INTRODUCTION

The Canadian agricultural sector has not forgotten the farm financial crisis of the 1980s, which saw historically high interest rates and the collapse of farm commodity prices. The situation pushed a number of businesses into bankruptcy. Recent years have seen an increase in land values and consequently in farm debt. In fact, financial liabilities in the agricultural sector reached a record high in 2015.

Because of growing concerns over farm debt levels, the Standing Committee on Agriculture and Agri-Food considered the matter and adopted the following motion on 6 December 2016:

That, pursuant to Standing Order 108(2), the Committee conduct a study of debt in the agriculture sector and the effect of debt on: 1) young farmers and generational transfer of farms; 2) start-up farms operating for 10 years or less; and 3) the ability to expand farming operations; that departmental officials be in attendance for at least one meeting; and that the study be comprised of no less than four meetings to be held at the Committee’s earliest convenience in order that the Committee may report its findings and recommendations to the House.[1]

The committee held four public hearings between 11 April and 9 May 2017 and heard from various representatives from the agriculture and agri-food sector as well as officials from Agriculture and Agri-Food Canada.

A. Overview

1. The financial health of Canadian farms

In recent years, farm debt has been on the rise. According to Statistics Canada, the value of total farm liabilities was $86.8 billion in 2015, an increase of 8.9% over the previous year (see Figure 1). Today, farm debt has more than doubled since 2000.[2] Based on analyses by Agriculture and Agri-Food Canada, larger, higher-revenue operations have higher debt levels, and approximately 30% of lower-revenue farms are debt free.[3]

Figure 1 – Farm Debt, Canada, 1981–2015

Source:   Figure prepared using data obtained from Statistics Canada, “Table 002‑0020,” CANSIM (database).

Table 1 shows that average debt per farm increased in all provinces. Across Canada, the average debt per farm was $603,759 in 2015 compared to $412,269 in 2011. British Columbia, Quebec and Ontario had the highest debt levels.

Table 1 – Average Debt per Farm, 2011–2015

Source:   Table prepared using data obtained from Statistics Canada, “Table 002‑0071,” CANSIM (database).

Despite increased farm debt in recent years, several witnesses pointed out that it was not a major problem for the sector as long as income levels allow farmers to meet their financial obligations while remaining profitable. Witnesses also said that the increase in farm debt coincided with rising incomes, a sign of a healthy industry.[4] Although farm debt increased more rapidly than the value of farm assets in 2015, witnesses testified that farms are doing well financially.[5] The debt ratio has remained low for several years. It was 15.4% in 2015.[6]

2. A capital-intensive sector

Strong income, greater profits and low interest rates have increased farm investment, particularly land purchases. This context has increased land values and farm debt.[7]

The value of farmland has been increasing for the past 25 years. According to Farm Credit Canada’s (FCC) latest annual report on this topic, the average value of farmland increased by 7.9% in 2016.[8] However, the rate of increase is slowing.[9] Farmland accounts for a large share of total farm assets. According to the Union des producteurs agricoles, it is a very high percentage.[10]

3. Risk management

Despite a favourable agricultural outlook, witnesses said it was important to remain vigilant and that the agricultural sector faces many production and market risks.

Even a small increase in interest rates could jeopardize many farms, especially start-up farms that typically have higher debt ratios than well-established ones.[11] Rising rates have a significant impact on cash flow. The impact will depend on how high they go and how quickly they climb. A slow and steady climb would allow farmers time to adjust. Rapid rate increases would be difficult to manage.[12]

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.[13]

In the current context, witnesses believe that risk management programs do not provide optimal coverage and do not adequately meet farmers’ needs. They propose protecting supply management and reviewing risk management programs. Improved programs would help increase and stabilize young farmers’ incomes and low program costs would increase cash flow to run their business.[14]

To help farmers manage their cash flow, the federal government offers them low-interest cash advances through the Advance Payments Program (APP).[15] Due to increasing farm sizes and rising operating costs, witnesses believe that the current limits on advance payments should be increased and indexed to inflation to better meet production conditions.[16] New farmers should have access to greater interest-free advance limits to help them address the operating constraints of a start-up.[17]

As noted above, the farm debt situation in Canada has not been a problem when well managed. The Fédération de la relève agricole du Québec said that “[d]ebt is positive if it creates wealth, but it is an obstacle to transferring agricultural concerns if it is too high.”[18]

B. Challenges for the next generation of farmers and the new farmers

Over the next 10 to 15 years, many farmers will transfer their operations to the next generation.[19] Heather Watson of Farm Management Canada expects three out of four farms to change hands.[20] Christie Young of FarmStart said a lot of farms are going to be transferred out of the family.[21]

1. Barriers to starting up and transferring farms

Young and new farmers face many challenges. A capital-intensive industry, rising land prices, poor access to credit, and lack of planning create significant barriers to starting and transferring farms.

Accessing funding is a major barrier to new farmers with no credit history, as most lenders require operating loans to be fully secured. Moreover, down payments, sometimes as high as 50% of the purchase price, can be insurmountable for young entrants.[22] Some witnesses believe that access to “patient capital” can help the new generation of farmers start their businesses and build up farm assets. The patient capital model takes a long-term approach. It consists, for example, of a long-term loan with low interest rate and favourable repayment terms.[23]

To facilitate access to capital, the Canadian Agricultural Loans Act (CALA) program provides loan guarantees for investments.[24] According to the Canadian Pork Council, the program is restrictive because the guaranteed loan amount is capped at $500,000. Yet the hog industry requires significant capital and this limit does not reflect the size of operations in the hog industry.[25]

Young and beginning farmers also have access to a variety of specialized financial products offered by Farm Credit Canada, including the Young Farmer Loan, the Young Entrepreneur Loan and the Transition Loan. The goal is to help young farmers start or expand their farm with a lower-than-standard down payment.[26] The new generation of farmers can also get loans with favourable interest rates from financial cooperatives.

To support their farming activities, numerous farmers depend on off-farm income. More than 40% of family farm operators engage in off-farm work.[27] This percentage is even higher among new farmers,[28] and in the cattle industry.[29] Off-farm income allows new farmers to raise funds so that they can access loans[30] and invest in their business without incurring excessive debt.[31] However, this prevents farmers from devoting themselves full time to developing and expanding their business.[32]

Many new entrants prefer renting to owning land because they do not have the funds to buy the land.[33] Some witnesses mentioned that speculative investors with a strong interest in the agricultural land market can contribute to higher land prices. Witnesses are concerned that these investors will curtail ownership, and therefore credit. Although the purchase of land by non-traditional buyers is a limited phenomenon,[34] witnesses recommended that data on transactions by these buyers be collected[35] so as to take a preventive approach to ensure that farmers maintain control of strategic assets like farmland.[36]

Witnesses acknowledged that renting can be a solution in some business strategies. However, according to the Union des producteurs agricoles (UPA), PANGEA, an investment firm, is of the opinion that renting is the only possible option for new farmers.[37] The UPA argues that the PANGEA model does not promote rural development, as it is a “franchising” of the farming business that is based only on grain production and the farmer’s share gives them no control over their business.[38]

C. Support for new and future farmers

Various government programs are available to the next generation of farmers and beginning farmers to assist them in the transfer process and help them establish themselves.[39]

Under Growing Forward 2, the government provides support for business risk management. Through the Canadian Young Farmers Forum, Farm Management Canada and provincially delivered cost-shared programming, the federal government provides support for farmers to develop business plans and strengthen their management skills.[40] The FCC also offers a variety of free learning opportunities and workshops to help farmers make effective business decisions.[41]

According to a study called “Dollars and Sense: Measuring the Tangible Impacts of Beneficial Business Practices on Canadian Farms,” presented by Farm Management Canada, very few farms adopt business management practices. The study found that “[o]nly 26% of farmers have a formal business plan and 33% have a financial plan, 27% have a succession or a transition plan, and 18% have a human resource management plan.”[42] According to this study, the key to success entails continuous education, financial literacy, using business advisers and planning.[43]

Recommendation 1

The Committee recommends that the Government introduce initiatives to further promote business skills.

An effective succession plan is essential to a successful transfer. Yet succession plans are often non-existent in most cases.[44] According to the Canadian Federation of Agriculture, transferring the family farm must be planned well in advance to ensure the financial viability of both parties. Good communication and consulting with experts is also required.[45]

In Quebec, the Centres régionaux d’établissement en agriculture du Québec (CREA), which have been in place for more than 20 years, provide support during transfers.[46] The Canadian Young Farmers’ Forum believes that having help managing the financial and tax consequences of farm transfers would benefit all parties.[47] In this sense, the next generation of farmers would like increased support when transferring or starting-up a business.

Farm transfers have consequences. Transferring heavily indebted farms also means transferring pre-existing debts to the younger generation.[48] Current tax policy does not support the transfer of farms between extended family members. Transfers are increasingly between extended family members or someone outside the family. The Income Tax Act provides no benefit for these types of transfers and can spell the end for some family farms.[49]

Many farmers want the Income Tax Act amended to broaden the definition of family to include other members.[50] To encourage unrelated next generation farmers, the Arterre project matches aspiring farmers with farmers who have no one to transfer their farm to, giving the next generation of farmers better access to farmland.[51]

One suggestion to facilitate the transfer of family farms is to use the seller-lender formula, where the sellers themselves back the loans to young farmers, who receive a reduced interest rate. In return, the seller receives a sort of annual rental income.[52]

The cooperative model may also be of interest to the new generation of farmers. In addition to playing an important role in developing rural communities, cooperatives help farmers start up or expand their business by pooling resources.[53] Cooperative models address the needs of its members, which may include lack of knowledge, lack of finances and lack of infrastructure.[54] Co-operatives can provide significant support to new businesses by educating its members through a variety of business learning initiatives.[55] Through mentoring, start-up cooperatives benefit from the expertise of long-standing cooperatives.[56] Various agricultural organizations also offer learning and mentoring services. For example, the cattle industry introduced the Cattlemen’s Young Leaders program and the Young Cattlemen’s Council to improve knowledge transfer.[57]

Recommendation 2

The Committee recommends that the Government provide support to the next generation of farmers when starting up and transferring farms through mitigating the financial and tax consequences.

D. Other: The agricultural workforce

Witnesses also raised the issue of labour shortages in the agricultural sector. Labour shortages on farms and in processing plants as well as career and employment opportunities in the agriculture sector were addressed.

In the 2017 federal budget, the government aims to increase agri-food exports to $75 billion a year by 2025. To reach this goal, Canada’s agriculture and agri-food sector will need farmers and workers. However, the sector is already having difficulties recruiting workers and filling vacancies.[58]

These issues were covered in a comprehensive section in the committee’s recent report from March 2017 on the next agricultural policy framework, in which the Committee made two recommendations on labour shortages.

CONCLUSION

Financial and human capital are essential to the economic success of Canada’s agriculture and agri-food sector. Although this sector is experiencing rising debt, witnesses testified there is no cause for concern, as conditions are favourable for producers and they can use their debt to leverage greater profitability. However, there is a need to provide business skill support to help farmers monitor debt levels and ensure that they can manage their debt. To assist the sector’s sustainability and prosperity, the next generation of producers need to access to risk management tools, training, information, and financial and human capital.