AGRI Committee Meeting

STANDING COMMITTEE ON AGRICULTURE AND AGRI-FOOD

COMITÉ PERMANENT DE L'AGRICULTURE ET DE L'AGROALIMENTAIRE

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 9, 2001

• 1535

[English]

The Chair (Mr. Charles Hubbard (Miramichi, Lib.)): I would like to call our meeting to order. We're looking at Bill C-25, an act to amend the Farm Credit Corporation Act, and at basically such amendments as may come forward.

We'd like to say bienvenue to Mr. Noiseux and Mr. Harel. We normally have about 10 or 15 minutes for a presentation. After that there will be an opportunity for members to ask questions.

We do have translation, as you see, and we welcome your participation here in French. Don't feel that we don't have a good system.

Paul, the floor is yours.

Mr. Paul Noiseux (Treasurer, Coopérative fédérée de Québec): The floor is ours?

[Translation]

The Chair: Yes.

Mr. Paul Noiseux: Thank you very much for the invitation to appear and this opportunity to present our ideas and comments regarding plans to amend the Farm Credit Corporation Act.

My name is Paul Noiseux and I hold the position of Treasurer and Director of Finance for the Coopérative fédérée de Québec. Jean-François Harel is in charge of Corporate and Public Affairs.

In order that everyone have a clear understanding of the Coopérative fédérée de Québec—because we think it's appropriate that you know more about it—Mr. Harel will begin with an overview of the Coopérative and how it operates. We will then move directly to our comments and views on amendments to the Farm Credit Corporation Act, currently under review by the Committee.

Mr. Jean-François Harel (Assistant Secretary General, Coopérative fédérée de Québec): On my own behalf, I would also like to thank the members of the Committee for inviting us to appear today.

The Coopérative fédérée de Québec is essentially an enterprise with two personalities: on the one hand, a federation of agricultural cooperatives in Quebec and, on the other hand, an industrial and commercial enterprise whose logo is "the industry of the earth". We have sales of more than $2 billion, primarily in the area of farm supply and meat, pork and poultry product processing.

Olymel, which is a wholly owned subsidiary of the Coopérative fédérée, is the primary Canadian exporter of pork meat in Canada. Its sales abroad amount to close to $500 million.

The Coopérative fédérée, through its Sonic division, is also involved in the distribution of petroleum products, primarily at the farm level, but also on regional markets, mainly in rural, rather than urban, areas.

The Farm Supply Division, which is the cooperative's focal point, supplies 100 member cooperatives, which themselves supply between 25,000 and 30,000 farm producers.

So, through these two entities, the Coopérative fédérée is deeply involved, both upstream and downstream, in agricultural production. It is a major player in the agricultural sector in Quebec and in the latter's development. It will be celebrating its 80th anniversary this year. For 80 years, it has been serving agricultural producers across Quebec who run the cooperative.

So, there you have an overview of the activities of the Coopérative fédérée. It has a dual mandate, since it is both a federation of cooperatives and an enterprise in its own right; its upstream activity involves farm product supply, whereas downstream, it is engaged in farm product processing.

• 1540

Mr. Paul Noiseux: With respect to the Coopérative fédérée de Québec and the Farm Credit Corporation, it is clear that the latter has some either direct or indirect involvement with a number of our member cooperatives. I will be focussing mainly on the interaction and relationship between the Coopérative fédérée and the Farm Credit Corporation, as financier or member of the banking syndicate of the Coopérative fédérée de Québec.

The FCC's relationship with the Coopérative fédérée de Québec, as financier, began in 1996, following an initial conclusive test involving consolidation of the turkey processing industry in Quebec, and a partnership agreement with an another cooperative, now called EXCELDOR, with a view to pooling our turkey slaughter volumes for processing in a single plant. This consolidation was necessary to ensure the development of the turkey processing and production sector in Quebec.

We also called on the FCC for assistance. We approached the Corporation in 1999, following this first experience with direct financing for the Coopérative fédérée, to see whether it would be willing to join our banking syndicate.

Given the size of the Coopérative fédérée de Québec, a banking syndicate is nothing out of the ordinary. On the contrary, it is quite common, given the size and financing requirements of the Coopérative fédérée de Québec.

So, in 1999, as I was saying, the Farm Credit Corporation joined the banking syndicate as one of the financial institutions involved in financing the CFQ's operations and its business development.

That is the background to the relationship between the CFQ and the Farm Credit Corporation.

Over the years, through discussions and periodic meetings with our financial institutions, we have had an opportunity to get together with officials from the Farm Credit Corporation and present our views with respect to their activities, and especially the need for the Corporation to get involved in similar activities in other agri-food industries, both directly and indirectly. UNIDINDON, created as a result of the first transaction I referred to earlier, was a transaction involving a subsidiary of the Coopérative fédérée de Québec. As far as the CFQ is concerned, this type of intervention was a success and could also benefit other businesses in other regions of Canada, not only in Quebec. I say that without actually knowing whether the Corporation provides similar types of loans to other businesses in Canada. Our comments obviously apply to our own specific case.

During that period, we made it clear on a number of occasions that it would be advantageous for both parties for the Corporation to apply and develop its expertise and those types of interventions within such a framework.

Secondly, in relation to the Bill or the proposed amendments to the Act, the goals we consider important are those that have to do with improvements to the services offered by the Corporation.

Our comments will deal, first and foremost, with the fact that the legislation must allow services to be provided both upstream and downstream of primary production. As I already mentioned, this is something we ourselves have experienced.

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I believe that the relationship and nature of the interaction between the Farm Credit Corporation and the Coopérative fédérée de Québec have been beneficial to both parties. That interaction provides an opportunity to exchange views, to get to know the nature of the business, to be an actual stakeholder in the business and to take a fairly broad and much more comprehensive view of the different sectors of the agri-food industry. We most certainly benefited from our relationship with the FCC, and officials working for the Corporation who have handled our file share our views with respect to the need for services to be provided both upstream and downstream. So, the Coopérative fédérée de Québec fully agrees with this new direction for the Farm Credit Corporation.

The second important point has to do with investments in the form of capital stock and risk capital. In that respect as well, we have had both formal and informal discussions with a variety of people. I believe that as part of the range of financial tools made available to both the movement and the industry, this is something which, while it may not be automatic, is extremely beneficial to the industry.

The third area where a change is being proposed along lines that we support, has to do with the ability and legitimate power to create and be a stakeholder in financing arrangements, be they direct, indirect or at several different levels—for example, at the level of a subsidiary, rather than being directly with the parent corporation. That flexibility and that capability are absolutely essential if the Corporation wishes to have all the necessary tools to be involved both in financing and in capital stock and risk capital. I will have more detailed comments to make in this regard later on, in reference to support for cooperatives. Whether we're talking about entities in Quebec or other provinces of Canada, that openness is needed to support industry stakeholders in that specific area.

Our fourth point concerns the possibility of changing the administrative rules that currently limit the nature of the financing and the amount that can be invested in organizations. That must be transparent in the legislation. If we want to ensure that there is consistency and that action follows dialogue, this is something that must also be considered.

As far as we are concerned, the fundamental issue is, what is absolutely critical and must therefore remain in the legislation? In this regard, we believe the objects and mission of the Corporation must continue to be the provision of financing and services for the purposes of supporting and developing primary agricultural production. That must continue to be the Corporation's focus. To attain that goal, the Corporation requires the three specific elements I mentioned earlier, which it needs to operate in the current environment and be ready for future changes.

Therefore, in terms of downstream services, our organization strongly believes that cost-effective development of Canadian agriculture requires that all the stakeholders involved in the agri-food chain have access to appropriate financing and capitalization mechanisms. If we wish to ensure the strength of the farming environment in the medium and long term, we need to take a wholistic view of the industry and ensure that each link in the farm commodity production and processing chain has access to all the tools, resources and financial strength it needs to market its products. The industry as a whole is only as strong as its weakest link.

Through possible intervention in all sectors of the agri-food industry, the Corporation would gain a better understanding of the opportunities and issues peculiar to each stakeholder, thus acquiring a far broader and more accurate understanding of the industry as a whole, while at the same time improving its expertise and its ability to recommend or implement better targeted intervention programs.

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It is important that the industry have access to financial institutions whose primary mission or market is the farm sector. Changes that have been occurring within the financial sector and agri-food businesses have had the effect of reducing the number of financial institutions that are active in our industry, and thus limiting the amount of financing available to individual businesses.

At the same time, bigger farms and agri-food businesses, more open markets and more emphasis on value added and exports require an environment where multiple and varied sources of financing are available.

For most financial stakeholders, the legitimate imperatives of appropriate risk and portfolio management limit the amount of financing that is available, even when the financial status of the business makes it possible.

The Farm Credit Corporation, through its expertise and knowledge of the farming sector, has played an important role in fostering the growth of our industry in Quebec and across Canada. However, like any entity, it needs to adjust to the new environment and be able to meet the needs of primary agricultural producers while acting as a lever or catalyst for development and growth. Broadening its range of activities, rather than bringing it into conflict with private financial institutions, will actually allow it to play a complementary role, by meeting the needs of various industry stakeholders and thus making a direct contribution to primary production development.

Financing requirements within the industry are considerable. There are fewer and fewer financial institutions, and those wanting to deal with the agri-food industry are more rare, which means that there is definitely room for an additional player in the field.

As for investment in the form of capital stock and risk capital, the current situation as regards investment of risk capital in the agri-food industry is quite disappointing in a number of respects, as far as we are concerned. In terms of total risk capital, agriculture's share of the pie is well below agriculture's contribution to the Canadian economy as a whole.

Industry development is subject to various cycles, and through each of these cycles, risk capital is needed. Current risk capital investors are limited both in number and in terms of their financial capacity. Our view is that it is important and makes perfect sense for the Farm Credit Corporation to be allowed to provide this type of financing, if we expect it to fulfill its mission. There again, FCC's expertise and extensive knowledge of the industry mean that it is well positioned to appropriately assess the risk underlying this kind of investment and to be a major player, acting as catalyst, partner and consultant with respect to development, so that we can successfully move through the various cycles of growth and development.

Also, given our sources, I cannot help but point out, without wanting this in any way to sound like a warning, that cooperatives are major players in every single segment of the industry. Interventions will therefore have to reflect their specific characteristics, both in terms of the form of investment and the return on risk capital or capital stock. Just like other kinds of entities, cooperatives need capital and should not be shunted aside because of their specificity.

A comprehensive package of services, including an equity component, is an essential ingredient for promoting, directing and supporting the development of the Canadian agri-food industry. The involvement of the Farm Credit Corporation in this area could attract other groups, through partnerships and alliances, and thus leverage overall risk capital investment in the agri-food industry.

Along the same lines, we are very much in favour of an agreement and partnership between FCC and the Business Development Bank of Canada. Indeed, we believe the synergy that would be created by pooling the expertise of these two organizations—one specializing in agriculture, and the other in the capitalization of small- and medium-size enterprises—would have a very favourable effect on agri-food business development and the creation of alliances, networks and nodes of development within the industry.

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As for the ability to create and be a stakeholder in indirect and complex financing arrangements, legislation does not necessarily need to be ahead of its time, but it must recognize current business practices and promote those that will foster attainment of these goals.

The proposed amendments essentially aim to allow FCC to operate on an equal footing and to give it the flexibility and ability to adapt that it needs to be effective in the current and future agri-food environment.

The Chair: Thank you very much, Mr. Noiseux.

[English]

With your own province here, Marcel, and with your background in agriculture, perhaps we'll let you begin our questioning today.

[Translation]

Mr. Marcel Gagnon (Champlain, BQ): Thank you, Mr. Chairman.

Unaccustomed as I was to hearing French come first, I had my earphone a little too far away.

I must say, Mr. Noiseux and Mr. Harel, that I am extremely pleased to have this opportunity to meet with you here in Ottawa and to hear you make your comments in French. It is rare in this Committee that I am not required to put on a headset to listen to the interpretation, even though we do have the benefit of excellent interpretation services.

As a general rule, you seem to be pretty much in agreement with the new Farm Credit Corporation Act, and you did mention that you had been consulted a couple of years ago, when this Bill was in the early stages of development.

You also talked about the ways in which the Corporation wants to extend its capabilities, in terms of both the upstream and downstream components of the farm industry, by bringing together agricultural producers, the core industries that supply agricultural producers, and the processing industries. You were also mentioning, if I understood you correctly, that there was a lack of risk capital. The Corporation certainly fills a gap in that respect, where there was evidently a lack of competition, based on what you seemed to be saying.

Could you elaborate on that?

Mr. Paul Noiseux: Your question has two parts to it as I understood it. I just want to be sure I got it right. You referred to both financing and risk capital.

In terms of risk capital, I doubt that there will be any increased competition, since there is practically no competition as it is. I am not saying there is none at all, but the vision of most of the players in the risk capital business does not include investing in the agri-food industry—which means that our industry has to fall back on financial institutions that focus on investing in the agri-food sector. There are not many such institutions, either private, public or parapublic.

At the same time, the industry's requirements with respect to risk capital are considerable—indeed, much greater than what is available. As a result, increasing the supply in this area will not result in greater competition. It would only begin to remedy what is now a problem of considerable proportions within the industry.

Mr. Marcel Gagnon: Do you think the Corporation is going far enough? Do you think it could be doing more to increase the availability of risk capital?

Mr. Paul Noiseux: The Corporation's mandate is to provide financial instruments and related services to develop the food industry. It has to take a step forward. But does that step need to be a major one? It will be up to the government or the legislator to determine the appropriate level of resources. We are not aware of how those resources are distributed. Will it come to the point where trade-offs have to be made between financing and risk capital? Let's remember we're talking about implementation and about what will be possible.

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To answer your question, given the industry's current circumstances and the fact that the FCC is not providing risk capital, to say that it should now move into risk capital would mean a major step for the Corporation. Now, could the Corporation alone take on responsibility for meeting risk capital requirements? I don't think so, nor do I think it would be advisable for the entire burden to be borne by the Corporation in terms of meeting requirements in that area.

But, as is the case with many other things, we think that over time, this will have a ripple effect and that expansion will be possible in this area. Getting involved in risk capital and capital stock means being right at the centre of a company's business. And there, as is the case with anything else, it's by doing business that you get more business. That is our reading of the situation. Our hope is that in that context, this would have a leverage effect. Without claiming it will necessarily be a hotbed of activity, we do hope that at least we would have evidence of other players becoming interested in possibly investing risk capital in the agri-food industry and that people will see that this is an industry with great future potential, and the ability to turn risk capital into profit. We probably won't ever see the same level of development as in other industries, but the level of risk is not the same either, and that has to be taken into account.

Mr. Marcel Gagnon: What you're saying, then, is that this might prompt other players to get more involved in risk capital.

At the present time, one of the big problems with farm financing is production quotas. Production quotas are now being negotiated at pretty stiff prices. The Minister tells us that the Corporation financed production quotas over a seven-year period. Do you think that financing production quotas over seven years, given the price of quotas, is the proper approach? Should it be over a longer period? What do you think?

Mr. Paul Noiseux: My initial comment would be that whether or not they are financed over seven years or ten years is not the only factor to consider with respect to financing production quotas. In terms of designing or putting together a quota financing package, over the course of the financing period—and here, there are a number of ifs—what is important is ensuring recognition, as part of the financing package, that when these quotas begin to increase in value, it should be possible to spread the financing over a longer period, because that is confirmation that the asset has value and that that value will be maintained or accrue over a longer period. So the reality of quotas must be taken into consideration.

It is difficult to say at the outset that if that asset is worth less in seven or ten years, then by providing for a period of paydown of debts or liabilities associated with it, there is a repayment mechanism in place. The other side of the coin is, though, that if that is not the case, there must be some openness to the idea of providing relief, because certain facts allow one to confirm that that asset has value and that it is therefore capable of supporting a debt, and that that debt can accordingly be spread over a longer period.

Is it only a matter of determining whether the period should be seven years, or should we consider the overall management associated with financing such assets? I think a holistic approach is needed. It's not just a matter of saying that it should be seven years.

Mr. Marcel Gagnon: You need to consider the farm as a whole.

Mr. Paul Noiseux: Well...

Mr. Marcel Gagnon: And the combined capital.

Mr. Paul Noiseux: Yes, the combined capital and the farm's overall financial situation.

The Chair: Marcel...

Mr. Marcel Gagnon: Is my time already up?

[English]

The Chair: Later.

Garry.

Mr. Garry Breitkreuz (Yorkton—Melville, Canadian Alliance): Thank you very much, Mr. Chairman.

Thank you to our witnesses for appearing before the committee. I gather you're supportive of the bill, and I want to raise an issue here and have you comment on it, if you would.

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The stated goals of Bill C-25 may not materialize if the legislation allows the Farm Credit Corporation to expand its services without the necessary controls placed on it to provide the services it has now been performing. It may expand into many other areas, and the legislation does not really mandate it to continue providing what it traditionally has been providing.

In other words, it may grow and develop into new areas and forget its original reason for being. For example, it could begin to serve very large clients, even transnational corporations. The corporation could make profit its aim, and family farms may be forgotten. I don't think family farms are even defined in the legislation.

Do you have concerns in this area? What amendments would have to be made to this in order to ensure that the FCC does not lose its original mandate or focus to serve primary producers? I could go into other examples. Maybe I'll mention them right now. I'll dump them all on the table and then let you comment.

The FCC could go into land ownership. That's not limited in any way, as far as I can tell. This could have a very negative effect on farmers and land prices. It could increase land prices if they become a competitor. They could be a competitor to credit unions or caisses populaires in Quebec. This may have a negative effect. Do you have any concerns in this area?

So I'd like you to comment on these other areas and maybe tell the committee whether you feel there have to be some amendments made to ensure that they continue to perform the traditional role that the FCC has been performing.

Mr. Paul Noiseux: On your question, our concern mostly—and I think it's one of the concerns I would bring to the committee—is that let's say the society has a certain amount it could invest on a yearly basis. I presume that you would continue as it is today, through this new extended financial service, because we don't feel it changes basically the mandate or the original mission. There are more ways to realize that mission. You can achieve things indirectly as well as doing it directly through the farms.

I think that's an important comment, because the environment is changing, and you need strong organizations, no matter the size. There's a pull effect or a push effect, depending on how you are in the chain.

With regard to your question, let's say you still have the same amount to invest, to support the growth of all the industries in Canada. With those dollars, there is choice if the demand is much higher or greater than the amount available. There is arbitration—or choice. I won't say “arbitration”, I'll say “choice”. Because at some point, it's going to be a lot more useful to invest in the capital. You give more financial strength, more leverage, to the organization than doing it alone.

But with the same dollars, you have a greater benefit from these dollars or this investment. That's a strong element in our comments, giving the ability, depending on which sectors, because some sectors are more in trouble than other sectors or segments of agribusiness.

For us, that's something of importance, because at the end, you could have a short view, but you have to have medium and long-term views as well. When we're looking at investing capital or taking some important action, we must take a longer view than does someone who is only applying patches or coming in for the short term.

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At this point we don't have any specific view of what should happen from the moment you allow your dollars, your capital, to be invested and you apply for a loan—how it would be managed. Our comment is, there is room. We believe that in this industry there is room for other players who have a deep knowledge of agriculture and investment, and there is a lot of room in the capital investment area. Wherever else, at the farm level, at the distribution level, or at the...those needs are at all levels.

A great need at one level doesn't make it much harder to satisfy the smaller needs of other enterprises or farms that require money. The further you go in the chain, the fewer and fewer players there are. You see the same tendency everywhere at the farm level: the farms are getting bigger and bigger. There is concentration and consolidation, and it even affects how you define a farm or family farm. There's no difference. The conclusion is that the way things are going, everybody is looking for a bigger stake and has bigger needs in terms of financing.

The Chair: Garry, do you have more?

Mr. Garry Breitkreuz: That's essentially my main question.

The Chair: I think I'll move over here and then I'll come back.

Claude, do you have...?

[Translation]

Would you like to ask a question? Yes?

Mr. Claude Duplain (Portneuf, Lib.): Could you come back to me later, Mr. Chairman?

[English]

The Chair: It's your time, oui. Later?

Mr. Claude Duplain: Later.

The Chair: Murray?

Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thanks, Mr. Chairman.

I'm just going over some of the Qs and As here. I guess my first question would be, right off the bat, with Farm Credit Canada's mandate when it comes, what's the difference between FCC and the chartered banks?

Mr. Paul Noiseux: I hope that in the end there won't be a big difference.

Mr. Murray Calder: Yes. Okay.

Mr. Paul Noiseux: The main reason is that you're talking about major banks. Let's think about major banks that are in the field of loans and investment in agribusiness. In the end, you have to make sure the community and agribusiness have enough institutions to take care of their financial needs. The way we see things is that there is not enough growth in the numbers of banks entering the agribusiness market. There is no growth. There is consolidation in the banking industry as well.

Mr. Murray Calder: Okay. In my farming operation I deal with the Royal Bank. If I'm looking at what the servicing costs of a mortgage are and everything, I can get a mortgage at a cheaper rate at the Royal Bank than I can with the Farm Credit Corporation. My question is, if I can do that, why would I go to the Farm Credit Corporation? You're more expensive.

Mr. Paul Noiseux: But if you can't do that....

Mr. Murray Calder: Okay. There is obviously a difference, then. In other words, if I can't go to the bank, then I have the opportunity to go to the Farm Credit Corporation. If the bank turned me down, why would the Farm Credit Corporation...?

Mr. Paul Noiseux: Or you could go to another bank.

Mr. Murray Calder: Or another bank.

Mr. Paul Noiseux: Or another bank. In the end...just to play the game, the corporation will have to have basic rules, have cards available, that will permit him to play the financing game with the bank. It can't be otherwise.

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Or as I say, you might have a much greater need than your bank is willing to meet or is ready to meet at a competitive rate. You don't want a situation where you're squeezed against the wall because there is no other place to go.

Mr. Murray Calder: In other words, are you telling me that the Farm Credit Corporation would be interested or willing to go into partnership with a bank? I'll give you an example. Say I was in a situation where the bank was carrying mortgages on my equity and I needed an operating line of credit. Would the Farm Credit Corporation be willing to go into partnership with the bank? In other words, you guys would put forward the operating line of credit, and that partnership would—

Mr. Paul Noiseux: That's the kind of partnership we have with the corporation and our banks.

Mr. Murray Calder: Okay. Great.

Mr. Paul Noiseux: I think they've shown us that willingness to be with a group of banks and to play by the rules, to do what's required to be part of that kind of partnership. You have to be part of a team when you're talking cost sharing, risk sharing, and everything related to banks. Right at the start that's what I mentioned to you. That's the kind of relationship we have with our five banks, and the corporation is one of the five.

Mr. Murray Calder: Okay. Your original mandate in 1959 was basically to be the lender of last resort. Obviously, the FCC has been going through an evolution. Where do you stand now with that? Are you willing to take more risk with a loan than what a chartered would accept, or do you take the same risk?

Mr. Paul Noiseux: At some point the same rules will apply.

Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.): These aren't FCC guys.

Mr. Murray Calder: Oh, I'm sorry. I thought this was the FCC.

Mr. Paul Noiseux: I appreciate that a lot, because I didn't know what the purpose of the question was. Thanks a lot.

Mr. Rick Borotsik (Brandon—Souris, PC): We don't understand it very much ourselves.

Voices: Oh, oh!

Mr. Murray Calder: Yes. Thanks, Rick, I really appreciate that. I'll leave it there, Mr. Chair. I'm sorry.

Mr. Paul Noiseux: I could answer. It would be easy money for me.

The Chair: I'm not sure who has the better colour, you or Rose-Marie.

Dick.

[Translation]

Mr. Dick Proctor (Palliser, NDP): Thank you very much, Mr. Chairman.

Are there aspects of leasing that make it more advantageous to farmers than outright purchase? What are your cooperative's views on that?

Mr. Paul Noiseux: You're asking whether certain purchases of assets could be more appropriately financed through leasing, as opposed to term credit?

Mr. Dick Proctor: Yes.

Mr. Paul Noiseux: Yes, I believe so. It allows a company that doesn't have the financial capability, because of its level of debt, to react quickly and purchase an asset. Leasing involves its own financial institutions, its own rules, and some stakeholders would be prepared to use leasing. These are not companies or businesses whose financial situation is poor. It's just that the agreements they have with their financial institutions are such that they have very little leeway in terms of... [Editor's Note: inaudible]... or other matters governing loans between the creditor and the business. Leasing is therefore something that is worth considering.

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Also, from time to time, there is a need to review the financial terms associated with leasing, given the tax advantages and that some businesses have a holding company. How is their risk perceived and reflected in their holding company? It may be different from the way a bank or a financial institution perceives that risk when the loan is with the business. It's not automatic, but it's important to remember that leasing can sometimes be an attractive financing mechanism.

We know that it is used mainly for equipment. In some respects, this equipment is merchandise that can be put back on the secondary or resale market fairly easily. It is a market in itself.

Mr. Dick Proctor: In the rest of Canada, there is a relationship between CU Lease, credit unions and the Farm Credit Corporation. Is the situation the same in Quebec? Is there a relationship between CU Lease...

Mr. Jean-François Harel: Yes, there is a relationship between financing and cooperatives...

Mr. Dick Proctor: Credit unions?

Mr. Jean-François Harel: Credit unions, but banks as well. All institutions are open to financing under the terms of the Loi sur La Financière agricole du Québec.

Mr. Dick Proctor: So, it's both.

Mr. Jean-François Harel: Yes, the institutions, the banks and the credit unions. Obviously financial institutions in Quebec are heavily involved. The National Bank and credit unions are heavily involved in financing core agriculture. The other banks are currently more involved in upstream and downstream activity.

Mr. Dick Proctor: Thank you.

[English]

The Chair: Thank you, Dick.

Rick.

Mr. Rick Borotsik: Thank you, and I have a couple of brief questions.

It's nice to have both of you gentlemen here. I understand you are an organization that normally represents not only producers but cooperatives as well within the province of Quebec. Is that correct?

A voice: Yes.

Mr. Rick Borotsik: You mentioned 100 cooperatives, everything from farm supply businesses to pork producers. Is that correct?

A voice: Yes.

Mr. Rick Borotsik: Perfect. You see, Murray, that's who we're dealing with here, not the FCC.

Mr. Murray Calder: Bless you.

Mr. Rick Borotsik: I have a couple of questions. In your experience, are you finding in the province of Quebec that the banks themselves, the national banks, are less interested in venture capital or risk in the agricultural sector? Are you finding that they're pulling away or pulling back a bit? They are in other sectors. I don't want to put words in your mouth, but do you find that they're still rather receptive to agriculture financing?

Mr. Paul Noiseux: I'll say—écoute—let's take the National Bank. They're not very much into venture capital, but they, as well as the Caisses populaires Desjardins, are very deeply involved in financing all sectors of agriculture in Quebec.

Mr. Rick Borotsik: They're very strong, the caisses populaires.

Mr. Paul Noiseux: Those are the two main organizations. The situation or the evolution of agribusiness in Quebec is that all the players are getting bigger and bigger at each segment of the value chain. When you think of the links from the farm to the table, the farms are getting bigger and bigger—

Mr. Rick Borotsik: It takes huge capital, yes.

Mr. Paul Noiseux: —or they're building networks. They are trying to achieve bigger size through structural organization rather than by direct ownership. It's the same thing at the primary producer level and the same thing at the value-added or further-processing stage.

The point is not that they are not willing to be part of it. The problem or the concern is that they are more and more exposed to risk because the risk is concentrated in that there are fewer and fewer players, and that's where the rule of managing risk.... They are facing at some point the fact that they can't finance all the needs of the organization, and that's where you need more than one group.

Mr. Rick Borotsik: Okay. I'm just going to jump in here for a second because the chairman is very tight on my time. This is the perfect segue into my next question.

• 1625

You talked about a banking syndicate that worked with your organization. Is this what you're referring to, more of a banking syndicate—that's obviously the term—where they share the risk in a lot of these larger main capital projects?

Mr. Paul Noiseux: They share a part of the amount of financing required by our organization.

Mr. Rick Borotsik: Do you see FCC as being a part of this syndicate now, because they have the expanded opportunities, the expanded service?

Mr. Paul Noiseux: In our view, when we knock on the door of the Société, because we are owned and we're darkly implicated in agribusiness, we are firm believers that the Société could be part of our requirement, and that's why we knock at the FCC's door.

Mr. Rick Borotsik: Perfect. I agree with you a thousand percent.

That also takes me into my last question. Maybe you can expand on this a bit. I think you said you can see this developing into an alliance with the Business Development Bank, the BDC and the FCC. Was there a tie-in?

Mr. Paul Noiseux: It's in the documents, and I was not aware of it. So I bring my comments. Yesterday we had the thought. You look at both organizations, the expertise of the Société, when you move into the capital investment, if you strike a deal with the BDC, which has been in that type of investment for a long time. So you get the synergy or the blending of two expertises, which is agribusiness with the Société, and the small farms or the small business investment with the BDC. For us, at the moment, you can merge both. If things are done in such a way that you're trying to bolt things, which is to the benefit of both organizations, it's a plus for enterprise and for agribusiness.

The Chair: Thank you. I can't get over how punctual you were—five minutes and about two seconds. It's really improving.

David, do you have some points?

Mr. David Anderson (Cypress Hills—Grasslands, Canadian Alliance): We all know that agriculture needs funding and how short that funding is, particularly for primary producers. This bill shifts the FCC focus from those primary producers to agriculture-related business. In spite of what the phrase says, I think we recognize that it will do that. My concern is then that the portfolio is also going to shift from producers to agriculture-related businesses as well. When you have a small individual producer who is looking for funding, he usually only goes to one lender, and he gets his money from them. If you have bigger projects, then you have the kinds of partnerships that you're talking about, that you're stressing today you'd like to see.

This bill does not reassure me that the primary producers are going to be protected. I'd like to hear your opinion as to what the protection is here for primary producers, not for those big agriculture-related business-type things that will be part of the financing after this.

Mr. Paul Noiseux: Right at the start we mentioned that the basic mission of the Société has to be and continues to be the funding of primary production. We deeply believe it has to be the same. Which controls? What has to be put in place? I don't have the answer for the committee today. What I'm saying as well is that there is a great opportunity to go outside that basic field of investment, which is as important as the type of investment you're talking about. When you blend all together, you have much more than you have when you're doing only one thing at one level. Second, you manage in such a way that you don't create big arbitrations between sectors. As I'm saying to you, there's investment between financing and capital.

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Mr. David Anderson: I hear what you're saying. I also realize that lenders would far sooner lend one big loan of, say, $10 million or $20 million, especially when they have other financial partners in on that, than they would 90 small amounts to producers who may have trouble getting those paid back. And I just think the focus of this is going to move the FCC's lending to those bigger projects and distance it from primary producers. I don't know if you have any other comment.

I have no further questions.

The Chair: Mr. Hilstrom.

Mr. Howard Hilstrom (Selkirk—Interlake, Canadian Alliance): Briefly, could you give me an example, without naming corporate names or anything, of where the caisses populaires or the banks have turned down a business venture in any of your groups that you represent? Could you describe an example of that and just why they refused to provide the funding that was required?

Mr. Paul Noiseux: Our own organization is an example.

Mr. Howard Hilstrom: The cooperative. Okay. What did you apply for the money for and what were the circumstances?

Mr. Paul Noiseux: Two banks in 1999 who were part of our financing decided they were going out of the agribusiness—two banks—one because it's completely going out of Canada, which is very easy to understand, and the other one saying that agribusiness doesn't fit their business plan any longer. So we have to deal with these. We have some cooperatives in the same situation.

Mr. Howard Hilstrom: So you're arranging loans for businesses in your cooperative? I don't quite understand. You are in the business of lending money, you're saying, with these partners?

Mr. Paul Noiseux: No, they were lending money to us, the bank. Your question was, do you have examples of banks—

Mr. Howard Hilstrom: Yes.

Mr. Paul Noiseux: —going out? What I'm saying—

Mr. Howard Hilstrom: And what were you going to do with the money, and how much money were you talking about?

Mr. Paul Noiseux: I was the one who owed money; I was not the one who gave the money.

Mr. Howard Hilstrom: Okay.

Mr. Paul Noiseux: We had a credit line with two banks that decided to run out of our enterprise and business.

Mr. Howard Hilstrom: And the case—

Mr. Paul Noiseux: And we also had banks, over time, that lowered the amount of loans they were willing to make to our business. We also have some cooperatives who are members of Coopérative fédérée de Québec who had to live with the same situation.

Mr. Howard Hilstrom: Did you already ask the FCC to step in, and did they step in?

Mr. Paul Noiseux: No. With that particular case in 1999, when we had this situation and we looked at the institutions or banks that could be part of what we called our banks education, because we have more than one bank for our needs, that's where the idea came from to look at the SCA as part of our financing.

Mr. Howard Hilstrom: I'll just explain, so that it's not unclear. The reason I was asking the question is that the FCC representatives were in and said they need to have their loans reasonably secured, the same as a bank, and this sort of thing. So we're wondering, what is the advantage to this Farm Credit Corporation getting more involved in banking, when they are, in essence, doing the same thing, charging the same rates, taking the same security, not going into any more risk? And they've explained this partnering thing, but that's why I was asking the questions about examples.

Mr. Paul Noiseux: But in the deals we have with the FCC or with all the banks, they are not different. What I'm saying is that you have to follow the same rules. You're part of a group, which you have to—

The Chair: Thank you.

Mr. Howard Hilstrom: Thanks, Mr. Chairman.

The Chair: This is not unusual, for banks to look at particular sectors, as I think Mr. Noiseux was saying. And they may decide in that sector, that province, or that area, they don't want to invest more or get more involved with the credit. You're talking about operating credit probably more than a mortgage and assets, are you?

Mr. Paul Noiseux: I'm talking both.

The Chair: Both.

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Mr. Paul Noiseux: Financial credit, or term credit, which can be based on financing of assets, mortgage, or land.

The Chair: I think, Mr. Noiseux, this is a very good point for the committee, because I've been involved in situations like that where the bank suddenly one day writes a letter to a firm and says, we're out of your line of business; we want to cut back in terms of your area. Of course, the firm is left holding the problem of needing money to continue and they have to go somewhere to look for it.

[Translation]

Claude, are you ready now?

Mr. Claude Duplain: Good afternoon, gentlemen. I am very pleased to welcome our representatives from Quebec. As I understand it, you seem to be in favour of the legislation, particularly as regards risk capital. We know that capital requirements in the farming industry are quite considerable.

I have two questions. Why isn't risk capital attracted to the farm industry? How does the Coopérative fédérée de Québec perceive the Farm Credit Corporation's role, in relation to that of La Financière agricole du Québec? Do the two complement each other or are they competitors?

Mr. Paul Noiseux: What was your first question?

Mr. Claude Duplain: I asked why risk capital is not attracted to the farming industry? There is a great deal of risk capital out there, but that is not an industry...

Mr. Paul Noiseux: The term "risk capital" says it all: basically, risk capital is involved in situations where there is a higher risk or where a risk has to be covered through a capital investment. That risk has to be assessed in the same way one would assess the financing requirements of a company in difficulty, one whose financing costs or interest rates will probably be higher. So, in terms of risk capital, the basic rule or equation is this: for covering a given risk, one has to expect a higher return, since part of the overall investment made will never be recovered.

Through its investments in a variety of industrial sectors or other areas, the risk capital industry has clearly developed certain expectations. The parameters are set on the basis of a rate of return on capital which, right from the outset, is difficult to achieve in the agri-food industry, particularly in the primary production and primary processing sector, and even in the secondary processing sector. In many cases, the requirements and expectations in terms of rates of return on risk capital automatically rule out investment in this kind of industry. However, compared to investments in other higher risk industries, the risks in this case are, in certain respects, far lower.

Mr. Claude Duplain: Yes, exactly.

Mr. Paul Noiseux: But risk capital institutions do not have unlimited capital. So, I presume that they review the situation and decide...

Mr. Claude Duplain: But in Quebec, there is apparently a surplus of risk capital.

Mr. Paul Noiseux: ... to invest in industries where there is a potentially high return.

Mr. Jean-François Harel: Not in the agri-food industry.

Mr. Paul Noiseux: No, not in the agri-food industry.

Mr. Claude Duplain: How do you see the FCC in relation to La Financière agricole du Québec?

Mr. Paul Noiseux: They are two completely different institutions. In terms of agricultural producers—in other words, primary production—is there a huge difference, or not that much? Well, that is difficult to say, because we still don't know much about La Financière. We know that it has money. We know that part of that money will have to be capitalized to support coverage of income protection programs. Part of those funds could be used for development and investment purposes. We have heard it would like to invest in all segments of the farm industry in Quebec. In that respect, its role is no different from what the FCC plans to do—in other words, involvement in every segment of the farm industry. I would say that is common to both.

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What rules or mechanisms will La Financière agricole establish in that investment context? Well, I believe that is currently under development and that implementation is still a long way off. It seems to me that La Financière will not be able to stray too much from what is currently offered on the financing market. I believe any company looks at what is available and tries to find the package that best meets its requirements and expectations. One of those requirements and expectations is obviously the cost of financing or, if capital is involved, what is required in the way of investment.

Does that answer your question?

Mr. Claude Duplain: Yes.

Mr. Paul Noiseux: Would you like to add anything, Jean- François?

Mr. Jean-François Harel: I just have one comment to make.

Mr. Paul Noiseux: He is more of an expert than I am when it comes to La Financière.

Mr. Jean-François Harel: I have noted a certain amount of concern with respect to possible underfinancing of family farms. I just want to make Committee members aware of the fact that even though we are speaking on behalf of the Coopérative fédérée, this is a view that is widely held in the Canadian agriculture industry. Cooperatives are very prevalent in the agri-food and agricultural industries all across Canada. Basically, cooperatives are businesses that belong to the producers and are active in both the upstream and downstream production sides of the industry. So, financing is farm expansion. That's what we call it. Allowing the FCC to invest in farm expansion also means helping family farms and producers, who are the key players.

That's all I wanted to add.

[English]

The Chair: Thank you, Claude.

Marcel, do you have...?

[Translation]

Mr. Marcel Gagnon: Thank you, Mr. Chairman.

You kind of beat me to the punch, in terms of my next question.

An hon. member: Sorry.

Mr. Marcel Gagnon: It is a fact that by broadening farm financing... It's almost scary to see how big some farm businesses are becoming nowadays. Considering what is going on in Europe now, with the foot-and-mouth disease and other epidemics, and how big our farms are becoming, it makes you wonder just what would happen if a disease like that were to enter Canada.

You were just talking about the family farm. That's a term that has almost gone out of fashion. Don't you think it would be a good idea, in financing legislation such as this, to try and ensure that at least part of the funding is used to maintain family farms?

There is also the whole matter of the environment. We are increasingly realizing that accidents are occurring because of the size of some farms—indeed, very serious environmental mishaps affecting the groundwater. We are very concerned about what the future may hold in that area as well. Would it be possible to set out guidelines on such things as part of the financing arrangements, in order to place certain limits on the size of farms, or should that be done outside of the framework of agricultural financing?

Mr. Paul Noiseux: I don't know to what extent such a mechanism would be effective in limiting the size of farms, in the sense that everything revolves around economic imperatives. I did say economic imperatives.

While I'm no expert, farms are increasing in size for a reason. Is it because there are fewer and fewer people ready to take over the farms? And when I say "take over", I mean who want to work on the family farm, keep it going and take responsibility for it. In this case, I think we need very specific programs that focus on transferring farms to young farmers who are just starting out. Should the FCC attempt to tackle that issue or is it such an extensive problem that support measures that go beyond financing per se and other alternatives are required? Are tax measures needed? In any case, there are many different facets to that problem. Without wanting to enter into a debate on that now, I do think that the growth and the size of farms is a fundamental problem.

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Will placing limitations actually result in smaller farms? I really don't know, but I am certainly not convinced that it would have the desired effect.

Now, your question had to do with environment problems.

Mr. Marcel Gagnon: Well, in a way, it's the same problem.

Mr. Paul Noiseux: Is the problem the same when you have one large farm or four small farms with the same environmental outputs operating in a single area? I don't know the answer to that question.

Mr. Marcel Gagnon: Well, we do know that a farm with 10,000 hogs is the equivalent of a town with a population of 15,000 in terms of waste. In the case of the farm, there is only one owner or two in charge of the farm, whereas the town with a population of 15,000 has an elected mayor who has to be accountable.

If I put the question to you, you may say that this is not part of the financing function, but the Corporation also makes plans and does follow-up, and helps the farmer to look after his business to a certain extent, or at least advises him. As part of that framework, do you think we should be trying to help people avoid getting carried away in terms of increasing the size of their farms?

Mr. Paul Noiseux: Well, I really can't answer that question. I would like to have all the relevant information and the skills to...

Mr. Marcel Gagnon: Basically, that is not the function of financing. That pretty sums it up.

Mr. Paul Noiseux: Well, it is pretty clear...

Mr. Marcel Gagnon: Yes, of course. I understand.

Mr. Paul Noiseux: ... that that is not the function of financing. Financing is the result.

Mr. Marcel Gagnon: Well, I did want to take this opportunity to raise it, because it is something of increasing concern to the population as a whole.

Mr. Jean-François Harel: [Editor's Note: Inaudible]... one of the things the agricultural sector is looking at, and the UPA is probably in the best position to answer that question. It is already taking an active role in reviewing that issue. It involves a variety of measures that are not only associated with financing.

Mr. Paul Noiseux: It has to do with the whole use of public funds. These are issues that have to be looked at, but in a far broader context than the one we are involved in here.

Mr. Marcel Gagnon: Yes, that was basically my point. Thank you.

[English]

The Chair: Thank you, Marcel.

We've moved from finances to philosophy, and philosophy is sometimes hard to deal with in a short time.

Mr. Paul Noiseux: Unless you're talking about the philosophy of financing.

[Translation]

The Chair: Paul and Jean-François, thank you very much for your presentation.

[English]

It certainly will help our thinking, and we hope the outcome of this.... If you have suggestions you might want to send us in writing after your presentation today, the clerk certainly would welcome receiving them. We plan to progress with the bill with speed if we can, to get it through before we go home in June.

But in any case, we certainly appreciated the information you gave us from the province of Quebec, and the work you do there in agriculture. I go through Quebec every week; it's a big part of your culture, and your province, in terms of its industry, and we certainly want to support it.

So with that, we'll adjourn this part of our meeting. We probably should go in camera briefly to look at the requests from the Ministers of Agriculture in Manitoba and Saskatchewan, and to look at our agenda in terms of the minister coming.

So again, we appreciate it, and thank you very much.