Mini-Review MR-72E FARM FINANCING AND THE GLOBALIZATION OF THE AGRI-FOOD INDUSTRY Jean-Denis Fréchette Economics Division 30 November 1990 Library of Parliament Bibliothèque du Parlement Parliamentary Research Branch
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2 FARM FINANCING AND THE GLOBALIZATION OF THE AGRI-FOOD INDUSTRY INTRODUCTION Those active in agriculture are calling the 1990s a decade of challenges that, if properly handled, will take us into the next century. It is not surprising, therefore, that the Canadian Bankers Association chose globalization of the agri-food industry as the theme for its first conference of the 1990s on farm financing. The conference, which was held in Saint- Hyacinthe from 28 to 31 October 1990, brought together representatives from banking, the agricultural industries, the various levels of government and the producers themselves. The conference theme was particularly appropriate in that all sectors of the economy will from now on be facing globalization. Canada s banks, like Canada s farmers, are looking for their niche in world markets. The search is not easy, partly because competition is already a significant factor in both new and old markets, but above all because the absence of borders that used to define the markets makes positioning more difficult. But what is globalization? The idea is not new: the discovery of the New World by the Europeans some 500 years ago was a kind of globalization. In our era, it also implies a discovery: the discovery that there is an international demand for goods and services. More than any other sector, telecommunications have proved the existence of these borderless markets, and now the phenomenon has spread to other economic activities. The industrialized countries were able to benefit from a period of concentration on domestic markets to develop their production infrastructures and their expertise; however, now that the exchange of goods, services and information is happening faster than ever, the strong global demand is engendering
3 growing competition on the supply side. Realizing that there are market opportunities outside their hitherto restricted horizons, business people want to secure some of those opportunities for themselves: bankers and people in the agri-food industry are no exception. Although globalization currently holds out dazzling prospects for development and growth to those willing to take the risk, it is also hedged about by a great many obstacles, part and parcel of the world trade network. In this era of globalization, financing and investment are major means of access to markets; this study will summarize the remarks of various speakers at the Saint-Hyacinthe conference who described their visions of what globalization means for the agri-food sector. GLOBALIZATION AS SEEN BY CANADA S BANKERS Introducing the concept of globalization into the debate over farm financing has in no way changed the bankers clearly-defined position. For 20 years now the debate has been over who should be the main agricultural lender in Canada, and who the potential clients. The bankers see the division of powers as relatively straightforward: established farmers, whose profile is comparable to that of business people in other sectors, would continue to be served by the banks, and young and high-risk farmers would deal with governments. The Canadian bankers view was echoed by a European participant, Pierre Théhiou of France s Caisse nationale de crédit agricole [national farm credit agency], who said that in the future a farming operation would have to demonstrate adequate profitability or cease to exist. The role of governments would be limited, on the one hand, to distributing information and encouraging training for farmers and, on the other to acting as banker of last resort. The globalization of markets has changed the nature of financing needs: they are broader, more specialized, and highly diversified. The bankers claim that they have adjusted their sights in order to improve the quality of their customer service and that they have been learning, just like the farmers, about globalization s growing influence on their own sector. This awareness has led them to define a three-point strategy to: (i) strengthen their capital structure and stress profitability rather than asset growth; (ii) adapt their powers to meet their clients needs more effectively; (iii) adopt a strategy of looking for openings on foreign markets.
4 Canada s bankers are convinced that market forces will more than ever dictate the rules for farm financing; in the same breath they say that government intervention, when it happens, must respect the rules of competition and offer the same opportunities to everyone. For example, if the government opens the Canadian market to foreign banks, then foreign markets must in turn be opened to Canadian banks, and the same thing has to hold true for agriculture. It is interesting to note how much the general strategy for dealing with globalization seems appropriate for all sectors of the economy.
5 IS THERE A ROLE FOR GOVERNMENT IN FARM FINANCING? This question was put by one of the participants, and the response was unanimously positive; however, the extent of the role is still controversial. On the other hand, all those involved in farm financing agreed on the need to reduce the economic uncertainties that restrict agricultural decision-making, beginning with the methods used to finance current operations and with long-term investment. James J. Hewitt, Chairman and CEO of Canada s Farm Credit Corporation (FCC), confirmed the federal government s place in farm financing in outlining his vision of the FCC s future role: (i) (ii) (iii) as an alternative source of farm loans, the FCC should deliver products tailored to the agricultural industry; the FCC would be responsible for administering the federal government s underwriting and guarantee programs; the FCC would act as the vehicle for delivery of the federal government s financial programs and plans. Figure 1 represents the FCC s role in farm financing. Certain provincial governments have taken a different approach, placing more importance on their own farm credit offices or corporations, whose present role already reflects the picture Mr. Hewitt described for the FCC s future. In Quebec, the Office du crédit agricole has developed a close partnership with commercial lending institutions in order to provide farmers with a complete range of financial services. In 1989, commercial lenders held 72.5% of Quebec s farm debt, the highest proportion in Canada; 75% of Quebec farms had dealings with the Office, for a volume of loans corresponding to 57% of all financing made available to the province s agricultural sector. Although a national farm-financing strategy is currently a priority, discussions at the conference made it plain that the federal and provincial governments and the financial institutions are still quite far from a consensus. On the other hand, the existing competition between private and public agricultural lenders has forced them to improve their services and above all to realize that the evolution of the agri-food sector also reflects the globalization of
6 markets. This means that the two types of lender, governments and financial institutions, are increasingly coming to evaluate projects rather than individual farms, as they used to do. The conclusion could be that the farm financing offered by governments tends to serve agricultural development as a kind of a regional development strategy, whereas the banks aim simply at financing agricultural operations, though this does also have an indirect impact on development. PRODUCERS EXPECTATIONS OF FARM FINANCING IN THE FUTURE Farmers are well aware of market globalization, a phenomenon brought home to them by the increased competition they face and by major changes in government economic policy. Equally they see that countries macroeconomic policies influence the terms and conditions of farm financing (for example, the setting of interest rates); however, they argue that these policies are influenced little or not at all by the realities of the agricultural economy, which is thus left completely at the whim of maroeconomic decisions. The reality for farmers is still that farm financing is an essential tool in their operations, and the terms of using this tool should be better defined and protected against fluctuations. Farmers do not believe that there is a lack of money for farm financing: the main problem remains the cost of this credit and the fluctuating conditions for obtaining it. For the agricultural sector, government participation in farm financing must not be seen as the alternative to loans from private institutions but rather as complementary to them. Farmers believe that, even though provincial participation in farm financing creates substantial disparities between provinces with respect to the services and rates available to producers, withdrawal by the provinces would not solve the problem of excessively high rates. This is why it is important for the federal government to have a well-defined, or even an increased, role in farm financing, according to Don Knoerr, president of the Canadian Federation of Agriculture. Most of all, farmers want a comprehensive policy that would make it possible to harmonize the efforts and responsibilities of all those who work with farm financing. The demand for immense amounts of capital to finance farming operations can only be intensified by the requirements of market globalization. To meet this challenge, Canadian farmers want a real farm financing policy to be put forward, with the federal government playing a leading role. Obviously any consensus on farm financing is a long way off.