Mr. Chair, this is my first opportunity to testify before this committee since joining the department. I'm very pleased to be here. I'm very pleased to be accompanied by Kara Beckles, the acting director general of our research and analysis directorate, which serves as the economic advisory group of the department.
Canadian farms—like businesses in all sectors—use loans as a tool to undertake investments that allow them to innovate and grow their operations. Canadian farms today are, overall, on solid financial footing. At the same time, many current baby boomer farmers are expected to retire over the next 10 to 15 years, and many will transfer their operations to the next generation. The government has programs in place to assist in that process and help young and beginning farmers to establish themselves.
Over the past years, many areas of the Canadian agricultural sector have experienced record incomes. The financial outlook continues to be positive. While we forecast that net income will decline somewhat in 2016 and 2017—by 2% in 2016 to $14.8 billion, and by a further 7% to $13.8 billion in 2017—we expect those to be still the second and fourth best years on record.
Over the medium and long term, we see Canadian agriculture benefiting from the increased global demand for more and better food, which is expected as a result of a growing global population and rising household incomes in developing economies. Over the past years, new technologies have increased productivity of Canadian farms.
With good income, increasing profits, and low interest rates, farm businesses have been investing in their operations, including purchasing farmland to expand their operations. This positive outlook has increased farmland values and debt.
However, since farm assets have increased to a much greater level than debt, farms' net worth has increased. In February, Statistics Canada released the Farm Financial Survey numbers for 2015. They show that while average debt increased to $600,000 in 2015, average farm assets climbed to $3.4 million, meaning that average farm net worth reached $2.8 million.
Producers' ability to manage their debt depends on their income. Given increases in farm incomes and low interest rates, we see that farms are generally in a very healthy position to service their debt. Over the past years, producers' incomes have grown much more than their interest expenses, meaning that they are in a much better position to meet their financial obligations.
Nonetheless, even in generally good times, farms are subject to several risks, such as weather and disease, as well as changes in commodity prices, exchange rates and interest rates. While interest rate risk is usually top of mind when talking about debt levels, in agriculture, it is actually crop prices and the Canadian exchange rate that have a much greater impact on farm financial health.
In recognition of the production and market risk beyond farmers' control, the federal, provincial, and territorial governments have put in place a suite of business risk management, or BRM, programs to assist farmers in dealing with these risks. Since 2013, these BRM programs have provided more than $5.6 billion in support.
AAFC's advance payments program, or APP, helps farmers manage their cash flow over the production year by providing access to low-interest cash advances. The loans give farmers flexibility to time the sale of their products based on the right market conditions, rather than the need for cash flow.
I'd like to talk briefly about young and beginning farmers. They, of course, are the future of the industry. Young farmers are more likely to be innovators, and more likely to invest in their operations. However, young and beginning farmers require access to significant financial resources to get started. To help young and beginning farmers, the federal government has in place a number of programs to facilitate access to capital, such as the Canadian Agricultural Loans Act, or CALA, which provides loan guarantees for investments. Also, as you'll hear more details shortly, Farm Credit Canada offers a number of special programs and services.
In addition, under Growing Forward 2, the government provides funding to the Canadian Young Farmers' Forum, Farm Management Canada, and provincially delivered cost-shared programming for resources to help farmers develop business plans and strengthen their management skills.
Canadian agriculture is changing and evolving at great speed. We see Canadian farmers adopting new technologies and taking advantage of new market opportunities here at home and around the world. Federal and provincial governments are supporting these efforts with programs that encourage the adoption of new technologies and practices, and strengthen required management skills. The result is greater capacity among farmers—those who are well-established and those entering the industry—to benefit from opportunities and to manage challenges and risks.
To summarize: the increasing debt levels that we see in agriculture are indicative of farmers using debt as a tool to increase their competitiveness and to grow. Producers' assets and net worth have increased much more than their debt levels. Canadian farms are generally in a good financial position, and the outlook for the sector remains positive.
Agriculture and Agri-Food Canada, together with its portfolio partners and its provincial and territorial counterparts, has policies and programs in place to help current farm operators manage production and price risks, support young and beginning farmers in establishing and growing their operations, and assist farm families with the transfer of farm operations to the next generation.
I am looking forward to your questions following Mr. Hoffort's remarks.
Thank you, Mr. Chair, and good morning honourable members.
It's a pleasure to appear before the Standing Committee on Agriculture and Agri-Food on behalf of Farm Credit Canada, FCC. My name is Michael Hoffort. I am the president and CEO of FCC. With me today is Jean-Philippe Gervais, our vice-president and chief agricultural economist.
Today, we want to share with you our insights on the debt level in Canada's agriculture sector, as well as provide some context and perspectives on some of the numbers, which Assistant Deputy Minister Tom Rosser referenced earlier in his remarks.
By way of background, FCC is a commercial crown corporation with more than 100,000 customers and a portfolio of approximately $30 billion. The vast majority of our customers are small to medium-sized family-run farm operations.
My family's story is rooted in agriculture. It is because of this heritage that I chose a career in the industry. After completing my education in agriculture economics at the University of Saskatchewan's College of Agriculture, I joined FCC as an account manager, and have spent nearly three decades serving the industry I am extremely passionate about.
As an account manager new to FCC, I cut my teeth working in the depth of the farm debt crisis of the 1980s, when most of our time was spent working with farm families to resolve financial challenges brought on by a perfect storm of record high interest rates, collapsing commodity prices, and, in many areas, severe drought. This experience of the industry, and all who worked through it, confirms the importance of today's topic.
Reflecting on our industry's history, and all the positive things that have taken place since those challenging days, it is not just financial relationships, it's the human element that drives me and our employees in offices across the country to do everything we can to ensure the success of our customers. At FCC, agriculture is our passion. We are focused on delivering financial solutions to farmers and farm families, and we know this is a significant responsibility.
Today, FCC holds over one quarter of Canada's total farm debt. We want to ensure our customers are successful, no matter what challenges they may face, or what stage they happen to be in their business life cycle, whether they are just starting out, expanding their operations, sustaining their farm size, or in transition to the next generation.
From my own experience, I know the vast majority of farm operations are passed down from generation to generation, and this continues to be the case, as confirmed in the last census of agriculture. It showed 98% of Canadian farms are family owned and operated, often in multi-family or multi-generational farm structures.
We pride ourselves in delivering customized products and services for the agriculture industry. Through the FCC young farmer loan and, more recently, our young entrepreneur loan, FCC is improving access to capital that allows young people to enter the agriculture value chain, grow their businesses, and pursue their dreams. Our transition loan builds on pre-existing relationships between a buyer and a seller, usually a patient seller such as a parent, relative, or neighbour, to help young farmers start or expand the farm with a lower than standard down payment.
We believe the future outlook of the Canadian agriculture industry is positive on the whole. Our confidence comes from an industry that is diversified in what it produces, augmented by Canada's international reputation for consistently producing safe, high-quality food. It's important to note that while demand for agriculture commodities remains strong, commodity prices have declined over the past couple of years due to increasing world supplies. A weaker Canadian dollar relative to the U.S. dollar continues to partially shield Canadian producers from softer commodity prices that are strongly influenced by the dynamics of the U.S. market.
At FCC, we also understand agriculture is a cyclical business. We stand by our customers through all market conditions and throughout every phase of their business life cycle. We take a long-term view of agriculture. We monitor current trends, and provide economic insights and forecasts to help producers to make informed business decisions.
In recent years, we have largely looked through the lens of a booming farm economy, supported by a long stretch of increased production, strong demand for agriculture commodities, and favourable interest rates. At the same time, Canadian producers have made significant investments in land and technology, and diversified their operations. Farmers have always been quick to adopt new technology, which is why Canada is ranked second in global agriculture sustainability, according to a recent study by the intelligence unit of The Economist.
During this period, farm asset appreciation has mostly kept pace with farm debt levels. This is largely due to the continued appreciation of a key asset, farmland. According to our latest annual farmland values report, which we released just yesterday, the average value of farmland across Canada increased by 7.9%, the latest increase in a 25-year trend.
However, the report also shows that substantial farmland value increases of recent years are losing steam. This is the third consecutive year the rate of increase declined year over year and is in line with our expectations of a soft landing for the farmland market.
Strong income, increased profitability, and low interest rates have pushed up asset values, which in turn drive up demand for credit. As a result, in 2015 we saw an increase in farm debt that for the first time in many years exceeded farm asset appreciation. Yet the ratio of debt to asset values in 2015 remains lower than the 10-year average.
A low ratio provides financial flexibility to Canadian agriculture to leverage investment opportunities or face unexpected challenges that could arise. It is also important to emphasize that net worth in Canadian agriculture also kept rising, a sign of a healthy industry.
As Canada's leading provider of agricultural financing, we encourage producers to allow for flexibility in their balance sheet, as well as ensure sufficient working capital exists to guard against unfavourable changes in economic and market conditions.
While a low debt-to-asset ratio is healthy, this is nonetheless a secondary measure of the ability to repay debt. A primary measure is always income. On that basis, the outlook for Canadian agriculture is positive. The global demand for agriculture products remains strong. Minimal increases in farm input costs as well as a low Canadian dollar should continue to buffer producers from the impact of possibly lower cash receipts.
Even so, we are actively encouraging farmers to identify efficiencies in their operations to counter any potential drop in revenue and ensure the long-term profitability of their operations. We recognize Canada's producers and agribusiness operators use a number of strategies to manage risk in an increasingly sophisticated and dynamic industry. FCC offers a wide variety of free learning opportunities to help producers make effective business decisions, including workshops designed to help producers improve their bottom line and strengthen their business.
This is what makes FCC unique among other lending institutions. We are a stable and steady presence in the marketplace. We are not publicly traded, we are accountable to our shareholder, the Government of Canada, and our only focus is on the success of Canadian agriculture and our customers.
Our business is built on strong customer relationships. This means taking the time to understand our customers' business and ensuring that they have the products and services they need to grow their farm operations and agribusinesses.
It also means lending responsibly by making good loans to producers with solid business plans and encouraging our customers to have a formal risk management plan. Because of this practice and our focus on risk management, it bears noting that more than 99% of FCC's portfolio is performing and in good standing, which means customers are paying back their loans as per the agreed-upon terms.
While we know sector challenges exist, our industry is still in a very strong position. With this responsibility, it's important we also extend a cautionary message to the industry about the current trends and to ensure individual producers have the knowledge and the tools they need to prepare for tighter and more volatile times.
As a proactive measure, FCC has recently published a series of weekly blog posts on farm financial fitness, copies of which we have provided to the committee today. Developed by our agriculture economics team, these posts provide producers with valuable information, tips, and tools, and advice on how to manage their farm business and operations, plan for unexpected challenges, and work through them.
At FCC we are aware that other financial institutions play a significant role in the agriculture lending market. We believe that healthy marketplace competition and a choice of financing options is good for all Canadian farmers and agribusiness.
Agriculture is a robust contributor to the economy that requires capital from all of us: banks, credit unions, and FCC to achieve its full potential. That said, FCC is the only financial institution solely dedicated to advancing the business of agriculture, and we've done this successfully for the past 57 years. We add value to our commitment to provide expert knowledge and services for the evolving needs of the people who work in this great industry every day. No matter what changes take place, FCC will continue to serve as a strong and stable partner to the Canadian agriculture industry.
At FCC, agriculture is our business, and we will support Canadian producers in the face of challenging circumstances and celebrate their success as well.
Thank you for the opportunity to speak to you today. I look forward to any questions the committee may have.
As you said, I'm Paul Glenn, the past chair of the Canadian Young Farmers' Forum. With me today is Justin Williams, our Ontario and Quebec director.
I would like to thank you for the opportunity to speak to you today about the very important issue of farm debt and its effects on young farmers.
I, myself, am a third-generation farmer from Keene, Ontario, growing soybeans, corn, wheat, and hay.
Agriculture is such a vast industry. Each sector has its own challenges in financing capital and operating capital, especially. With crop production, land values vary, from upwards of $100,000 an acre in B.C. to $100 an acre across Canada. This depends on the region in which you live and what type of climate you need to support the crop production and the cost of land.
On the high end, you have high-value crops, like flowers, blueberries, cranberries, and greenhouse production. That is just the start, which does not include any input or infrastructure costs for greenhouses. On the lower side, you have the cost of pasture land.
We do have some very savvy young farmers creating new farmland in the Yukon and also in Newfoundland, but it isn't easy. Not that much in farming is easy, I have found.
For young farmers transitioning between generations, I find it is more and more difficult with higher debt loads, rising costs of production, variables on crop sales, and also retirement planning for the exiting generation. People are living longer and need more income to retire, which adds complexity to transitions and requires extensive planning to complete successfully. Start-up farms, operating 10 years or less, are still in a growth phase, expanding their market share and clientele, servicing debt, and incurring debt to grow. This is one of the most important times, especially for young farmers. They are starting families and transitioning from previous generations. That's when they need the most support with strong financing, operating capital, and income stabilization programs to continue to operate and grow their businesses.
The ability to grow current operations is also tough because of increasing land input, equipment costs, and lower margins, which make debt servicing more difficult. The economy of scale is also variable for every operation and commodity, so having support for variable operations is a must.
Young farmers are diversifying their agribusinesses to help stabilize income streams. That is why supply-managed sectors are typically very attractive to young farmers, but they are very capital-intensive.
On that note, I'll pass it over to Justin Williams.
My name is Justin Williams and I am working on becoming an eighth-generation farmer. Our family has been farming since 1814.
I am very happy to be here with you today.
About 12 years ago, I started my own maple syrup business in order to diversify the farm a little bit. Currently, we have dairy, as well as crop farming, and in the last couple of years, we've had the maple syrup business.
With decreasing margins, the younger generations are having to work harder to pay off the debts from previous generations, such as my grandparents who were paying off debts from their fathers. When I take over the farm, I'll be paying off debts that my dad has acquired, even from his grandfather.
Higher debt on farm business has led to less gifting of farms. In previous generations, generally the farm was gifted from the father down to the son or daughter, but now, with increasing debts, it's a business transaction and young farmers are having to pay more in order to acquire the farm from previous generations. Increasing debts for farmers has also meant increases in stresses, both for the previous generations, as well as for younger farmers getting into agriculture.
As Paul mentioned, the economy of scale is variable by commodity. In dairy, I have supply management and these sectors are minimally affected by economy of scale because price paid to the producer is stabilized due to the controlling of supply based on the demand of the consumers. Due to supply management, these sectors of agriculture more easily handle the highs and lows of the economy, without requiring government programs.
With increasing use of technology in agriculture, it is ever more important for farmers to further their education, as mentioned in the previous session. As well, they need to continue to network with sectors within agriculture, whether it be their own sectors or other forms of agriculture. Technology is greatly increasing in the use of tractors and what we're using in the barns to collect data on the animals, as well as for controlling debt.
We'd like to thank you for inviting us here today and we'd like to leave lots of time for questions afterwards.
Thank you for the opportunity to share my thoughts and research regarding contemporary issues facing young and start-up farmers who seek to begin or expand their farm operations. I'll also address the associated issue of debt and the transfer of farm operations from one generation to the next.
Before getting into the heart of my comments, I want to recognize that there are many unique aspects of farming, most of which were raised in our previous discussions. Farming requires a unique partnership with nature, and this dynamic relationship poses an ongoing challenge. Second, many farmers and future farmers grow up on farms and come to know farming as a way of life. In this regard, farmers are committed to place and farming in a way that many of us view as important.
Let me begin with a very important question. How do young farmers fare in the agricultural sector? This question poses a bit of a challenge because, to answer it, one needs to find an occupation to compare with farming, and as I've mentioned, farming is unique in many respects. With that caveat in mind, one starting place might be to compare the percentage of Canadian farm operators under 40 with the percentage of Canadian owners of small to medium-sized enterprises under 40.
Using data from the 2011 census and Industry Canada, we calculate that, as of 2011, 10% of the total farm operators identified as the oldest operator on the farm were under the age of 40. Comparatively, in the same year, 12% of majority owners of small and medium-sized enterprises were under the age of 40.
Should we be surprised at the percentage of farm operators under 40? I'm not in a position to answer that question for you, but as you continue to contemplate this issue, keep in mind that farm operations typically involve millions of dollars of assets and hundreds of thousands of dollars in debt; hence, these kinds of capital-intensive industries require unique operational and managerial skills. We need to assess our age expectations in farming against similar capital-intensive businesses in Canada.
As we do this, we should keep in mind farming and its unique partnership with nature. This means that, as one farmer recently put it to me, 80-hour work weeks are a good thing, and during some seasons, they work when the sun shines and enjoy a day off when it is raining. In these times, weekends are just part of the calendar. These seasonal demands may discourage some young people from entering the industry. Also, it is important to recognize that modern farming is not as biased against older folks as it used to be and is less demanding physically than in the past.
Farming requires a broad suite of capital investments, including land and buildings, machinery, and equipment, and in some cases, livestock. Importantly, it is unlikely that the magnitude of debt for any particular farm can be associated with the soundness of the farm operation. Farmers running the highest debt are likely to be doing so because creditors are comfortable that they are in a position to repay this debt. For this reason, there are other measures used to assess the financial well-being of the farm sector. These were gone over in detail in your last session, but they include measures like liquidity and debt-to-asset ratio. In reviewing these current measures, FCC suggests that they are generally in line with or more favourable than historic averages.
For farmers in general and young farmers in particular, incurring debt allows them the opportunity to undertake enterprises that could not be financed by personal wealth. The current debt reflects in part the capital cost of being a competitive farm operation in today's agricultural sector. In addition, some of the increase in debt is due to the decisions of farmers to invest some portion of their net income, which has generally been increasing in recent times, into capital investments. One of these investments has been farmland, which as you all know well, has appreciated in recent years. For example, in Ontario the Municipal Property Assessment Corporation estimates that between 2012 and 2016 the average increase was 16%. The increase in value of land does not, however, as someone recently pointed out, mean a farm is sustainable from a cash flow basis.
It goes without saying that the ability to manage any business and its debt is easier when net income flows are favourable and interest rates are low, a setting that describes the agricultural industry these last several years. The situation becomes more challenging when these flows become attenuated or interest rates rise. This issue emphasizes the importance of making productivity-enhancing investments in good times and making sure that the generation of farmers is prepared to manage the farm, not only from an operational perspective, but also from a financial perspective. We therefore rely on our credit markets to appropriately weigh the risks of lending to young farmers.
This helps to avoid the deleterious effects of incentivizing less productive investments or supporting farmers who can be profitable in good times but not in less favourable times. One challenge here is that young farmers will be more highly leveraged because of their need to make high levels of capital investments and their lower levels of accumulated assets. This implies greater risk.
Given the high capital costs of becoming a competitive farmer, you might ask how these young farmers get in the game, get up to scale, and stay in the game. There's not one answer, but borrowing money from a financial institution will most likely play a role in all of these stages. There are many ways young farmers start out to develop the wealth that allows them access to these loans. I will discuss three: off-farm income, renting in farmland, and support from parents.
On off-farm income, many young farmers, and indeed farm families in general, supplement their income with off-farm work. The average farm operator in Canada has about a 41% probability of engaging in off-farm work, and the probability for the youngest farm operators is higher. Spouses of farmers also often work off the farm.
As for renting in farmland, as noted earlier and discussed earlier, farmland is expensive. In many places, the price of farmland may be such that a moderate return on investment requires continued farmland appreciation. One option for young farmers is to scale by renting farmland or through contract farming. The farmland rental market is well established in Canada. Close to 40% of the Canadian farmland is in the rental market. A long-established exchange between landlords and tenants suggest benefits to farmers and non-farmers alike.
Now I'll talk about support from parents. Farm families help their children get into farming by developing their knowledge of farming. They transfer assets through bequests, gifts, or sale. In many cases, farm families use a combination of all of these approaches. Increased debt can complicate the situation. As an extreme example, in the event that a parent dies intestate, without a will, there may be confusion as to who is responsible for paying the debt, and they go into arrears.
Moreover, the farming operation may suffer as families attempt to clarify how the farm assets should be distributed. Importantly, the appreciation in key assets like land poses a challenge to parents who, on retirement, want to treat themselves and all their children equitably. Children who may want to continue the farm operation at the same scale as their parents have may have a difficult time purchasing farmland from their parents or from their siblings' share of inherited land.
There are presently a variety of institutions designed to support young farmers and the transfer of farms from one generation to the next. There are a variety of tax policies that influence these transfers of assets. Provincial-federal cost-share programs support succession planning. FCC has a young farmers program. Importantly, universities throughout Canada, including the University of Guelph, are actively engaged in preparing the next generation of farmers with the management skills that they will need to effectively manage a farm operation.
Finally, if you will allow me to end this testimony on a personal note, I have spent the last 13 years of my life working with young people. Many have become farmers. Many want to become farmers and many have gone on to research issues relative to our agricultural sector. I'm constantly impressed by their innovative capacity and their work ethic. I have been a beneficiary of their new ideas and our agricultural sector will benefit as well.
Our investment in youth, which needs to be a focus of a broad suite of policies, is our best chance at making the most of the good times, diminishing losses in the bad times, and increasing the likelihood that the former will characterize our future more often than the latter. No generation is better suited to address the future than is the future generation. I'm committed to that. I'm glad you're having these discussions, and I am prepared to discuss this testimony and other questions you might have.
Thank you very much.