Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue No. 18 - Evidence - Meeting of November 17, 2016
OTTAWA, Thursday, November 17, 2016
The Standing Senate Committee on Agriculture and Forestry met this day at 8 a.m. to study the acquisition of farmland in Canada and its potential impact on the farming sector.
Senator Terry M. Mercer (Deputy Chair) in the chair.
[English]
The Deputy Chair: I welcome you to this meeting of the Standing Senate Committee on Agriculture and Forestry. My name is Senator Terry Mercer, from Nova Scotia. I'm the deputy chairman of the committee. I will start by asking the senators around the table to introduce themselves.
Senator Beyak: Good morning. Senator Lynn Beyak, from Ontario. Welcome.
[Translation]
Senator Tardif: Good morning. I am Claudette Tardif from Alberta.
Senator Gagné: Good morning. I am Raymonde Gagné from Manitoba.
[English]
Senator Merchant: I am Pana Merchant, from Saskatchewan.
Senator Plett: Don Plett. I'm from Manitoba.
[Translation]
Senator Pratte: André Pratte from Quebec.
Senator Dagenais: Jean-Guy Dagenais from Quebec, Montreal region.
[English]
Senator Ogilvie: Kelvin Ogilvie, Nova Scotia.
Senator Oh: Senator Victor Oh, Ontario.
The Deputy Chair: Thank you, senators.
Today the committee is continuing its study on the acquisition of farmland in Canada and its potential impact on the farming sector. For our first witnesses, we welcome, from Farm Credit Canada, Michael Hoffort, President and Chief Executive Officer; Corinna Mitchell-Beaudin, Executive Vice-President and Chief Risk Officer; and Jean-Philippe Gervais, Vice President and Chief Agricultural Economist. Thank you for accepting our invitation.
We would invite the witnesses to make their presentations, but I would also like to remind them that, as per our instructions that they have been previously given, presentations should not exceed seven minutes in length and will be followed by questions by my colleagues around the table.
Michael Hoffort, President and Chief Executive Officer, Farm Credit Canada: Thank you Mr. Chair. Good morning, honourable senators. It's a pleasure to appear before the Standing Senate Committee on Agriculture and Forestry on behalf of Farm Credit Canada, or, as I will refer to it this morning, FCC.
My name is Michael Hoffort. I am the president and CEO of FCC. With me today is Corinna Mitchell-Beaudin, Executive Vice-President and Chief Risk Officer; as well as Jean-Philippe Gervais, Vice President and Chief Agricultural Economist.
Like many at FCC, my involvement in the business of agriculture is seated in my family history, and I have spent nearly three decades in various capacities at FCC focused on delivering financial solutions to farmers and farm families. It's what drives me and our employees to serve.
That is why we are here today. We want to share with you the perspective of agriculture, in particular that of farmland. Farmland is not only a key asset or security for a loan; it also represents the hopes and aspirations of each and every one of our customers.
FCC is a commercial Crown corporation. The vast majority of our more than 100,000 customers are primary producers. With a healthy portfolio of more than $28 billion, FCC is able to reinvest its profits back into Canadian agriculture by creating innovative products and services tailored to the changing needs of the industry. FCC works closely with the Government of Canada and Agriculture and Agri-Food Canada to provide lending solutions for farmers and farm operations from small to large.
We believe the future outlook for the Canadian agriculture industry is positive on the whole. Our confidence comes from an industry that is diversified in what it produces and from Canada's international reputation for consistently producing safe and high-quality food.
While demand for agriculture commodities remains strong, commodity prices have declined over the past couple of years due to increasing worldwide supplies. Canadian producers have been partially shielded from these shifts with the weaker Canadian dollar relative to the U.S. dollar supporting the local prices Canadian producers receive.
As well, we know that the very nature of the agriculture business is cyclical, as we have seen this year with a wet and snowy fall on the Prairies, which has halted harvest in many cases. This has impacts on both crop quality and overall revenue for producers. FCC has already responded by offering customer support to reduce the financial pressure on the farmers impacted by these conditions.
Without question, the Canadian agriculture industry is resilient, led by highly skilled, knowledgeable farm-business operators who create value for our economy and who take seriously their task of feeding a growing world. Most farms represent several generations of farm families who care deeply about what they produce and how they produce it. According to the last Census of Agriculture, 98 per cent of Canada's farms are family farms, many multi-family, multi-generational, and the vast majority of FCC customers are small- and medium-sized farm operations.
Supporting the country's global position as the fifth largest agricultural exporter, Canadian farmers continue to be among the most productive and efficient in the world.
I would now like to make some comments on farmland value trends and insights.
As Canada's leading provider of agriculture financing, FCC is in a unique position to offer insights to the committee on the most important asset a farmer owns and the most essential input for agricultural production, that being land. We are experts in the field of assessing farmland values as represented by our annual FCC Farmland Values Report that we have produced for the past 30 years. Today we provided a copy of our most recent report.
Our assessment of farmland values is influenced by a number of factors, some of which vary significantly between regions and provinces. These factors include supply and demand, weather conditions, commodity and livestock prices, interest rates and the intended use of the land.
There is an emotional connection to the land on which farmers grow crops and raise livestock. This is the legacy of multi-generational family land ownership. Investment decisions such as purchasing farmland or entering into a land rental agreement are analyzed with a long-term view. With this view, producers looking to start or expand their farms are sometimes even willing to pay a higher price to acquire land, knowing that it may come available only once in a generation or maybe longer.
Let's look at Canadian farmland values from a historical perspective. In 1981, land represented 54 per cent of the total farm assets. In 2015, the date of our last Farmland Values Report, we found land represented 67 per cent of total farm assets.
Increases in farmland values are part of an overall increase in the asset appreciation in recent years. This has primarily been driven by low interest rates and strong crop receipts, which makes it attractive for many to invest in land. It is fair to conclude that as farming becomes more profitable, farmland becomes a more significant investment. That's exactly what we have seen over the past 10 years or more.
Based on current economic conditions and forecasts, we believe farmland values are, for the most part, at the top of their growth cycle, and we have generally seen the rate of increase in farmland values decelerate over the past couple of years. This is not to be mistaken for a decline in farmland values. Land values are still increasing in many regions, just not as rapidly, so affordability of land has to be carefully considered.
It is also important to keep in mind that FCC measures the average change in provincial farmland values. We recognize there may be isolated pockets where the price of farmland is unusually high due to a number of local factors. This is not always captured in the farmland value assessments.
As I travel across the country and speak with our customers and agricultural association representatives, I'll often be asked the big question on everyone's mind: Are Canadian farmland values at fair market value or are they too high? There is no easy answer to that question, but here are some of the indicators that we monitor:
First, land-to-revenue ratio. This looks at the value of land compared to its ability to generate revenue through crop receipts. For example, in Saskatchewan, which accounts for approximately 40 per cent of Canada's arable acres, this ratio is close to the 25-year average, which suggests a fairly balanced market. In some other parts of the country, it is fair to say that land has become more expensive compared to crop receipts. However, if we look at the situation through the lens of a booming farm economy supported by a long stretch of low interest rates and strong demand for agriculture commodities, it is entirely understandable why land values have also increased. Producers know their cash flow and see the opportunity in making a long-term investment not only in their farm operations' most important asset, but also in the future generations of farmers.
Another indicator we monitor is debt-to-asset ratio. We have provided you today a copy of the most recent FCC Outlook for Farm Assets and Debt report, one of our most important reports both from an industry and agriculture lending perspective. Through our analysis of economic data and trends, this report reveals the average debt-to-asset ratio for Canadian agriculture in 2015 remained historically low. This is good news, since a lower debt-to-asset ratio generally gives a farm operation more flexibility to withstand unexpected changes and challenges. It also gives the farm the financial strength to pursue opportunities. All this is to say we believe Canadian farmers are in a good position to meet their financial obligations, and strong land values are an indicator of the industry's strength.
Back to our big question: Are Canadian farm land values at fair market value? We really don't know for sure, since fair value is market driven based on the economics of supply and demand, but here is what we do know: A sign of a healthy and dynamic industry is that these transactions are taking place and the vast majority of them are between family-owned operations or happen as a result of an inter-generational transfer of farmland.
When it comes to farmland and farmland acquisition, the ideal scenario would be for the average value of farmland to reach a point of long-term stability where any future increases or decreases are modest and incremental. While strong farmland values are good for producers who hold land as an asset, it can be a challenge for young farmers or new entrants wanting to get established in the industry, as well as those looking to expand their operations and even those looking to exit farming. In other words, it can make the inter-generational transfer of private land or sale of land a bit more challenging.
In 2015-16 alone, FCC disbursed $2.6 billion to farmers under the age of 40. This total lending to young farmers has grown steadily over the past several years. Part of this support comes from a special loan offering that helps young farmers buy land as well as purchase or improve buildings. The FCC Young Farmer Loans program enables qualified producers to borrow with no fees and at affordable interest rates. FCC has made $1.5 billion of financing available through this product since its launch in 2012. This loan fills a gap in the marketplace by enabling young farmers to access the credit they need to become established in the industry. The future of the industry depends on attracting young, bright entrepreneurs to careers in agriculture or by helping those raised on the farm realize their dreams of someday carrying on their family farming tradition.
Our transition loan builds on a pre-existing relationship between a buyer and seller — usually a patient seller such a parent, a relative or a neighbour — to help young farmers start or expand their farm or to help establish farmers transfer their farm assets to the next generation. The transition loan allows for a low down payment with the payment to the seller spread out over a maximum of five years. For the buyer, this staged loan disbursement provides the opportunity for a greater percentage of their initial loan payments to go toward principal reduction, helping build their equity more rapidly.
In addition to these two loan products, we are actively looking at ways to expand our offering and broaden our lending products to specifically serve young producers, to work with them in establishing a strong foundation from which they can build and grow their farms. This speaks directly to our mandate at Farm Credit Canada and our role in the agriculture lending market. We offer products and services that are specifically tailored to the needs of all our customers.
At FCC, over 90 per cent of our customers also deal with another financial institution or credit union. We believe that healthy marketplace competition and a choice of financing options is good for all Canadian farmers and agri-businesses. Agriculture is a robust contributor to the economy that requires capital from all of us, be it banks, credit unions and FCC, to achieve potential.
That said, FCC is the only financial institution solely dedicated to advancing the business of agriculture. Our role is to provide Canadian farmers with the financing they need to grow their business and we have done so successfully for the past 57 years. No matter what changes take place in the industry, FCC will continue to serve as a strong and stable partner throughout all business cycles. We will not abandon agriculture in challenging times and we will support them in the face of unpredictable circumstances. Agriculture is our business and we are in it for the long haul.
Thank you for the opportunity to speak to you today. I look forward to any questions the committee may have.
The Deputy Chair: Thank you, Mr. Hoffort. I understand that you will be the only presenter, but the others will be prepared to answer questions. We will start the questions with Senator Plett.
Senator Plett: Thank you, chair, and thank you to all three of you for being here. You've spoken mostly, Mr. Hoffort, about land values and prices of grains, but you have spoken very little about other agriculture. Is the majority of your business to grain producers, or do you do business with hog farmers and dairy farmers? There is no difference; everybody qualifies?
Mr. Hoffort: Yes.
Senator Plett: You said that, basically, farmers were in pretty good shape to carry the debt load they are now carrying, keeping in mind that the interest rates are pretty low. Yet we hear all the time about possible increases in interest. What happens, overall, if interest rates increase by 1.5 or 2 or 2.5 per cent? Will the farmers still be able to continue to operate, or will that have a devastating impact?
Mr. Hoffort: An increase in interest rates is something we do consider, even within our assessment of loan applications from producers. In the event of an increase of 2 or 2.5 per cent, the answer is it depends, and in a couple of ways.
The first part is how fast that happens. If it happens in a very rapid series of months versus a series of years, I think that would put a lot of stress on some of the producers carrying higher debt loads. Oftentimes, that would be a young producer or an expanding producer. A rapid increase in interest rates of 200 or 250 basis points would quite likely put some strain on those operations.
I would say, though, that if you look at it overall, the profitability of farm operations and their ability to adjust if they did have time means that they would be able to see that through. One of things we have concentrated on, from a structure of farm debt in our customers that we would deal with, is to make sure there is space if we did need to extend out some amortizations or do some things to provide some cash flow relief. They would be structured to do that. Our average mortgage loan with an amortization, typically, would be 15 years or in the range, perhaps, up to 20. There is flexibility to make adjustments to the balance sheet in terms of how it is structured if there was a very rapid increase and if somebody needed to time to adjust to that. But our belief is that if it looks like the market suggests an increase over a series of months and years, when it starts to move, Canadian agriculture would adjust to that at current debt levels.
Senator Plett: Over the years, we've all gone through our initial loans we have made to buy our first car or first house. I find it difficult to understand that it always seems that banks — well, I guess, maybe, it is understandable — seem to charge a higher interest rate to those who have problems paying back their loans, and, of course, the higher the interest rate, the more difficult it will be to pay back the loan. It's working in the wrong way, in my opinion. Do you charge different interest rates for people based on risk, and if so, what generally are your interest rates?
Mr. Hoffort: In terms of interest rates, there are some risk-based interest rates that would be in line with your assumption. A high-risk customer generally would pay a slightly higher interest rate that a very low-risk customer. That would be consistent with the marketplace and how the banks and FCC would structure the charges we would have. In terms of the spread between those rates, I don't think it would be significant between the lowest rate offered and the highest rate. In general, it's not a broad level of adjustment between them.
In terms of interest rates and the board right now with prime at 2.7, and the low cost of funds as it relates to the bond market and some of the other areas, interest rates in the 2.5 to 4 per cent range would not be uncommon in terms of what people would be paying.
One of the factors in our Young Farmer Loans is to ensure the rate that that young farmer would pay through our program would be consistent with what a low-risk customer would get. It is to bring that in line. With the additional factor of not having a fee on top of that for the loan set-up and those types of things, it does help those young producers get a bit of a break from what they might get on a market-based rate.
Senator Plett: We've had a number of witnesses talking about, obviously, as you've already mentioned in your report, the price of lands and that they are increasing. I'm from Manitoba, and we have a lot of dairy and a lot of hog farmers in Manitoba. Especially with dairy, there seems to be no upper end to what they will pay for land, not because they necessarily need land to put crops in but they need it to spread manure. There seems to be no upper end to those land prices.
Are you finding that across the board, that people are buying a lot of land, whether for that reason or even speculation on building cities? Where are the highest increases in land and why? Saskatchewan seems to be staying fairly level.
Jean-Philippe Gervais, Vice President and Chief Agricultural Economist, Farm Credit Canada: We have noticed from year to year certain parts in some provinces where urban sprawl would have an impact. It would be localized, though.
If you look at our report, we report on a provincial basis, but if you look at a detailed description of our assessment of the farmland market in each province, you will find examples of what you've just mentioned in terms of, for example, a specific year. I'll mention Ontario, for example, because that's the example that comes to mind. A region where there is a large concentration of dairy producers would see some significant increases in farmland values. We're not exactly sure what the dynamics are, the reasons behind why this year versus not another year, but it happens that we have some pockets or very localized regions, because we use benchmarks in each of the provinces to try to capture the overall trend in the province. It does happen.
I would say that when it does happen, if you are looking behind the numbers and trying to make a connection between what we are noticing on a localized level to what we are reporting on a provincial level, there is no strong connection. There is one obviously because you feed that into the overall provincial average, but it remains to be that the main drivers are still crop receipts, interest rates and the need to expand and be competitive.
But I would say that, yes, in some very specific localized areas, you will find examples of some sectors having some impact in specific years.
The Deputy Chair: I would guess the Walkerton effect would also be a driving factor in dairy, to move back from the streams as much as possible.
[Translation]
Senator Dagenais: My first question goes to Mr. Hoffort. Mr. Hoffort, from the subjects you were studying, can you paint us a picture of the agricultural landowners who give up their farming as a result of attractive proposals from real estate developers? Those developers take a very long-term view; they are generally very patient and are ready to pay a little more today in order to generate profits a few years later, usually because of urban development.
[English]
Mr. Hoffort: The story relates to J.P.'s last response. Around some of the urban centres, the larger ones in particular, there has been some degree of speculation on the ring around the city. It's a reality we have seen. In some cases, the cities have stalled and there has to be quite a bit of patience in those types of holds, but typically in those scenarios, the land is rented back to local producers for production until you see some development.
It varies for sure, depending on where you are and the circumstances. For example, the Lower Mainland of B.C. has the Agricultural Land Reserve. It specifies that their agricultural properties will remain in production. You still see some pressure, though, from the overall market. We hear a lot about Vancouver and the housing market there. Some of that pressures a bit into their agricultural properties. I think they've done a good job of not converting properties out of the reserve into residential, and that is probably one of the factors behind their urban prices for homes.
It does vary across the land in terms of what is happening with that. I wouldn't deny that is a factor. As J.P. mentioned, it is localized. One of the realities is where it does come out of local ownership and then typically flips back to a rental situation for a local producer, and at some stage you can see where that would be converted to a residential neighbourhood. A little bit at a time is probably not a big concern, but as land gets converted, I would suggest it does become a concern to local area producers, where they have to relocate to continue farming or expand their operation.
[Translation]
Senator Dagenais: With your permission, Mr. Chair, I have a question for Ms. Mitchell-Beaudin. Ms. Mitchell-Beaudin, in strictly financial terms, what in your view is the risk tolerance of farmers, of Farm Credit Canada, and of bankers in general? Who is prepared to take risks for the good of our country's farming? At what point does the risk become too great for your organization?
[English]
Corinna Mitchell-Beaudin, Executive Vice-President and Chief Risk Officer, Farm Credit Canada: FCC, like all financial institutions, would have very specific lending practices that we would establish and live into every single day.
I can't speak specifically about the risk tolerances of other financial institutions, but with respect to ours, we have a very strong belief that we're not doing anyone any favours by giving them a loan that they can't repay. So when we conduct our analysis on any loan situation, it's from a repayment perspective, ensuring that there will be sufficient cash flows to repay the loan over the long term.
Then the secondary source of repayment is the security, and in the context of this conversation, land represents a great amount of the security that we would take on a loan. We would have specific limits that we would set as to how much we are prepared to lend on a piece of security. Typically, that would represent about 75 per cent of the value of the security, but our new lending every year would be, on average, below that maximum of 75 per cent.
That represents, in general, our risk appetite as an organization, but philosophically our belief is that we want Canadian agriculture to succeed. We want producers to have success in their careers and be able to realize their dreams, so we are very much committed to making loans that they are able to repay through cash flows.
Senator Oh: Thank you, witnesses. First of all, I would like to say to FCC that you have been doing a great job, according to your report, in helping out young farmers, transition periods and setting up farms.
According to the National Farmers Union, the lack of data, especially in provinces that permit foreign ownership, makes it difficult to determine the number of acres purchased by foreign investors. Is farmland acquisition by foreign investors an issue of concern for your members? Do you finance foreign investors who buy farmland?
Mr. Hoffort: I'll answer the second question and then I'll turn it over to J.P. to address your question in terms of foreign buyers that we are seeing across the land.
In terms of FCC's mandate and where we lend, it is only to Canadian citizens and to landed immigrants, so we would not be actively lending to foreign investors. In fact, as per our guidelines and policies, we do not lend to investment funds or any of those things either. It's very much directed at individual farmers and Canadians who are looking to invest in Canadian agriculture, from that perspective.
In terms of foreign ownership, J.P. has more insight to help you get a feel for what's going on there.
Mr. Gervais: Thank you. I think you were pointing out that the issue of foreign ownership when it comes to farmland is a difficult issue, and for sure one of the reasons is the lack of data. Foreign ownership and specifically ownership is a provincial matter, and all the provinces have different rules around ownership.
We are aware of a few studies that actually point in some directions when it comes to data. The one study that I refer to often is the one that came out of the University of Guelph not too long ago — I think it's about two or three years old — where they were looking at all the land that is rented out or not owned and farmed by producers. A very small share of that land would be foreign-owned.
Foreign ownership exists to different degrees across provinces, but in a province like Ontario that does allow some form of foreign ownership, it still represent much less than 1 per cent of ownership of total farmland, so that leads us to believe that this is not necessarily an issue in all the analysis and the data that we report.
Senator Pratte: My question would be a follow-up to all of those questions. Foreign ownership, urban encroachment and institutional investors buying land are concerns that have been raised before us as, first of all, occupying land and, second of all, a factor in the increasing value of land.
Looking rapidly into your provincial data and report, non-traditional ownership is mentioned, I think, in the case of one province, Quebec, and I didn't see it mentioned for other provinces. I don't know if it means that something in particular happened in Quebec and not in other provinces. Is what you call "non-traditional ownership'' a factor in some provinces, some areas, or not? Because you do mention that the vast majority of transactions happen between family-owned operations. Is it a factor or not?
Mr. Gervais: It is a factor; it is a trend. I don't think anybody can deny it given what has been reported in news outlets, and, again, we don't have the data on ownership. We do have studies here and there that guide us into what the picture overall is. It is a factor. It certainly is a trend not only in Quebec but I would say in Ontario, for example, where some investment funds have actually purchased land, and that's been documented as well.
When we look at trends in farmland and we want to help our customers understand what is driving the price of farmland for them to make informed decisions about the marketplace and the value of land, over and over again our analysis suggests that this has not had an impact on overall numbers.
In the case of Quebec that you mentioned, there has been one benchmark in our overall study that we used to measure farmland values that has seen a bit of an impact because of institutional or non-traditional purchases of farmland, but how that feeds into the overall number remains not necessarily significant because of just the sheer number of acres that we're talking about compared to the overall acres that are farmed in a province like Quebec, and in other provinces as well. I am mentioning Quebec; it would be the case in Ontario as well as in other provinces.
Yes, it is a trend. You can't deny it. Farmland has been not only offering good returns for investment funds but has been offering some stability, which is something also that these investors look for when they are actually purchasing an asset. But behind the numbers and behind the trends we do report, I think by far we still are seeing transactions being carried out between a buyer and a seller that are both producers.
[Translation]
Senator Pratte: I would like to know what statistics you have available. You say that most transactions happen between family businesses, but that you do not have precise data on land bought by non-traditional investors. Do you have data on the transactions between family companies?
Mr. Gervais: The data we have relate to the transactions that we see in the market, the regular transactions that we do and do not finance, because we have our own evaluation service. For example, when a producer buys a piece of land, the evaluators examine the transactions that have an impact on the value of the land that the producer wants to buy. We know that there are many transactions on the market but we do not have data as such. We can always use data related to our portfolio, but FCC only has a part of the market and does not represent the industry as a whole. We have to use aggregated data. For example, the report on agricultural assets and liabilities comes from national statistics and from aggregated data that include agriculture as a whole, not just the data from our portfolio.
Senator Pratte: If someone wants to buy land in Montérégie using their pension fund, for example, do you have any details about the costs involved?
Mr. Gervais: We can consult the information about a transaction that we are involved in. We can see the transaction prices using the official registries in each province. We can establish comparisons from land assessments. We can consult those data but they are not compiled precisely. So it is impossible to paint a complete picture of the situation. With the help of our evaluators, we know the market trend. Clearly, the trend is towards non-traditional institutional transactions, but the vast majority of the transactions that we observe in our daily operations are done from farmer to farmer.
[English]
Senator Pratte: If we wanted to have this complete data, who would be in the best position to request it from?
Mr. Gervais: There have been a lot of different efforts into collecting that sort of data. I was mentioning a study at the University of Guelph that I'm aware of that uses survey-based methods. There are also some efforts that have gone through the provincial registries to look at actual transactions, label them and compute them and put them in a database so that you can actually have a picture, in most cases, not necessarily of the entire province but a region. So there have been efforts here and there, but I'm not aware of any comprehensive national or even provincial efforts.
Senator Tardif: Thank you for being here this morning. You indicated that there are differences in farmland values between provinces. In looking at your report, I notice that there has been a decrease in farmland value between 2015 and 2014 in three provinces: Saskatchewan, Quebec and New Brunswick. The other provinces appear to have remained steady or increased. What would be the factors that would explain the diminishing percentage in farmland values in those three provinces?
Mr. Hoffort: In reviewing the report, in all cases in 2015 we would have seen an increase in farmland values. The difference would be that the rate of increase is slower in some of those provinces.
Senator Tardif: The rate of increase.
Mr. Hoffort: If you look at some of the key drivers in terms of what's going on, Saskatchewan, Alberta and Manitoba continued to increase around that 10 per cent range — a little bit above in some provinces, a little bit below in Saskatchewan. That would be consistent with what we would have seen happen, in Saskatchewan's case, with pulse crops and the pricing in terms of some of the lentils, chickpeas and things like that. They drove profitability, which generally gets capitalized into some farmland values.
In the case of Alberta, strong cattle and livestock prices in areas of crop production would have also been in that situation.
In Manitoba, last year it has been one of the faster increasing provinces. A number of factors would come to that, for example, the strength in terms of some of their general operations there, the shift in crops coming across the province of Manitoba, whether it's more corn or soybeans. I would suggest a bit of a lag effect. There was a lot of flooding in those areas a few years previous, and land values didn't increase very much, if you look historically, and then they caught up a little bit coming into line with what was happening from a profitability perspective there. Just different things from those are key drivers.
Then in a place like Ontario, by example, where the rate was somewhat slower, it had been rapidly increasing in the previous couple of years if you look at the historic increases, so I think it's just settling. We expect crop prices will start to settle. As we start to see the top of that cycle, so to speak, you'll start to see farmland values in many cases start to slow in terms of their rate of increase to even just level off and settle in. That's kind of our expectation on what we'll observe over the next couple of years.
Senator Tardif: If I understand correctly, the price of farmland depends, to an extent, on the commodity grown and the profitability of the commodity?
Mr. Hoffort: Very true. Yes, for sure. It's also the strength of an area, as was mentioned earlier by one of the other members. If you have a large number of very strong dairies in a neighbourhood, when land does come available, it will be actively pursued in many cases. That can have impact on farmland values as well.
Senator Tardif: Do you see that there's enough profitability there to allow farmers to invest in expanding their farms in the future?
Mr. Hoffort: We do. We don't anticipate the profitability will drive the farmland values higher. Our observation, or our hope in some ways, is that farmland values will settle in a little bit, consistent with what's happening in the income levels of farmers. Then you'll find an equilibrium where the price of farmland is consistent with what you'd expect it to be so that they can buy and be successful, and you don't have to subsidize to a large degree the new land purchase with your existing farm operation. You can do that quite capably on a large, established operation, but it's much more difficult on a smaller, growing operation. We want to make sure, as much as we can, that some of those levers stay in balance and that it's a healthy kind of situation.
Senator Ogilvie: I realize the numbers you've presented are not a complete analysis of the farm business, but they show a very solid industry overall in terms of an asset value appraisal. Perhaps I missed it in your presentation, but I don't think I heard and I don't see in these documents the failure rate of loans that you provide.
Mr. Hoffort: Our loan losses on our portfolio would be at historic lows at this time and for the last several years. It's in the range of 0.15 of 1 per cent of our portfolio, so it's an extremely low level of loan loss, which is 100 per cent a good-news story for Canadian agriculture and is reflective of the strength of the industry.
One of the factors that comes into play with that, though, is that when you're in a rising land market, which we've experienced for the last decade, if you do experience some cash flow difficulties and you do feel that your future is somewhat of a challenge, there is an ability for producers to be able to sell and either restructure their business and stay in the game or sell their business to a neighbour and be able to exit and protect their equity.
But by in large, the repayment of our loans has been very strong. The amount of customers that we're working with intensively has been very manageable, and not a significant percentage of our portfolio would be experiencing difficulty at this time.
Senator Ogilvie: Is the 0.15 per cent the percentage of the total number of loans or of the total value of loans?
Mr. Hoffort: That would be a percentage of the total portfolio.
Senator Ogilvie: I asked specifically the number of those loans or the total value of those loans.
Mr. Hoffort: It would be the values.
Senator Ogilvie: Thank you.
The other thing that stands out as I go through your documents — I always look for things that really stand out — is that in terms of the per cent change in farmland values overall in the industry, it's a normal forward progression as you described, but in 2012, in Manitoba and Ontario, the per cent change was double the per cent change previously and afterward, with the exception of Manitoba where it stayed high for two years. These years were fairly strong in a number of provinces, but a doubling of the change? What unique factor occurred in Manitoba and Ontario in 2011 leading to the value change in 2012?
Mr. Gervais: There are a number of different factors. I would say we highlight one specifically: In 2012, it was a good-news story for crop producers in Ontario. They had the drought in the United States — a major drought going all the way back to 1930s in terms of the severity of the drought. They had very poor yields in the United States. Not a record crop, but a good crop in Ontario with record high prices because of all the issues in the U.S. triggered a big rise in income and did have a major impact.
Even though 2012 was really the peak when it comes to commodity prices, prior to that there was also an increase following a bit of a softening after the financial crisis of 2008.
So it was a positive perfect storm of sorts from an income standpoint. Manitoba felt some of that as well. Corn has taken more and more acres already in Manitoba, so you've seen income grow at that time.
Senator Ogilvie: That didn't apply totally across the country but, generally, 2012 was a good year. That would explain it in terms of the previous problems coupled with the change in North American conditions in 2012. It would have been largely felt in the second half of 2012. Would that be the case? Presumably, if the current crop conditions had an effect, it's going to do it after the crops are in play. There was a very strong level of activity in the second half of 2012, and it carried on a bit, certainly in Manitoba, in 2013.
Mr. Gervais: I would say so. There's also sometimes a bit of catching up between provinces as well. That explains the 2013.
[Translation]
Senator Gagné: My question is about future trends in the demand for credit. I was wondering if you have analyzed the profiles of the farmers, that is to say, at what age land transfers are being done. I would also like to know what your forecasts are in terms of the demand for credit in the next 10 years.
[English]
Mr. Hoffort: We are just in the process of putting together our five-year plan for the organization, and one of the things we look at is what we expect from a credit request perspective.
At this stage, we would anticipate that we will have credit requests relatively in line with what we're seeing right now with modest growth in that 3 to 5 per cent on an annualized basis in terms of credit requests. That's kind of a normal level of credit, based on the size of operations and the assets involved.
The factors that will drive that will be some continuation in terms of farms' growth and the desire to strive for efficiency, but there are also a lot of assets from an intergenerational transfer perspective that need to move. In a sector that has, I think, over $500 billion of assets, a lot of those will be held clearly by people who are in their latter ages, and here will be transfers of those farms.
The interesting thing we're seeing is that in a lot of cases with the intergenerational farms, which is very much a reality — you'll have grandma and grandpa, mom and dad, and sons and daughters all involved in these operations — in some ways those assets transfers are almost smooth and happen over decades versus a big event, which that might have been the case 30 years ago, for example. We anticipate we'll see those assets transferring through to the next generation.
This strong decade we've had in agriculture has actually brought in a lot of youth and is signalled by that $2.6 billion we've lent the farmers under the age of 40. That's really a sign that there's a new generation coming into these farm operations. They are excited and intelligent and up to some really good things. We're confident that's going to happen and they will be there, but we will see these assets leading the transfer, and there will be some requirements of capital from us, the credit unions and the banks to make sure that happens in an orderly manner.
The Chair: Let me thank the witnesses for being here. It's been very informative. You've also provided us with some very interesting background material.
As we proceed through the study, you may hear from us again. I would also encourage you, as you no doubt continue to monitor our proceedings, that if there's something you think either you forgot to tell us or that has come up that you think we should need to know, please don't hesitate to communicate with us via the clerk. He will circulate it to committee members so that it can become part of our study. Thank you again for being here.
Our next witness is Charles-Félix Ross, Executive Director, Union des producteurs agricoles du Québec. Thank you for accepting our invitation to appear.
I would invite the witness to make his presentation, and then we will go to questions. We are starting a little late, so I ask everyone to be succinct in your questions and answers.
[Translation]
Charles-Félix Ross, Executive Director, Union des producteurs agricoles du Québec: Thank you for having me this morning. I am the Executive Director of the Union des producteurs agricoles du Québec, which is the professional association representing all agricultural producers in Quebec. My directors would have liked to be here today, but we are one week away from our annual general congress. So my president and vice president are on the road meeting producers in various forums.
We were pleased to learn that the Senate is addressing the property issue, the acquisition of farmland. This is an issue that concerns us. Actually, an alarm bell rang at the beginning of this decade, when financial investors became interested in Quebec farmland.
As you know, Quebec is not Western Canada. Despite the province's dynamic and prosperous agriculture, farmland makes up only four per cent of our territory. That four per cent translates into six million hectares, protected by legislation in the form of the Act respecting the preservation of agricultural land and agricultural activities. But of those six million hectares, only two million, a third of the protected land, are under cultivation. That is really minimal in relation to the size of our territory as a whole. Our agriculture developed mostly on the St. Lawrence Lowland. People settled there, causing a pressure for urbanization, a pressure to expand into agricultural land.
As I said, the alarm bell rang in 2010. At that time, there were rumours that Chinese investors had bought up farmland around Saint-Hyacinthe. That turned out not to be the case. But, in the same year, a financial institution, the Banque Nationale, began to buy farmland in Lac-Saint-Jean for agricultural use. At the time, we met with the CEO of the bank, Louis Vachon, who told us that the bank wanted to invest $100 million in the purchase of farmland. Mr. Vachon explained that, in 2010-11, after the financial crisis, the bank was looking for a safe haven for its money because the stock markets were no longer performing well and farmland was increasing in value year after year, thereby bringing performance and stability to a financial portfolio.
Since 2010-11, we have been monitoring the market for farmland. We have indicated our concern about the situation to our provincial government and we have asked them to intervene with specific actions.
We have four reasons to justify our approach to the government. In our study on the agricultural land market in Quebec, we have noticed a very significant increase in the number of transactions each year, that is to say that the market for farmland is much more active than in the past. The second observation is the value of those transactions. So there were not only more transactions, but they were also being negotiated at higher and higher values. The result is a market that is more active both in the number of people involved and in the value of the transactions.
We also noticed new players. The Banque Nationale subsequently withdrew, but financial investors, investment funds, are interested in Quebec farmland. These are not so much foreign funds as Canadian funds. The main purpose of those funds is not to practice agriculture, but to get a return on the investment. So that concerned us.
The fourth reason is that we believe that the business model of the funds that have been approaching farmers is not a model intended to maintain dynamic agriculture in Canada in the future. We have been critical of the situation with our government and we have asked them to intervene in two ways. The first is for them to oversee the market for farmland. In Quebec, six million hectares are protected, of which two million are under cultivation, but there is no government oversight of the market for farmland and agricultural assets. So there is protection, but we do not know what is happening in that particular market.
Then, in order to curb the investment funds' appetites, we have also asked the government to regulate the sector and limit the purchase of farmland to 100 hectares per year, meaning that an individual, a company or an investment fund cannot buy more than 100 hectares in a year. An average Quebec farm, for example, is 100 hectares. That is still pretty big. It may not seem a lot, but, if you use the example in the documents you have received, you see that the investment fund called Pangea bought 4,000 hectares of land over two or three years. In Quebec, that is the equivalent of 40 farms, 40 families making their living from agriculture. So it is quite significant.
Those are the requests we have made to our government. A National Assembly committee was held in the spring of 2015 and a report was subsequently produced. It recommended that the government should establish a registry to oversee land purchases. There has been no real follow-up to that recommendation.
Those are the main observations we wanted this Senate committee to hear this morning.
The Chair: Thank you very much, Mr. Ross. The first question will come from Senator Dagenais.
Senator Dagenais: Thank you, Mr. Chair. Mr. Ross, you should know that I know the Saint-Hyacinthe area very well. I was the Conservative candidate there in 2011. I still have good ties with the area. I know the Lanaudière region well too. So I am familiar with the prices for farmland.
Having said that, I would like to talk to you about urban sprawl. Many agricultural producers receive requests from land developers to sell their land. Some very patient developers may buy land, keep it for some time, and wait for the cities to spread to them. We have seen that around Laval where land has greatly increased in value. Some people may even have become millionaires from the sale of their land. Is the UPA aware of that situation, the approach where developers wait for the opportunity to buy farmland? You yourself mentioned this as a good investment and that owners can sell their land to developers later. Are you familiar with that situation?
Mr. Ross: We are extremely concerned with that situation and we are constantly critical of it. In Quebec each year, 4,000 hectares are removed from agricultural zoning and used for purposes other than agriculture. Over 10 years, that is the equivalent of the island of Montreal. So it is quite significant. In our observation of the market for farmland, we have seen that, in some outlying areas, investors are interested, but the speculation and the number of transactions is increasing, mostly in areas around cities.
When you look at the transactions that have been registered in the land registry office in order to find out who are making those transactions, you see that there are a lot of farmers, but also a lot of numbered companies. When you dig a little, you realize that those companies are owned by developers or law firms.
In the territory of the Montreal urban community, 50 per cent of the farmland under cultivation is leased to the farmers. The producers do not own the land. They work it, but the land belongs to a whole host of owners. This is a very worrying phenomenon and we are asking the government to enforce the law more.
The law does the job by itself, but the act respecting the preservation of agricultural land and agricultural activities has to be enforced and there has to be a better vision for urban development. How should the territory be developed? Can we encourage densification? Can we implement a long-term plan for public transit? This goes beyond the realm of agriculture, but it is important to plan for the development of the city in 10, 15 or 20 years. If we use the space correctly, it will put less pressure on farmland.
In Quebec, for all kinds of reasons, from the way in which the tax system is set up, more than 80 per cent of our municipalities' revenue comes from real estate taxes on buildings, businesses, homes and farmland. That creates an enormous amount of pressure. Municipalities need urban development if they want to increase their revenue. As we have a number of municipalities, we are somewhat losing this vision of development and management; indirectly, that creates pressure on farmland to the benefit of developers.
Senator Dagenais: You surprised me a little when you talked about the Banque Nationale investment. We all know that banks exist to make a profit. So do the funds looking for a return. Do you not believe that, one day, that might come back to haunt the world of agriculture? Perhaps one day, for example, there may no longer be any tenants to farm the land. Imagine a bank buying land and no longer finding any tenants. Who could then make a profit from those investors purchasing the land when there are no tenants left? Could that happen? Does that happen in your vision of the future?
Mr. Ross: We have asked ourselves the question. Mr. Vachon was very clear and open with us. He said that, as far as he was concerned, the bank was looking for a safe place to put the assets in its portfolio. Later, it sold the land to Pangea, an investment fund whose principal shareholder is Charles Sirois, a businessman who is quite well known in Quebec.
We have asked ourselves why these people are interested in this market. In the long term, are they going to see agricultural development as a priority? We have come to the conclusion that it is probably about setting up a business model for agriculture that can be resold. For example, I could start up a fund, buy a block of farmland for, say, $100 million, about 30,000 hectares. That gives me access to bigger funds. For example, the Caisse de dépôt du Québec has investments through an American fund and it has bought up farmland in South America, meaning that the major investment funds become interested in those international assets. If I am a Quebec operator, like the Banque Nationale or Pangea, and I buy 30,000 hectares of land, assemble them and set up an agricultural model, I become of interest. The Caisse de dépôt, or any other major investment fund, does not want to deal with farmers to find out whether they are prepared to sell their land. That is work they just do not want to do.
We think those players are consolidating right now. They are focusing the activity. In our opinion, based on the most realistic assumptions, the idea is to resell the land for larger amounts eventually. Is it good for agriculture? We think there is nothing more resilient than family farms. If the price a producer gets for grain is not good enough for two or three years, he will stay on his land. He does not mind if he's paid below the minimum wage for two or three years because he has roots in his land since his family lives there and his children go to the village school.
However, in terms of land-grabbing companies introducing a different farming model, whose primary focus is on return, not on farming, we are really worried about the kind of model being developed. It's not widespread, but it's on the horizon. As soon as it is no longer profitable to farm in Canada, because places such as South America have three seasons in the year, they have extraordinary returns, the social costs are lower than here, and there are fewer environmental constraints, will farmers ultimately decide not to farm in Canada and go elsewhere?
Family farms and farm families will not go anywhere else, because they want to stay here. Of course, we are extrapolating, but those are our concerns, and they are shared by the farmers of Quebec. I travel around Canada and, within the Canadian Federation of Agriculture, farmers from across Canada have exactly the same concerns as we do.
Senator Pratte: I would like to come back to one point. You asked the provincial government to establish what you call oversight of the market for farmland. You said that your study of the market had revealed a number of problems. What are the benefits of this oversight? According to a number of witnesses who have appeared before our committee, there is apparently a lack of data on farmland ownership. What information do you have or would you like the oversight to provide?
Mr. Ross: Transaction information is available. When I sell land, I must register my transaction with the land registry. Those data are available to the public. However, no one collects or analyzes the information. Specialized firms, such as GDL in Quebec, prepare reports for stakeholders in the agricultural sector, which are then sent to banks and financial institutions. The only information they collect from registries is related to the transactions, namely that Mr. So-and-so sold Lot B No. 4570 to Mrs. Such-and-such at a certain location for a certain amount of money. If the transaction interests me, I can find the titles and see the number of hectares for the land in question. I can also identify the buyer and the number of lands he has acquired over the past year. By doing a thorough search, I can see other transactions. The information is in the reports, but no one is responsible for analyzing it, to see whether a particular type of player is more active than others, whether the business model is used for that land and why. There is no analysis, but we are able to draw conclusions and find out what the trends are, in order to address concerns or become familiar with issues of interest.
Senator Pratte: I am not in a position to know whether institutional investors have taken a significant portion of the land in Quebec. Anecdotally, we know that land is on the market, but we do not know the exact proportion or the changes over the last five years. No data are available on that.
Mr. Ross: That is correct. We sort of did that, because we looked in the registry to see how much land Pangea had bought from a given year to a given year — I often give Pangea as an example. We looked at the deeds, but that is a lot of work. That is where the government could play an important role. Even in the next Canadian agricultural policy framework, the Government of Canada, in partnership with the provinces, could support that type of analysis at the national level. I think it would be a useful initiative.
Senator Tardif: You said you are concerned about institutional investors. However, there is also the whole issue of Energy East. If, by any chance, the construction of the pipeline ends up affecting farmland, what would be the consequences? Do you foresee any negative consequences for farmers and their productivity?
Mr. Ross: Clearly, this is a hot issue in Quebec and Canada. Just now we were talking about investors and developers, but farmland is often seen as the easiest route for power lines, pipelines and all kinds of infrastructure. In terms of the pipeline, farmers are most concerned about accidents, spills and the risks of soil and groundwater contamination. The farming community is very concerned about this initiative. We would be very happy if the pipeline went somewhere other than across farmland. From a legal standpoint, in the event of an environmental disaster, will companies be able to provide compensation for the damage to the environment, to the businesses or to the residents of that land? For example, in the case of Lac-Mégantic, the companies were not really financially robust enough to compensate for the damage to society, the environment and the landowners. That is one of the farmers' major concerns.
There is also the whole issue of accountability. If a problem arises, is the producer responsible? The union and the producers would be very happy to hear that the pipeline could be built away from farmland. From a legal point of view, if government authorities decide that the pipeline will pass through farmland, we will have to live with that reality. If this project comes to fruition, we will demand that the government establish rules for financial compensation and that it apply rigorous standards and strengthen oversight to avoid disasters. If the project moves forward, we want to see a strict legal framework for people's protection.
[English]
Senator Oh: Mr. Ross, you mentioned earlier that there is no Chinese investor investing in land in Quebec, correct?
[Translation]
Mr. Ross: That's correct.
[English]
Senator Oh: It's not true?
[Translation]
Mr. Ross: We have no evidence. I cannot guarantee that there are no Chinese investors in Quebec, but I can assure you that we have no information that Chinese investors are buying farmland in Quebec. Do I sound like a politician?
[English]
Senator Oh: Part of this committee has travelled recently to China, promoting agriculture products in China. China, in fact, is now the second largest Canadian agricultural product importer overseas. It is a big and crucial market. Our farmers have produced the best quality agriculture products and the Chinese market loves it.
There are some pilot projects that I heard about in other parts of the country — I don't know about Quebec — about growing certain Chinese agriculture products for export to China. Have you heard anything in Quebec of this nature?
[Translation]
Mr. Ross: No, I have not heard anything about that. A project was in the works in Abitibi where Montrealers of Chinese origin were thinking about investing in an alfalfa processing plant for export to China. They wanted to partner with local producers. The main Canadian investor was of Chinese origin. In Quebec, that's the only project we have had some information on. Discussions have taken place, but the project has not materialized so far.
[English]
The Deputy Chair: Mr. Ross, thank you very much. That's very helpful. You've given us some food for thought that should give us some background into the situation in Quebec. We do appreciate that, and we appreciate you coming to join us this morning.
(The committee adjourned.)