, the Outdoor Farm Show, the Royal Agricultural Winter Fair and the Canadian Western Agribition.
As farmers establish themselves in business, banks work with them through the inevitable peaks and troughs that come with working in the agricultural sector. This past decade has seen farmers confront BSE, avian influenza, drought, floods, the H1N1 virus and country-of-origin labelling. When these events occur, bankers work closely with farmers, taking into account their individual situations, to find solutions that are sustainable and in their best interests. Sometimes banks need to have tough conversations with their clients so that farmers can make decisions to preserve the capital of their farming operation. The banking industry's work during these events is the tangible demonstration of our interest in contributing to the long-term viability of Canadian farmers.
As farmers start thinking about retirement and passing their business to the next generation, banks also have the expertise to assist with this transition. Our experience is that few farmers actually have a written succession plan. Indeed, according to the 2010 Farm Financial Survey, only 9 per cent of farmers have such a plan. There are complex issues, often emotional, that the family has to address in such a situation — the viability of the farm operation and the adequacy of the income being generated, among a host of other issues. As a result of banks' relationships with farmers, they are able to look at the full picture of a farm family's needs to create a succession plan that encompasses everything from banking and lending to insurance strategies, investment management and estate and trust planning in order to protect the income and assets for both the younger and the older generations. Bankers are able to draw on the knowledge and resources of the wider bank financial group, such as private wealth management and investment teams, and the network of external contacts in accounting, consulting and legal fields.
Banks have long-established and strong relationships with farmers across Canada. These relationships have been developed in branches, around kitchen tables and at agricultural events in farm communities. It is because of this relationship that Canada's banks are well positioned to work in the best interests of farmers through good times and bad.
We would be pleased to answer any of your questions. Thank you again for your invitation.
The Chair: Thank you, sir. The first question will be from Senator Mercer.
Senator Mercer: Good morning ladies and gentlemen, and thank you very much for being here. I live in a community small enough that we do not even have a bank of any kind. We have to travel to a suburban area for banking. However, it is not that important this morning.
You talked about succession planning. Those of us who have been involved in the committee for a while know that this is a huge concern of farmers and people who live in rural Canada. Your comments are encouraging in that the banks have the expertise to assist with this transition.
The five banks that are represented here this morning compete with each other fairly aggressively, and we continue to encourage that. However, is there a set program that the Canadian Bankers Association, in association with you five banks, has in place to advise farmers on succession planning?
Mr. Ciappara: I will start off on that and let my members pick up on it. We do not. Each bank has its own business strategies and objectives when it comes to succession planning, but they have ways to do it. I will let my members describe and give you details as to how they do it.
Peter Brown, Director, Agriculture, Scotiabank, Canadian Bankers Association: Thanks very much for the opportunity to speak to you today. I will respond to that by saying it is a very big issue, something we identified quite some time ago. In fact, we did a lot of research back in 2004 and 2005 to see what we could do to help our clients through this.
In the fall of 2005, we rolled out a program that we call Scotia Farm Legacy Services. We discovered in our research that a lot of the offers in the marketplace were simply one silo type of offers in that they dealt with the legal side, the accounting side or the investment side. What the marketplace needed — and what we think we have delivered and continue to deliver with this program — was an all-inclusive holistic type of approach where we look at the full needs of the farming family. We think that is very important because it allows the farming family to get their issues on the table, and then we can put together a package that actually works. We have a lot of materials. In fact, I brought a binder along that is full of materials that we use to try to bring that together. We involve several different parts of the bank into it, our wealth and estate planning side, so we can have those conversations that start our clients thinking about all the possibilities out there.
Along with that, we work with the local accountant and lawyer because those professionals are already working with the farm clients and know those situations. There is no reason why we should not work with them and introduce anyone else into the equation.
We have had some success with this. It is a long-term kind of approach. It is a marathon, not a short race, and so we have to stick to our knitting and we are attempting to do that. We think we have had some great success. Where there is probably a weakness, and I will touch on it, is financing the next generation. We are looking for better ways to do that. We have a unique mortgage product that we try to put in play that allows for a vendor take-back portion in it, but I think we need to find better ways to finance the next generation, and we are looking to do that.
Often when we have that conversation, for us to really win the right to deal with the retiring situation — the retiring family wealth and issues — is to answer the question of how will you finance this next generation. Sometimes the answer is that there is not enough capacity in the business to do it; there are too many families wanting to get income from this. We have to have those tough conversations. Sometimes the answer is that the next generation is not prepared to take on the business. We have those conversations, but often when we really clear the decks and have those conversations we come up with a much better answer.
We are approaching it and we look to see a lot more opportunity in that area.
Stacey Schrof, Manager, Agriculture Policy and Process, TD Canada Trust, Canadian Bankers Association: With regard to succession planning, Mr. Ciappara's statistic of 9 per cent would assume that not a lot of people are thinking about it, but I think that trend is reversing. A lot of our clients are becoming more proactive and they are coming to us first. They are coming to us 10, 15 years before they are planning on having that farm transition, which is a great thing to see. It shows the optimism in the industry as well, and if you look at the average age of our farm clientele, we will see a lot more of those succession plans coming through in the next few years.
Further to Mr. Brown's point, we are one partner of many. We work alongside a lot of our accountants, lawyers and so forth. Within our institution, we have a succession planning specialization within our wealth management and personal banking divisions.
Darryl Worsley, National Director, Agriculture, CIBC, Canadian Bankers Association: Thanks for the opportunity to be here this morning. As my colleagues pointed out, there are the soft skills and then really the core business issues with succession planning. We, as well as my colleagues, have been offering client events — meetings across the country — where we will have clients — members of the farm community — come in and listen to experts in farm succession planning, who are our own internal folks and our private wealth management and trust areas, and third-party accountants and lawyers, as well, to help people work through the issues.
As Mr. Brown mentioned, it is a long process. Sometimes it is initially planting that seed about succession planning. People take it away and then they come back to us, sometimes over several years, as they build their plan.
Ms. Schrof: I would like to speak about the products side of succession planning. There is no one product that will fit every farm transition. I think we can all speak to the fact that we customize options from a banking standpoint.
David Rinneard, Director, Agriculture and Agribusiness, BMO, Canadian Bankers Association: Thank you very much for your question, senator. I think it is quite evident that my colleagues certainly agree with all of you that succession planning is a material issue in the agricultural space, and that certainly includes BMO. I will not belabour the point, as I think everyone has touched on a number of the key features that we all offer.
I can speak from personal experience, however. Just in the last couple of months, I participated in numerous succession planning events hosted throughout rural Canada, where we hosted quite literally hundreds of farmers in concert with our Nesbitt Burns succession planning folks. Those really deliver a compelling and important message to Canadian agricultural participants that succession planning is really fundamental to the industry's continuity and prosperity, and that timing, as so many have suggested already, is really of the utmost importance when talking about preparing Canada's youth — at least those who are interested in participating in the future of agriculture — to get started, and the earlier the better.
Certainly the plan has to be equitable for all family members. That is obviously a difficult hurdle to get over, but one that is made easier to surpass if proper plans are put in place at the earliest juncture.
Senator Mercer: There is no question that agriculture is a unique industry. Not very many other industries have the situation where the single question that every owner asks is whether their son or daughter will take over the business along the way. Unfortunately, the answer is "no" a lot of the time.
Before I ask my next question, I would say to the five banks in particular that you are very generous in your philanthropic efforts and give money to good institutions, and I encourage you to include agriculture schools across the country. They need that help. That is important for all rural parts of the country to get that type of support. Agricultural schools sometimes get lost in the shuffle of big universities. As a former fundraiser for a lot of these institutions, I want you to remember that.
My next question is —
The Chair: Senator Mercer, could I interrupt?
Senator Mercer: Sure.
The Chair: Ms. Paddock from the Royal Bank, do you have any comments on the first question? I see Mr. Rinneard wanted to comment, also.
Gwen Paddock, National Manager, Agriculture, Royal Bank of Canada, Canadian Bankers Association: I think the subject was well covered by my colleagues, but we tend to think of it as farm business continuity planning because, as Mr. Brown mentioned, there is the farm succession, there is the retiring generation but then there is also the importance of ensuring that there is a viable farm business that is left to continue on.
The Chair: Thank you. Mr. Rinneard, did you want to add something?
Mr. Rinneard: Certainly. I just wanted to pick up on the senator's point with respect to philanthropic generosity, if you will, to Canadian educational institutions. I can cite a couple of instances that transpired just in the last little while with respect to our organization. I had the good fortune of being present for some cheque presentations where we gave a quarter of a million dollars to the University of British Columbia to aid in dairy research and education. That was an event I attended a little more than a year ago.
Equally recent was a fairly comparable donation we made to the University of Saskatchewan for some production facilities there. We did that in concert with the provincial government and, in addition to that, of course, the federal government.
We absolutely recognize the fundamental importance to Canadian agriculture's continued prosperity, and that it really does start with the research that takes place at many of Canada's fine institutions.
The Chair: Before we return to Senator Mercer, Senator Eaton has a supplementary question.
Senator Eaton: Following on Senator Mercer's question, you are talking about succession planning and helping young farmers pick up the slack from their parents. What about young graduates who do not have parents and who are not in the line of succession but have gone to agricultural school and perhaps have apprenticed on a farm, and who want to set up on their own? We have heard from witnesses that people are leaving the land, but we have heard a question from young farmers: Who is there to help them start to farm?
I would be interested in your responses to that. That is a big question that has come up for us in this study.
Ms. Paddock: I would be happy to answer that.
When you think of young people coming into agriculture who do not have a background in agriculture, the interesting thing is the trends that we are seeing as far as opportunities for smaller operations, whether it be local or organic production. Big is not necessarily better; better is better.
For some of those individuals who are coming in without perhaps an already established base in agriculture, there are opportunities for them. They have to come in a little slower, so they probably have to take on off-farm income as they grow their own operation. It is quite possible that they can do it.
Senator Eaton: Do you mean they cannot afford the machinery, but you might give them a loan to buy land, because no matter how small you start, you still have to have land?
Ms. Paddock: They do not necessarily always have to own the land, either; they can rent the land. Within our organization, our value proposition to our clients is business and financial advice. One of our agriculture account specialists would be advising those individuals to start slow, to rent the land as they get established, to have custom operators do some of the cropping if they cannot afford equipment, and help them build a viable business. It is sometimes just not possible to come in and establish yourself as a large organization or operation right from the get-go.
Mr. Worsley: To add to your question, senator, we participate in the Canada's Outstanding Young Farmers' Program. Interestingly enough, a few regional and national winners the last few years have been folks that you describe: young people out of school with an interest in agriculture but who did not have a strong financial backing from existing family members. To Ms. Paddock's point, they started small — very much niche market opportunities — and they have become very successful businesses in a short period of time. Again, they are often much more small scale and niche, but they have proven to be successful businesses.
Ms. Schrof: There is a huge cost of capital to get into agriculture. None of us will dispute that. One thing we strongly encourage to new or existing farmers is to take advantage of some of the government programs that are offered, such as the Canadian Agricultural Loans Act, which do allow for higher leverage for beginning farmers.
Mr. Ciappara: I want to add one point. In terms of a tool that young farmers can use to get into agriculture, there is a loan guarantee program set up by the federal government that I alluded to in my opening remarks called the Canadian Agricultural Loans Act, and it provides a loan guarantee for farmers. That program is focused on young farmers, intergenerational farmers and cooperatives.
As of the end of March 2013, banks have $116 million outstanding underneath that program.
The Chair: Thank you. We will go back to Senator Mercer, who still has the floor.
Senator Mercer: This will be my last question, chair, because I know others want to get in.
In your presentation, you talked about the Advance Payments Program, the APP. Perhaps you could enlighten us a little bit about the APP, so we will have a better understanding of what it is and what its effect is on the industry.
Mr. Rinneard: I am happy to field that. The APP, or the Advanced Payments Program, is a government program that is in all respects delivered on behalf of the federal government by Canadian financial institutions. In essence, it is a government-guaranteed program designed primarily for input financing. The folks who enjoy the financing, if you will, benefit from a government guarantee that enhances the palatability from a risk perspective of those individual enterprises. The APP is most often delivered by either large organizations that specialize in government program delivery or by many of the respective commodity organizations. There are several dozen across the country in all provincial jurisdictions that deliver APP administration on behalf of the federal government.
Mr. Worsley: If I may add, the program offers preferential pricing. It certainly helps young farmers starting up who may even be part-time farmers initially. It helps them to get into certain sectors, such as participating in cattle feeder associations, for example, where they can get the benefit of improved interest rates on their loans.
Senator Plett: I am also from a small community, similar to Senator Mercer's community. We have a credit union in my village, but it has been there for only the last number of years. People in my area, mostly farmers, also needed to travel to larger centres for their support. My questions will be possibly a little more personal.
Farms today are much larger than they used to be, and that is one reason there are fewer people on them. There are fewer farms because they are larger farms. They need to operate more like a business than they possibly used to. Nevertheless, there are still some of the old timers like myself who are out there farming. They believe they are invincible and that God will indeed supply at the end of season with a good crop so they are able to pay back all the money they owe.
The committee visited a farm about six months ago. That particular farmer just west of Winnipeg had put his crop in, had done his fertilizer and everything else he needed to do. When we were there, he had just deposited a cheque for $1 million into the bank because that was when the money came in. Obviously, there was a huge investment out there, even though he rented most of his land. How do you deal with someone who is renting most of his or her land because they obviously do not have the collateral of the land, which appreciates; and we understand that. The farmer was saying that he had brought in his crop for the last 25 years and would bring it in again. Considering that $1 million out there without a lot of collateral is dangerous, how do you deal with that? The younger ones understand that they need to have a business person, but the older ones do not understand.
Mr. Brown: One of the most positive things coming forward from that kind of situation is that the individual has a lot of experience, which we recognize. One of the key things we look for is the management capability and the experience of the individual. When it comes to financing, we do not always need the hard assets of land behind our financing, if they need revolving lines to put the crop in and take it off. We finance that based on GSAs and the crop in the ground.
Ms. Paddock: Especially in the West, we are seeing a lot more producers working rented lands. That is not seen as a negative or weakness but rather as a business operator looking at how to allocate resources, and perhaps the best allocation is toward equipment and inputs rather than land. That is quite a common structure that we see; and it very easy to work with.
Senator Plett: To continue with that a bit, I am sure that one of your competitors, if you will, would have to be Farm Credit. They have been known over the years as the people who are more understanding of the farm. Ms. Schrof is from something of a farming community, but I do not know about the rest of you. When I have talked to farmers, they have given me the impression that the boys in the big cities do not understand what farming is all about. Is that the case? In your banks, do the people who deal with farmers have a farming background? Do they understand farmers? Where are they in line with farm credit? I apologize for using the words "the boys in the big cities."
Mr. Rinneard: Without question, there is a host of competitors in the space. Other than my competitors joining me here today, there are several others, such as credit unions, a number of provincial organizations that provide financing and, of course, the federal government through Farm Credit Canada, FCC.
With respect to our rural distribution throughout Canada, I can say with absolute conviction that we have hundreds of branches established that have representation with material cognizance of agriculture. The individuals who are generally inclined to work in positions that involve representing organizations like ours in rural Canada naturally come from an agriculture-oriented background. They often view a position within agriculture working in a finance capacity as a way of keeping one foot in the industry. It is because of that natural inclination that they become such effective agricultural account managers.
The degree to which they succeed in the space is often a direct correlation to their ability to genuinely relate to Canadian agricultural producers. I echo your sentiment and certainly appreciate your recognition of the importance of having that appreciation of the space as a fundamental attribute to being a successful agricultural account manager. Our rural distribution is beyond reproach with respect to how well we are distributed throughout all of your respective provinces.
Ms. Schrof: I will speak about TD and how we finance. We have a dedicated agricultural services division. Our lenders are asked to go out to the farm. We do not want farmers coming in to see us as we want to be grassroots level. Within our agricultural services division, our lenders are typically from a farming background and live in the rural community. That speaks to the fact that they know agriculture from a national and regional level. They really have that understanding.
Ms. Paddock: Royal Bank has been lending to agriculture since the early 1900s. In the 1960s, we determined that it was easier to teach someone who understood agriculture about banking than to teach a banker about agriculture. That was when we started industry specialization. We had agriculture finance specialists who were dedicated to serving the needs of the farm community.
I grew up on a beef cow-calf-to-finish operation south of Guelph. I went through 4-H Junior Farmers. My degree is in agricultural economics. I am a graduate of the Advanced Agricultural Leadership Program and am past president of the Ontario Agri Business Association. Even though I am "one of the boys" from Toronto, the blood is pretty green. I am pretty proud to say that my background is not dissimilar to our 150 account managers who serve the agriculture industry. When I hear some of the comments about the banks not understanding agriculture, I think that we really do understand agriculture. We are committed to the industry, and it is important to us.
The Chair: Thank you.
Mr. Brown: My comments are similar to Ms. Paddock's. My background is agriculture and, in fact, very similar to hers. I think everybody on the panel here is from the farm. We have that close tie.
I work out of our headquarters, as do most of the individuals here, and one of my roles is to make sure that, at the higher levels of the bank, the interests of the agricultural sector are heard. I take that role very seriously because it is such an important part of what we do. Being from the farm allows me to do that with a lot of confidence. We, too, are divided into a purified or a specific agricultural sales force that is out in the field and a credit department that does just agriculture. We have done that because we want to concentrate the expertise there to ensure that we make the right decisions and that we are not focused on a lot of different sectors and get the uniqueness of agriculture confused.
Senator Plett: Thank you very much. Of course, I have a list of questions for the second round.
Senator Tardif: The future of agriculture rests not only on the next generation, as you have indicated, but also on the adoption of innovative practices and the use of new technologies. What is your policy on access to credit for innovation in the agriculture and agri-food sectors?
Ms. Paddock: I would be happy to address that. When you look at innovation, there are a number of different ways agricultural producers can innovative, whether it is the adoption of technology in their equipment or early-stage or start-up companies that have the next new greatest widget that will help improve the productivity. There are two different ways to finance those opportunities. When it is the adoption of technology and equipment, we have a number of different financing options — term loans and equipment loans — to bring that piece of equipment into the farm operation.
When it comes to early-stage or start-up companies that are actually inventing the new technology and the innovation, within Royal Bank, that actually goes to our knowledge-based industry specialists. When you think of those types of operations or companies, they need access to the network of angel investors and venture capital investors, and their business is a little bit different than the production agriculture business. In Royal Bank, we actually introduce them to one of our knowledge-based industry specialists, and they will then connect those businesses with the angel networks, who provide the source of capital that is more appropriate than debt capital for those early-stage and start-up companies.
Senator Tardif: Anyone else?
Mr. Brown: We are similar in how we approach the marketplace. In agriculture, we look at providing debt financing from the main bank's approach. We also have a group that is the wholly owned subsidiary of the bank called Roynat. They look at doing more unique types of financing involving leasing or equity financing. Agriculture does not have access to their group to any great extent yet, but, more and more, we are seeing that there are ways to use some of that unique financing. We do have individuals who specialize in this, and we are promoting it more and more to the farm sector.
One of the other things is that innovation is a broad term and can be defined in many ways. Taking a traditional approach and doing it just a little bit differently is also a way of innovation. We certainly support that with our clients, and, in fact, we have an ad campaign that actually focuses on existing clients that are doing something innovative. We want to highlight them because we want to tell the marketplace that this is something we like to see and think is very positive. I brought a couple of those ads along, and they really do focus on the farm family doing something unique and something that gives them an advantage in the marketplace.
Mr. Rinneard: I would think that, from a structural perspective, all of our organizations are quite comparable, but I want to talk a little bit about agriculture and the innovation within it. Farmers, by nature, are innovators. That is probably no surprise to any of you. There is no formula for operating a farm. Every farm is operated individually, and regardless of the subsector of agriculture that the farmer chooses to participate in, I can say, with absolute conviction, that they have something on their farm that defines them differently from someone else in their space. It is most likely something that they have created. I have the good fortune of being on farms several times a week, and, every time I am on a farm, there is something innovative, something, in many respects, ingenious that demonstrates their ingenuity in how they have been able to commercialize it, whether it has been to create efficiency on their farm, to address environmental issues or energy concerns or to address erosion or moisture control. There are a plethora of strategies that farmers are perpetually trying to address. In many instances, they then commercialize those things. We have some customers across the country, many of whose business I have had the good fortune of visiting, businesses that were spawned as farms but, because of the success that they have seen through their innovation and the subsequent commercialization of it, have actually morphed into manufacturing businesses or consultancies. Without question, innovation is emblematic of Canadian agriculture and paramount to its continued success in Canada. As you all know, we cannot compete with cheap costs. We do not have great weather, with perhaps the exception of this week. It really is incumbent upon the industry and certainly upon us, as financiers, to continue to nurture that innovation and to see that it excels to ensure that Canadian agriculture competes on a global scale.
Senator Tardif: I was going to tie that into monies you might invest in R & D in order to make the agriculture sector more competitive and productive. Do you have a policy on the amounts that you might invest in R & D in those sectors?
Mr. Ciappara: Because of the business model of the banks, because we are using depositors' money to finance farms, when depositors put money into the bank, they expect to get it back. The difficulty with R & D and venture capital financing, in general, is the tremendous amount of risk that comes with that.
Senator Tardif: Banks are not that risk-averse.
Mr. Ciappara: There is a reason we have been seen as one the strongest and most stable banking systems in the world. We take risks, but we do not take a lot of risk. That is more for the venture capital firms. Our banks do, if there is a firm that is looking to do venture capital financing, help with non-credit products — advice, economic forecasting, business planning strategies and that sort of non-credit advice — as well as with everyday banking needs, such as deposit and savings accounts. There is a still a role for the banking sector when it comes to helping those small innovative businesses that do not necessarily have an income stream coming in. We still do provide assistance to them as well.
Senator Tardif: Mr. Worsley, you were going to answer a previous question.
Mr. Worsley: On your previous question on innovation, we have noticed, in the last few years, that many clients, like a dairy farmer, have decided to move from traditional production practices — milking cows — to actually processing the milk and selling it, owning the process end to end, not only producing the milk but also processing it and selling it from a retail store. We have been able to finance those types of operations, in many cases, with our existing suite of lending products.
Senator Tardif: Thank you.
[Translation]
Senator Maltais: My comments are for Mr. Ciappara. You are the president of the Canadian Bankers Association. I suspect that you have consulted each other before coming here and that is why my comments are directed at you.
I have been listening to you from the beginning, and the feeling I am getting from your speech is that there are no problems in agriculture in Canada. That is funny because we often go into the field and there are problems.
There are major problems in the large provinces, whether we are talking about the grain and livestock industry in the western provinces, the vegetable industry in Ontario or British Columbia, the dairy and hog industry in Quebec, or potatoes and other kinds of livestock in the Maritimes. The people we visited have told us that the problem is the transfer of farm assets. Farm assets are large businesses today, we must admit; as Senator Plett so well said, he is the only small farmer left in his province. People have large businesses. And when large businesses have $5 to $6 million in assets, people who have worked all their lives, are at the end of their careers and have increased the value want their money. And their sons are not able to pay $4,000 or $5,000 for a farm. No one wants to give them a loan because who is to say that the young man will not be discouraged and leave, or even leave his brother or sister. You never know.
Over the next 15 years, Canada's challenge will be to ensure that there will be farm transfers within families and that the land will continue to produce, that Ontario pears will continue to grow, Quebec milk will win prizes, western potatoes and wheat and British Columbia fruit will continue to grow. That is Canada's challenge.
So what are you going to do as the president of the Canadian Bankers Association? How do you see the future of farm transfer in the next 10 or 15 years?
[English]
Mr. Ciappara: I do not want to suggest that there are not any problems in agriculture. I was simply outlining what we do for agriculture. Over the last decade, as I alluded to in my remarks, there have been problems in agriculture. There have been the problems of the hog crisis, avian influenza, H1N1 problems and BSE. I suggested in my remarks that the banks and members around this table are there to assist them through those problems.
In fact, when there were hog problems back in 2009-10 with the depression in prices, the government, AAFC in particular, asked us to help them implement a program. That program was the HILLRP, or the Hog Industry Loan Loss Reserve Program. We worked intensely with them. We had about 10 meetings over the course of three months to help get this program off the ground. We spoke to the hog farmers. It was quite an accomplishment. We got this program, from conception to establishment, off the ground within three months. That is quite a feat. We are there if this were to happen again. AAFC knows whom to contact — the CBA or the banks directly — when a future problem like this comes up. We are there for the farmers and to assist the government.
[Translation]
Senator Maltais: I can appreciate the work that you do and I congratulate you. However, I am concerned about the future. How do you see the future? You are the president of the Canadian Bankers Association. You must have a better idea of what the future holds. You must look beyond 2013. What is your vision and how do you prepare so that young people can benefit from farm transfers? Are farm transfers possible?
[English]
Mr. Ciappara: I wish I had a crystal ball in front of me. We will continue to do what we have been doing all along. Our lending to the sector has been increasing. It has increased about 30 per cent to 35 per cent over the last 10 years, remarkably in line with the growth in the sector, and will continue to provide financing. I know for some of the banks around the table, agriculture is a major part the lending portfolio. My members are committed to continuing to finance that sector. It is not just credit; it is providing that advice in the intergenerational transfer piece on succession planning that my members spoke of.
They will continue to do what they are doing now and providing good advice, great credit for the farmers.
Ms. Paddock: As farms get larger and more complex, they are probably supporting multiple families and to the point of their continuing, absolutely. That is where the advice that we provide our clients is important. We talked about business continuity or succession planning, the importance of starting that early and not leaving it until the end. In looking at those large and more complex farm businesses — and they are a farm business — you need to look at the financial independence of the retiring individual to ensure they are not totally dependent on the farm to continue to provide for them in retirement. You need to ensure the farm is generating sufficient revenue to support the families it is supporting. In some cases, the next generation does not have the capabilities to manage the operation going forward and you bring in professional management. The sooner you start those discussions and talk about the options, the sooner you can lay down the ground work to successfully transition it.
[Translation]
Senator Maltais: We must be careful and look to the future with an open mind if we do not want to end up like the Americans with Hart Farm. You know why that happened. It is very important that your vision includes transfers for families.
I would have liked to hear you say to someone selling their farm that here is what your sons can give you, because people must be able to have a pension to live on. The young man must not go into debt up to his ears because, as soon as he needs to buy a piece of equipment, it will cost $200,000 to $300,000. He will be discouraged if he does not make a profit and will lose everything, and so will his father.
Could you tell me how you see the future and what your plans are for the future? A free trade agreement with Europe is in the works, which has a major impact on agricultural production in Canada, and people must be prepared for that. So how do you see your role in the future?
[English]
Mr. Worsley: If I may, senator, you are right. It is not simple. It can be challenging, and it varies farm business to farm business. What we have seen in the last few years are a lot of farm businesses becoming incorporated. That effectively allows a transfer of the assets and ownership over time to the younger generations. As you mentioned earlier, it is a significant capital investment to purchase a farm, take over a farm. However, we see with some of the family businesses that they are incorporating, and it is allowing a transfer of those assets and ownership over a period of time, which helps the younger people assume the business. It benefits both the older generations and the younger generation.
Mr. Rinneard: Thank you. Without question, there is an inordinate amount of capital intensity in agriculture, more so in agriculture than in any other family-owned business. In some respects, it provides challenges, but it certainly provides opportunities, too.
You talked about people exiting the industry. I think they appreciate the degree of wealth — in many cases — they have accumulated over the last couple of decades with respect to the capital appreciation they have earned on their respective farm assets, in addition to the equity they have built in their respective companies.
I think your issue is more to do with having their children succeed them in the business.
One thing I think my colleagues talked about earlier is quite simply vendor take-back: In instances where farmers have wealth and succeeding children who are interested in taking over the farm, parents, in concert with their respective financiers, can provide through the course of their retirement financing to their children that does not necessitate the instantaneous transfer of the assets to the children; rather, it is a more protracted transition for the new entrant, if you will, to complete succession. That enables them to stretch that strategy over several years, if not decades.
Again, I think to some of our earlier commentary, the importance or the success, if you will, of a strategy like that materializing is often predicated on how early you start to have that conversation. There is no question that it is fundamental that the people have the conversation early.
When you talk about our involvement beyond finance, I know what we have done at BMO. I can speak with relative authority: Agriculture is without question the single largest commercial sector that we serve at the bank. It is absolutely critical to our commercial success. It is an extremely important industry to us.
One thing that we have been asked to do in the last several years is participate with some of the commodity boards in developing new entrant programs, because they, too, recognize the challenges that all stakeholders, such as yourselves, have in the space with respect to getting new entrants in. The new entrant program is not uniform across commodity groups, but it certainly has a lot of very comparable features, one of which is in essence a hand-up or a hand-in of a loan — a free loan, if you will — of quota, for example, that we have seen in many of the supply-managed commodities. It is a hurdle for some to get in, so the supply-managed boards have provided that to new entrants, in concert with some of our recommendations and with our financing.
There was a question from Senator Eaton, I think, with respect to people coming into agriculture who do not have a foot within agriculture at the outset. In the event that they do not become bankers, they certainly can become farmers at a later date.
However, the program has facilitated people from outside of agriculture to come in. That is good, because you get fresh ideas, new capital and new perspective coming into an industry, and that is good, regardless of the industry that we are talking about.
Mr. Brown: Senator, you have touched on a very important issue, I think, and it is one that we talk about at great lengths when dealing with our farm families through succession plans. One of the things that we very strongly encourage young farmers to do is put together a business plan and really focus on what their vision is. These are young entrepreneurs; they need to have a vision. If they do not have a vision for their business, then they probably will fail.
Often that vision goes in a different direction than what the last generation had. Maybe the last generation had a fairly large, capital-intensive business that focused on certain commodities, whereas the next generation does not have the capacity to do that and needs to either scale back or not own as many assets. Also, perhaps they need to focus on something other than a straight commodity, such as considering a local market or some niche.
It is those types of conversations and those types of business plans that we encourage our young clients to have. They need to have a vision for the future.
Senator Merchant: You are five different banks here, and you compete against each other. If I were looking to find someone to finance my dream, what is the program that you offer that might work? How do you differentiate yourselves to try and get that particular person to come to you?
Ms. Paddock: I think at the Royal Bank, we have the best people.
Seriously, though, I think when you think about loans, we all rent money, so that is not a differentiator. What differentiates us is the quality of the people that we have serving the market and their ability to provide relevant business and financial advice. Ensuring that the people we are dealing with have access to the best is the key.
If you are asking what we use as far as trying to differentiate ourselves from the competition, it is our people.
Senator Merchant: But from each other here.
Ms. Paddock: They are my competition.
Senator Merchant: You all will say the same thing, will you not, that you have the best people?
Ms. Paddock: Then it is a matter of demonstrating it and earning that trust. To your point, it is easy to say, but if you cannot deliver, then you lose credibility. What differentiates us is our ability to deliver on that promise.
Senator Merchant: I think it might be difficult, then, for a person. They would have to study each of you very closely, and they should.
Ms. Paddock: I think Canadian farmers are very fortunate that they do have a strong banking industry from which to draw the expertise and get access to credit.
Senator Merchant: As banks, how do you decide what sort of projects that people come to you with? How do you decide which ones to support and which ones you do not support? Is it the ability of the person to be able to generate enough income to meet their obligations, or do you see some niches where you feel that it is important to support farmers to come up with new ideas? How do you decide — other than with the financial aspect — to support an idea or not?
Ms. Paddock: There are a number of different criteria we will look at. We used to do the three C's of credit, which are character, capacity and collateral. A lot of that is around the individual. Mr. Brown spoke about the vision for their operation and their management ability, because there is a lifestyle component to farming, but it is also a business. Therefore, it is the capacity of the individual to actually manage that operation. As the operations get bigger and more complex, that becomes even more important.
It is the balance sheet of the entity. You are not doing anybody any favours to give or lend money to someone who does not have the capacity to repay it.
Then there is the individual's ability to secure the loan, because we are secured lenders.
All of those factors come into play around assessing the risk that is associated with lending to that individual.
When you talk about niche opportunities, we do not pick and choose as far as saying that we think everybody should be growing ginseng, for instance; we do not have favoured products. We find that there are good producers in all commodities. Really, it comes down to the individual and the business that they are operating.
Mr. Brown: My comments are very similar to Ms. Paddock's, and I would echo all of that. It does drive us back to the importance of that individual having a vision and a very detailed plan as to how they will execute. That is an indication of management, first of all, so it is very key.
They need to know how they will market that product, whatever they are producing. Is that market established, or do they need to go and try to establish it?
We look at those issues. If they do not have a clear vision or if the market is not established or if they have at least not gone out and maybe formed some contracts or some relationships where they can market their product, then it really is an uphill climb for them. Those who really take the planning part seriously and go end to end on it are the ones we are looking for, and that is who we want to finance.
Senator Merchant: It must be a real struggle for someone who is not from a farming background, as we heard earlier, who might have another job as well on the side to do all these other things — like to have an idea about how they will sell their product and to have some markets developed. Do you have any idea how many people have to work outside of the farm to try to support their aspirations to eventually become full-time farmers, let us say?
Mr. Brown: I do not have numbers for you, but certainly a large number of young people starting into farming, whether they are from an agricultural background, go to other sources of income in the early years. That is a fairly common approach. It is unfortunate that it has to be that way; but that is the way it is. Other businesses that people get into need that as well; so it is similar. It goes back to the strength of those entrepreneurs when they have an idea, a strategy and a dream, they will do what it takes to get them there. Those are the individuals we want to finance.
The Chair: Ms. Paddock, would you please restate for the record your three C's?
Ms. Paddock: They are character, capacity and collateral.
The Chair: Thank you.
Senator Eaton: It would be most helpful for our report if each of you could tell us what you see as the next biggest problem in farming over the next 20 years. You are looking at it from a very different perspective than farmers, academics or even we look at it. It would be very interesting because you hear all kinds of stories and see all kinds of things that you are all too discrete to tell us about. Surely you must know what the biggest problems will be.
Ms. Schrof: I will talk a bit about what I am concerned about in agriculture. The great thing about agriculture right now is that there is a renewed sense of optimism, which is great to see. I am incredibly passionate about this industry. I grew up on a farm, took agriculture in school, and dealt with agriculture throughout my career.
Much of that optimism is being driven by the low-interest-rate environment we have and the high commodity prices. I am concerned that we have been in the low-interest-rate environment for quite some time. People get used to these rates and think that they will stay forever. The responsibility of a financial institution is to educate our clients: Can the operation sustain the impact of a 5 per cent interest rate or a 7 per cent interest rate? What does that do to the bottom line?
Mr. Brown: I have no crystal ball either. However, as we watch the agricultural marketplace, we see that the whole area of marketing and markets will be a challenge and an opportunity going forward.
Senator Eaton: Why do you think it will be a challenge?
Mr. Brown: It will be a challenge because it is always a challenge to find markets, secure them, keep them, and deal with the necessary players in those marketplaces. It has always been a challenge and will continue to be a challenge. I say "challenge" in the sense that it is an opportunity as well.
Senator Eaton: Even with our free trade agreements, you still see that as a challenge. Is it more challenging for certain sectors of agriculture than for others in terms of markets?
Mr. Brown: Well, of course it is. Certain sectors do not have the same access to foreign markets, for instance, that other sectors have. I do not want to focus on the challenge part of it but more on the opportunity part. It will be a big issue, and it is that now.
We are involved in a lot of trade agreements around the world. That is starting to open the doors for agriculture and will continue to do so. This is a food-producing nation, and we need to look beyond our borders, I believe, for those opportunities. Yes, negotiating those deals to get the right deal in place is a challenge; but it is also an opportunity. Our farmers need to look beyond their own farm gate to see what the opportunities are out there.
Ms. Paddock: The biggest challenge potentially will be agriculture and its impact on the environment. Agriculture needs to be proactive in adopting farming practices that are scientifically based and where the impact on the environment is managed and minimalized. If it is not done, then we risk losing our social licence to produce, in particular livestock production. That is where innovation comes into play. How do you innovate around some of the farming practices to ensure that the impact on the environment is minimized and managed?
Mr. Rinneard: In some respects I want to build on some of the commentary that Ms. Schrof offered with respect to debt. Without question, debt is escalating and will continue to escalate in the sector. In many respects, it has been predicated on a very low interest rate environment. I remind people when I can that it was just six years ago that interest rates were twice as high as they are today. If you ask anybody, regardless of the industry they are in, whether they could tolerate an interest payment that is twice as high as they are paying today, the response, more often than not, is "no." It is a fact that is often quite shocking, to be frank. We always encourage folks to stress test their balance sheets to ensure that their business models can tolerate fluctuations in interest rates. If they cannot tolerate an extensive elevation in interest rates, then they should fix money or embark on a few different strategies that we always recommend with respect to interest rate hedging.
That is so important because — and this is germane to your study with respect to innovation — the agriculture industry, in Canada in particular, has to be perpetually evolving and innovating. The problem, as with any business, is that if every dollar you earn is earmarked for debt service, then there is little latitude whatsoever for experimentation. Experimentation comes with risk. Whether it is a new chemical, a new seed variety or a new genetic, there has to be some assumption that it could fail. In the event that it fails, it cannot be catastrophic to the fundamentals of the business.
Farms, like all businesses, require some degree of latitude with respect to their cash flow at the end of the day so that they can tolerate some hiccups in terms of experimentation while continuing to service all of their other obligations.
Mr. Worsley: To add to your question around looking forward, market and weather risks are big things approaching farmers as we move forward. From a market perspective, several years ago grain farmers would typically sell their crop once or twice per year. Today, because of the fluctuations in the markets, they need to be more creative in terms of their sales and marketing plan, properly hedging their prices in the market. We will continue to see volatility in the commodity markets going forward, as we have seen in the last few years. I do not think that will go away. It is important from an environmental perspective. We talked about the weather earlier today, and that seems to continue to be a challenge. It has always been a challenge and will continue to be one. It is important for farmers to have proper insurance and risk mitigation in place.
[Translation]
Senator Rivard: Most of the good questions have been asked and answered. Is it safe to say that there are more bankruptcies related to payment defaults and closures of small- and medium-sized businesses in the agri-food or the agricultural sector than in other sectors? Are there any statistics? Is it worse in agriculture?
[English]
Mr. Brown: I do not have the exact figure in front of me, but our portfolio is very strong and has been strong for a very long time, particularly in the primary production area. Our losses are far less, on average, than in the rest of our commercial book.
[Translation]
Senator Rivard: I would like to ask another question. I remember that, a few years ago, Quebec had a loan guarantee program for hog producers. To your knowledge, are there any such provincial or federal programs for the agriculture and agri-food community?
[English]
Ms. Paddock: The quick answer is yes. Specifically in Quebec, there is FEDQ, which is quite an extensive loan guarantee program that is administered through the provincial government. Also, you mentioned hogs. Mr. Ciappara commented on the HILLRP program, which was introduced by the federal government at a time when the hog industry was in crisis, so there are government-guaranteed loans there as well.
[Translation]
Senator Rivard: I have one final question. This committee is concerned about research and innovation. That is the purpose of our study. Your comments this morning are certainly very useful.
Let us look at a potential scenario; I am a medium-sized business and I need $500,000 for a research and innovation project. So I submit a business plan to you; I submit the potential earnings prospects and, naturally, you are interested in the financing aspects, in the amount invested by the promoter, whether there are subsidies or money from somewhere else. Then you provide the rest of the money if you think it is an attractive plan. Do you have a pre-set threshold percentage of 50 per cent or 40 per cent that you cannot exceed? For instance, that is what happens when you buy a house; the government imposes a ceiling on the amount that can be loaned. Do banks use the same criteria with a percentage threshold?
[English]
Ms. Paddock: When we talk about financing research and development, the percentage that we would finance would depend on the specific balance sheet of the company that we are financing. When I talked about the three C's, one of them was collateral, what type of security would be provided for the loan. It would be really business-specific for what percentage. We have a SR&ED, scientific research and education, credit program, and we will finance up to 80 per cent of the accounts receivable for SR&ED credits. That is a program that agricultural producers are eligible for as well.
Senator Plett: I have a couple of questions. Mr. Rinneard, just to follow up on your comment about interest rates, you are far too often faulted for crop failures and for the dollar fluctuation. One of the reasons the pork industry got into as much trouble as it did was because of the Canadian dollar going up, which many of us were happy about, but the hog farmers were not. Crop failures are not your fault.
However, debt levels have gone up across the board, not just in farming. They have gone up everywhere. We have unprecedented debt levels in every Canadian household. One of the big reasons for that is low interest rates. Now, those of us who still owe some money appreciate those low interest rates. Those that have some savings wish the interest rates were a little higher.
You, to some extent — not you personally but the banks — control that. Are you, in fact, in that regard, at fault for some of the issues that we have?
Mr. Ciappara: At least in the agricultural sector, I can say that we have looked at it. If you look at the economic growth and the GDP in the agricultural sector, it has gone up about 25 per cent to 30 per cent over the last 10 years. That is pretty much in line with the growth of our portfolio as a total. We have been lending in line with growth in the agricultural sector to farming. I think we have been lending quite appropriately and quite responsibly to the agricultural sector.
Senator Plett: Did you have a comment?
Mr. Rinneard: Certainly. The question, I think, was are we at fault. The short answer, of course, is no.
To simply build on what my colleague, Mr. Ciappara, has alluded to, the growth that we have demonstrated with respect to debt to the Canadian agricultural sector has been commensurate to the gross domestic product of the industry. As the industry has continued to advance, excel and generate more economic activity, so too have their borrowing requirements, and, as a consequence, so too have we been there to match those. It is important to note that the type of financing that many of us at this table provide — and certainly at BMO — is working capital financing. That is important to recognize. It is financing that is tied very closely to the short-term activity of the operation, and it is, in many respects, a more difficult type of financing to provide because it requires a really judicious assessment of the company — its performance and its ability to deliver on its projections — because it is so closely tied to sales, as opposed to simply asset appreciation, over a very protracted period of time.
We feel, with absolute sincerity, that it is our prudential responsibility to have a conversation with a prospective customer, if they are entertaining new debt, to ensure that their business model can, in fact, sustain the type or the level, more importantly, of debt that they are looking to take on, that it is appropriately matched to the assets they are financing. What we never want to get into, senator, is a situation where someone has perhaps financed breeding livestock for 20 years because that breeding livestock, as you know, will not enjoy that kind of lifespan. We want to ensure that they are not paying for something subsequent to its demise. That is the same for machinery. You do not want to be paying for a combine for 15 years if it will only have a useful life, on your farm, for three.
That is certainly incumbent upon all of us to do. I can say, with confidence, that we do provide that prudential advice when we are having conversations, at kitchen tables, with farmers across Canada.
Senator Plett: In light of time, I will wrap my next two questions into one if I could, chair. Directly from your presentation this morning, I will just read what you said:
Indeed, a recent Industry Canada survey showed that rural small and medium-sized enterprises had a higher approval rate for the debt financing requested than urban SMEs, and when it came to obtaining financing, rural SMEs ranked it as the least problematic external obstacle to growth
The two questions are these: First, other than small and medium-sized enterprises, where do farmers rank in that?
Second, could you explain to me this statement:
Bank credit represents about 36 per cent of the total farm lending market. In addition to the over $25 billion that farmers have borrowed from banks, close to $12 billion in additional credit is available to farmers without any additional application.
Could you explain what you mean when you say that the $12 billion is made without additional application?
Mr. Ciappara: Absolutely. On your first question, in terms of where agricultural SMEs fall into the whole of rural SMEs, they are a component of the rural SME population. I do not have the exact numbers on me, but I would be happy to provide them to you afterwards.
Senator Plett: If you could.
Mr. Ciappara: It is an Industry Canada study.
In terms of the additional $12 billion, that is what we call authorized credit. We have talked about working capital and operating lines of credit. Quite often, when a farmer — and I will let my members expand on this — or anyone comes into a bank branch and wants to apply for credit, they will be authorized a certain amount on their operating lines of credit. The farmer or the business will then have the opportunity to draw down on that line of credit.
What I am stating in that part of the opening remarks is that farms have drawn down about $25 billion of that credit, and they have an additional $12 billion on their operating lines of credit and working capital. However, I should say that $25 billion is not entirely working and operating lines of credit. There are some terms and mortgages in that number. The difference between $25 billion and $37 billion is mostly operating lines of credit and working capital.
Senator Plett: Any other comments? Thank you.
[Translation]
Senator Maltais: There is a sector that we have not addressed, but that still affects a large part of Canada, specifically British Columbia, Quebec, the Maritimes and Newfoundland and Labrador. It is the fishery industry. What is your involvement as a banker in that sector?
[English]
Mr. Ciappara: I will say something very quickly. We do lend to the fishery sector. I do not have the numbers of how much we lend, and the bankers we have around the table really focus on agriculture. I do not have those numbers. We do lend to the fisheries sector. That is it.
[Translation]
Senator Maltais: I am happy to hear that, because a significant number of Canadians still depend on the fishery industry, be they fishers, owners or plant workers. How does the transfer work? Do any of you know how the transfer of small and medium fishing boats is done in the Gulf of St. Lawrence and the Pacific Ocean? How does it work? Is it the same principle as a farm transfer or is there a specific redemption program to ensure that fishing boats are passed down from father to son?
[English]
The Chair: I could probably ask Mr. Ciappara to provide us with an answer through the Canadian Bankers Association.
Mr. Ciappara: Absolutely, we would be happy to do that.
[Translation]
Senator Maltais: I would have expected Scotiabank to give us some information about that for Senator Mercer since he comes from that region.
[English]
The Chair: To the bankers and the association, we have touched on a lot of subject matters relating to agriculture. There is one question that I would like your comments on. This would be the last question unless Senator Plett or Senator Mercer has additional questions.
There is a big challenge, and it is the family farm. Could you give comments on what the future holds for family farms versus conglomerates across Europe and North America?
Mr. Ciappara: It is probably better if my members answer that question because they are closer to the farming community than I am.
Mr. Brown: Often it comes back to your definition of the family farm, and that is not an easy one to make sometimes. We see a lot of family farms that are corporate entities and are growing. I am not sure whether you consider those conglomerates or not, but they operate like one. However, they are very large family farms.
Yes, the direction of farming is that it is going to bigger and bigger entities, and yet they are still family owned and controlled. We see some growth in land holding companies, and that may be what you are referring to. They are an interesting group because while land prices are going up and agriculture and a lot of sectors are enjoying some pretty high prices, things look good for those entities. I guess we do not know what will happen if agriculture goes into a down period, whether those entities will continue because the money invested in those may not be as patient as family- owned operations.
I think it is yet to see. We certainly are conscious of it and are watching it quite closely.
Ms. Paddock: Similar to what Mr. Brown mentioned, when you think about corporate farms, we do not have conglomerate farms here like the United States or to the same extent. When we have large farms, you can count on one or two hands the number of true corporate farms that are managed, controlled and owned by corporate or publicly traded entities. For the most part, our large farming operations are multiple-family farms and by the nature of size and scope, they support multiple family members. I would still consider them as family farm operations. In the future, I think we will see a continuation in the growing and large farm segment and a growing small farm segment which is the niche, the local, organic production. Both provide opportunities for family operations to participate in agriculture and to be successful.
Mr. Rinneard: Certainly, I agree wholeheartedly with my colleagues' comments with respect to the degree or prevalence of genuine corporate entities, corporate farms, as pundits like to talk about. For the most part, they do not exist in Canada.
There are increasing corporate farms, but that quite simply means from a statistical perspective they have registered as a corporation and in most instances have done so to facilitate succession. My colleague suggested earlier in our discussion that it forms a key facet to an effective succession plan to have a corporate entity because that is a more effective means to transfer or transition a farm or any of its respective assets.
The extent they have grown has been disputed. The statistics suggest that, but it really has been a necessity in many respects. I was on a farm this week, and it is increasingly becoming representative of the industry. It is a farm that works 3,000 acres in southwestern Ontario, and the management consisted of a wife and a husband and the labour consisted of three children. That was really the farm. It was a family farm. Without question, it was incorporated as a farm but remained a family entity controlled entirely by the family.
If Canadian agriculture continues to progress the way it is, it needs to transition that way. Economies of scale are a critical component of success in the industry and Canadian agriculture, perhaps more than any other industry, has continued to do more with less. If you look at the input that Canadians farms have put into the sector, it has been a trailing number from a labour and capital end perspective despite the fact the GDP in the space has grown considerably. In many respects, it is an exciting story and a product of maintaining that family entity and control.
Ms. Schrof: My comments will basically echo those of my colleagues on the panel today. The majority of our corporate farms are two or three generations and are typically incorporating because of tax purposes on advice from accountants and so forth.
Mr. Worsley: The businesses we predominantly work with are family-run farm businesses, as my colleagues have mentioned. Increasingly, they are becoming incorporated, but at all levels they are typically farm family businesses. I think the future is brighter than ever in terms of farm family businesses. In the last years, we have seen an increasing number of young people wanting to be involved directly in the farm business, and it is very encouraging.
The Chair: As we conclude, we have one final questioner.
Senator Plett: I just want to make a comment and ask the panel if they would agree with it. We have talked about the corporate farms and, as you have all mentioned, those are family farms that have simply gone incorporated like all good businesses do.
I know farmers in Western Canada who farm seven and 10,000 acres of land, and it is a family of a couple of people and a few employees. There are dairy operations where they are milking 800 cows and it is a family operation. Much of the reason for that is the automation and the size of the equipment we have. You can buy a combine now that will do so many more acres a day of combining than was possible 20 years ago. Therefore, it is possible to expand without necessarily expanding the size of the group that is operating that.
The witnesses are nodding, so I assume they agree with that.
My last question is for Ms. Paddock. You talked about the three C's. Are they equal, or do you put more weight on one of C's, such as putting more weight on character than collateral?
Ms. Paddock: The quick answer is that it depends. I would say that they are not necessarily equal. If you do not have the business acumen and the management ability for some of these larger, more complex farms, it does not matter how much collateral you have; it is not a good deal for us to be entering into.
I would actually put character or business acumen as probably being the most important, especially as we get into larger, more complex operations where management is key.
Senator Plett: I like that answer, because we all know that banks are often considered impersonal, and people are afraid to walk in and talk to a banker. If you put a lot of weight on character, I think is great.
Mr. Rinneard: I quite simply want to echo Ms. Paddock's comment with respect to character. Managerial prowess is the 2013 Canadian farmer; if you think about Canadian farmers today, in many ways they have to be veterinarians, chemists, botanists, mechanics, accountants, merchandisers — there is such a broad spectrum of managerial attributes that they have to demonstrate, particularly because there are in many cases only one or two in management position on the farm.
They have to have not only a breadth of knowledge but a great deal of depth in any of those respective fields, as they are becoming increasingly fundamental to continued success in the space.
Managerial prowess is becoming the defining difference between a successful Canadian farmer and one who is not. I suspect that is probably consistent with many industries.
The Chair: To the Canadian Bankers Association, it was said by a statement that we surely are a food-producing nation. We all have a role to play. What your leadership has demonstrated this morning and from the questions you have answered, we have seen two things: One, it has been very enlightening and, two, we have seen a caring attitude from our financial institutions to move forward in cooperation with governments and communities, because we want to continue to position Canada as the best country in the world.
With that said, for the record, we have Alex Ciappara, Director, Economic Analysis, Canadian Bankers Association; David Rinneard, Director, Agriculture and Agribusiness, BMO; Darryl Worsley, National Director, Agriculture, CIBC; Gwen Paddock, National Manager, Agriculture, Royal Bank of Canada; Peter Brown, Director, Agriculture, Scotiabank; and Stacey Schrof, Manager, Agriculture Policy and Process, TD Canada Trust. Thank you very much.
Honourable senators, the meeting is adjourned.
(The committee adjourned.)