Marcel Groleau, president of the Fédération des producteurs de lait du Québec, agreed to be interviewed for the Coopérateur agricole and comment on the Swiss and French experience subsequent to rejecting dairy quotas and Wisconsin, our quota-free, 600 + cheese making neighbour to the south.



Le Coopérateur agricole France and Switzerland decided not to cash in their dairy quotas to keep their dairy industry from crashing. What do you think of this?

Marcel Groleau Having been to France on a few occasions, I can say that quotas could not be cashed in directly, they were connected to the land, the farm, or to the region and their value was transferred, in part, to other assets.

C. A.
As for Switzerland, they unanimously rejected any kind of financial traffic between producers. What’s your opinion on this
M.G
I know that Europe increased production to decrease the value of quotas or diminish the interest in owning quotas. They increased their right to produce, which created a surplus of milk and resulted in lower prices. Lower prices mean that producers are no longer interested in buying quotas.
   
C. A.
Participants in France and Switzerland tell us that the main reason there is no price on quotas is to make farm transfers easier….
M.G
Furthermore, to facilitate farm transfers, they had to create common groups of agriculture operations. Another problem in France is that producers are not landowners, for the most par they work on leased land, which poses a risk. It’s hard to explain why they chose this, and why we chose cash quotas. Because we are nearer to the States, less socialist, we may have been more attracted to a form of cash capital rather than sharing social values or any other type of value.
   
C. A.
Let’s go back to quota prices. The Pronovost report mentions how difficult, almost impossible, it is for Québec’s next generation to buy a farm at its market value, if the farm is worth $2.5 million; there’s $1.5 million in quotas. That’s very disheartening, don’t you think?
M.G
Or it allows for a farm transfer. Let’s take the U.S. for example, which makes for a fair comparison. In Wisconsin, where there are no quotas, some farms with as much as 300 heads can’t be transferred since their revenues aren’t enough to support the farm’s owners. So what’s better? A farm that’s worth more and has a guaranteed income for the young farmer and that will provide the retiring parents with some kind of annuity or a farm that doesn’t generate enough income to provide a decent living for its operators?
   
C. A.
Some bankers report situations in which, if I am farmer and want to transfer my farm to one of my children, I have to hand it down with its quotas, which is somewhat unfair to the other three or four children in the family. Now tell me, how many farmers would rather sell instead of starting a family feud?
M.G
There are relatively few because the business is exactly that, a family business. Quota values are seldom a problem if harmony reigns; however, if there is no family harmony, any reason is a good reason to start a fight. We agree on that.
   

C. A.
So, the farmer who wants to transfer his farm must either give away his quota with the farm or reduce its overall value?
M.G Yes, but it’s just like all other generation to generation transfers. This is pretty much standard operating procedure for companies that are not publicly traded businesses. There are no quotas in pharmacies, yet Jean Coutu handed his business down to his family. In some way he made a donation. Had he sold his company at market value, his sons, who were just graduating from university, would never have been able to afford the company. This is no different.
   
C. A. Is the replacement rate sufficient to ensure the continuity of the dairy industry?
M.G Yes, but with less farmers producing more milk. I can’t see a day when the number of farmers will increase, unless there’s an incredible increase in the demand for dairy products.
   
C. A. In May 2006, quota prices rose above $32,000 per kilo of butterfat per day. Why set a ceiling price?
M.G Decisive action was needed. Economics was my primary motive while politics came second. People who could add saw the lack of cost-effectiveness of buying quota at $32,000 or more, compared with our production costs and our milk price.
   
C. A.
We are currently experiencing a serious economic crisis and times are tough for WTO negotiations. Some observers have said that quotas are similar to what commercial paper was to the housing bubble, speculation is part of the whole?
M.G There was evidently speculation. Today, with the ceiling in effect, there is no longer any speculation. In fact, over the past few months, prices dropped faster than the planned ceiling price.
   
C. A. At $25,000 per kilo of milk butterfat per day, this seems like a logical ceiling price?
M.G I know of a lot of projects currently in operation because quota prices will not exceed $25,000. There are projects that couldn’t be done that are now being done, and there are transfers being done.
   
C. A. And the risk quoted by WTO negotiations and the economic crisis?
M.G As it relates to the bubble, there are always risks. People invested in textile plants before tariffs were removed and they thought they were doing a good deal. The North American Free Trade Agreement (NAFTA) resulted in the elimination of tariffs for some sectors of industry and this changed their structure. There is no way to be protected from this. I think there is enough talk about the WTO that people know that there are risks involved in buying quotas.
   


C. A.
If I finance the purchase of my quota at 50% or 75% of its value over the next ten years, isn’t this irresponsible?
M.G A bank takes on the risk along with the producer. In many cases there are a lot of nervous bankers, but they still do it. They assess the risk and determine if it can be supported. As farmers, we have ideas, projects. When the financial people follow us, it’s probably because they trust us. l
   
C. A.
But doesn’t the level of indebtedness concern you a little?
M.G
Yes, absolutely.
   
C. A.
On a competitive level?
M.G
The level of indebtedness, in the kind of environment we have today, is manageable. However, if trade regulations change, if trade barriers fall, the level of indebtedness will certainly become a burden. It’s a question that both banks and government need to ask.
   
C. A.
Let me go back to the WTO. The Pronovost report and the Caisses Desjardins suggested “going beyond a defensive attitude and develop various scenarios to reduce trade barriers and to open the domestic market.” Have you considered these scenarios?
M.G
We studied their impact should the scenarios occur. Obviously, today we are able to take a certain percentage of tariff reductions. We can undoubtedly manage this in the short term. In the long term it will be difficult.
   
C. A. How hard is it going to be in the long term?
M.G The problem in agriculture is that farmers will be the only ones to carry the weight of tariff reductions. Each time tariffs are lowered; neither the processor nor the distributer lowers his margin. Shrinking margins are always transferred to the farmer and to raw material. It’s a universal law.
   
C. A. If we accept open markets, Québec farmers will not be competing with America’s worst but will be going against its best. Are you afraid of this?
M.G Absolutely, with the size of businesses in the United States, industrialization, environmental regulations that are different from here, weather…. Right here, on my own rocky parcel of land compared with a farmer from Saint-Hyacinthe, there is already a difference of 500 thermal units. If trade barriers fall to the wayside and that we leave it to market competitiveness, dairy production will not increase here, it will go down. Saputo and all the others will always be able to get dairy ingredients elsewhere at better prices than those from Canada because of production costs. This makes no sense at all, just like it’s cheaper to make a T-shirt in China, it’s also cheaper to produce a kilo of skimmed milk powder in Argentina.
   



« We finance quotas, but the day when quotas are not worth anything; farmers will still be in business. It’s just like the housing bubble »

Should interest rates rise, just like the housing market, there will be bankruptcies!’ declares Cyrille Parent, nicknamed the banker-agronomist and a member of the Temple de la renommée de l’agriculture in 2007, after a long career with the National Bank, second largest farm lender in Québec.

Enjoying retirement for the past 14 years, Mr. Parent is concerned with overextending credit at this critical time of one of the most serious financial crisis since 1939 and ongoing negotiations with the WTO.”A quota used to be financed over four years and was worth $2,000 per cow. It’s risen to $25,000 - $30,000 per cow. It’s all speculation, just like commercial paper!”

“By setting a ceiling price for quota at $25,000, the industry self-regulated because $30,000 to $32,000 was no longer transferable. We created monsters, just think of a farm with an average of 51 cows - worth some 3 million dollars - half of the value, 1.5 million, comes from its quota” states Yves Mathieu, Vice President of Marchés agricoles et agroalimentaires with Desjardins. The institution loans farmers up to 50% of the quota value over a period of ten years, and this has become common practice in the financial world, “however, the ideal timeframe is four to five years” stipulates Mr. Mathieu. Two out of three farms in Québec deal with the Mouvement des caisses Desjardins.

“We sometimes hear farmers say that should quotas fall, they will no longer have any debt. A loan is a loan is a loan. If the value of your loan is greater than the value of your guarantee and if you are in default of payment, you can collect all your marbles because there’s nothing to cover it”, explains Raymond Morissette, Agronomist and Accounts Manager with the Royal Bank of Canada (RBC). RBC, the fourth largest lender in Québec, extended its 50% of quota value loan financing period from 7 to 10 years in 2003-2004, to follow the competition.

In fact, Vincent Giard, Vice President Québec Operations, Farm Credit Canada (FCC), denies unfair competition and refutes a rumour to the effect that the institution provides loans for up to 100% of quota value over a period exceeding twenty years. FCC is the third largest financial services player in Québec but is not a chartered bank, it is a crown corporation that provides business and financial services to Canadian farms and agri-businesses and has a 15 billion dollar portfolio.

“There are all kinds of variables in purchasing quotas. If quota is the only guarantee, we won’t go beyond ten years. If there’s a whole lot, buying cattle, quota, equipment, buildings including a cesspit, the average amortization period may very well exceed ten years, but it will never go beyond twenty, that wouldn’t be helping the borrower”, states Mr. Giard. He further adds that the FCC doesn’t hand out capital reimbursement exemptions on the quota portion.   

When asked if the federal government has a strategy to prepare producers to face greater openness of the domestic market and lower tariffs, which could influence quota values, Jean-Pierre Blackburn responds: “We want to maintain the GO5 and supply management… it has been the position of the Harper government since the beginning… Agriculture producers know that we are defending them. Throughout this process, we’re all around the table and we hope that, by the end of it all, the others (countries) will effectively see it from our point of view and respect the principle.” The Minister of National Revenue and Minister of State (Agriculture) reiterated his unconditional support for supply management to the WTO during a telephone interview given January 29 of this year, two days after the liberal leader Michael Ignatief, voted to support the conservatives’ budget, allowed the Harper government to stay in power.

Several dairy farmers invest or are tempted to invest when interest rates are at the lowest they’ve been for 45 years and that quota prices are around $25,000. Caution seems to be the word of the day for financiers everywhere. “The United States is printing money to restart the economy. When it does restart, inflation will also resume and there will be a fierce rise in interest rates, which will hit agricultural economy very hard”, declares Mr. Giard who predicts an increase of 3% to 4% in interest rates within the next 12 to 18 months. To help farmers face the music, he recommends they cover themselves by setting their interest rates for a period of 3 to 10 years and keep some room to manoeuvre with at least 3% of their debts.    

Nobody can predict the future of quotas or how the WTO negotiations are going to go by 2009-2019 at a time when the dairy industry’s landscape in Québec will be polarized. The banking world believes that there are big and small farms on the one hand, and on the other, there are very efficient farms while others are less so, due to the “manager’s talent”. As for retired banker-agronomist, Cyrille Parent, the economic powers will, sooner or later, push Canadian producers to join those who produce milk at a cheaper price. In this respect, he concludes “I’m not concerned with the survival of agriculture in Québec
 






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