Royal Bank of Canada's Long-Term View
on Agriculture and Banking
Barbara G. Stymiest
Chief Operating Officer
RBC Financial Group
Pike Management Group Summer Conference 2006
July 6, 2006
Good morning. It's a pleasure to be here with you today -
to be in the company of so many experienced and successful
businessmen and women. I'm happy and I'm proud to note how
many of you are long-time RBC Royal Bank clients. As for the
rest of you - well, we're ready when you are.
I think I have a good sense of why Gary Pike invited me here
today. The way I hear it, there's nothing a farmer or rancher
enjoys more than when a Toronto banker blows into town to
tell him his business. For maximum effect, I should probably
wear a monocle and wag a finger as I speak.
Alas, I'm going to have to let you down. From a hands-on
perspective, I don't know much about farming, and I'd be a
fool to pretend otherwise. Where I come from, "working
the land" means hauling out the weed-whacker once a week.
The closest I ever get to a ranch is when I put on my leather
But I'll tell you something else. As chief operating officer
of RBC Financial Group, I understand full well the importance
of your industry to the Canadian economy, and the importance
of your businesses to the success of our company.
I also grasp and appreciate the scope of the challenge, and
the extent of the opportunity, that lies ahead for everyone
in this room - and everyone involved in Canadian agriculture
- as we consider the state of this industry come 2016. What
I hope to do today is give you a sense of our perspective
on what the future holds and why we at RBC are optimistic
about the next 10 years - about the agriculture and agri-food
industry, and about you and your businesses.
Before we get to where we're going, let's begin with where
At RBC, we employ a number of people who are engaged in a
pursuit that's almost as nerve-wracking as farming - their
job is to make economic forecasts, to predict what's to come.
So what do we see?
We see the dollar ending the year at around 85 cents U.S.
We expect that crude oil prices will ease off somewhat, finishing
2006 at $60 U.S. a barrel. Overall, we are forecasting continued
strong overall economic growth and relatively stable interest
rates over the coming year, which I know is welcome news for
farmers. Job growth will remain strong. Canada will in many
ways continue to be one of the world's economic success stories.
That doesn't translate into assured prosperity in agriculture,
of course, but it does mean the domestic market for food products
should remain strong.
As Canadians, we should always remember that our country
has an enduring comparative advantage in agriculture - one
that so many others nations would love to possess. We have
vast amounts of productive farmland and abundant fresh water.
These resources are managed by highly skilled professionals.
They have ready access to capital, to technology and, generally
speaking, to trade.
Still, we live in a curious era. Demand for food has never
been greater. Canadian farmers have never been more efficient.
And yet these are tough times for many in your industry, perhaps
even for some of you.
As I've said, I don't claim to understand the technical aspects
of farming - but I'm pretty sure that when I saw all those
farmers converging not long ago on Parliament Hill, they weren't
there to assess its quality as arable land. They were there
to express their frustration, their anger. For some, their
Competition is tougher today, and growing ever more global.
Our dollar has increased by 45 per cent over the past four
years, cutting deeply into export profits. Technology is bringing
new and better ways but at great expense. Energy costs have
soared while grain prices have declined to unsettling lows
even after modest gains. And labour shortages are putting
more pressure on farms to invest in more modern equipment
and higher yielding crops. These factors have come together
to create farming's version of the perfect storm. And there
are many who have felt, and who continue to feel, its wrath.
Make no mistake about it: Farming is in the midst of transformative
change. We can't see the result; we can't know how it will
all play out. That's how it is when you're in the midst of
the storm. But we can be certain that when the clouds clear
this world, this industry, this as a way of life is going
to look very different.
We get a hint of the magnitude of that change by looking
within the day-to-day operations of our business. Some years
ago, we organized our agriculture portfolio into two segments.
One segment was intended to serve smaller farms and
ranches, as well as farms that exist basically for lifestyle
reasons: hobby farms, weekend farms, and so on. The other
was focused on larger commercial farms and ranches.
I can tell you that the balance between smaller and larger
producers has undergone a radical shift during the past five
years. We're serving far fewer smaller operations, and far
more big clients. The makeup of the industry is being consolidated,
transformed, forever changed.
But that's only part of it. There's a more pivotal evolution
that's well underway. We are in many regards witnessing the
decline of traditional farming - the days when you would simply
grow a crop, the same crop year upon year, harvest it and
sell it. In retreat are the days of farmers as suppliers of
simple commodities. As one futurist has noted: "If you're
a farmer growing wheat, and all you're producing is undifferentiated
wheat, then your margins are going to get slimmer and you'll
wind up out of business."
Countries such as Brazil and Ukraine are producing bulk,
undifferentiated commodities for less. And then there's China.
When the agriculture industry looks to this rising power,
you understandably see a huge potential trade partner - and,
perhaps, a huge potential competitor.
Let me tell you about an innovative client of ours in Ontario— a vegetable producer who banded together with others to
add value to what they grow. These producers were asked by
their Ontario customers to do some of the processing themselves.
Their buyers wanted the carrots to be chopped up or diced,
then frozen and delivered in thousand-pound tote boxes.
The farmers built, or bought, large freezer tunnels to process
the carrots the way the companies wanted. The producers earned
more for adding value and they cemented long-term relationships
with some top agribusiness companies. Now, there's a complication:
China. The buyers have found they can get carrots cheaper
from China than from local producers in Ontario.
Longer-term, it's debatable whether China can continue to
be such a low-cost producer. Market forces, logistical issues
and other factors could make it hard for them to continue
to grow food so cheaply. Environmental issues are looming
large in this equation, as China's air, soil and water resources
are put under severe pressure.
Regardless of how we ultimately are influenced by the rise
of China and its massive new middle class, the agriculture
of tomorrow will be about extending value beyond the farm
gate. It'll be about your ability to market and your willingness
to be flexible - to change crops as demands change, to specialize
in order to suit evolving tastes and take advantage of evolving
trends. For instance, as we learn more about genetics and
are increasingly able to discern the kind of diet that's right
for us, specifically for us, a market may well be created
for very specialized crops created for a very small but loyal
group of consumers.
As we look to 2016, let me examine from our perspective the
rise of value-added agriculture. When farmers make the transition
from commodity producer to 'value-adder,' they become an agribusiness
rather than a primary producer. We've seen the impact on our
books. Five years ago, we had very little agribusiness lending.
Today, we have a significant portfolio of agribusiness loans,
and it's a sector we believe will continue to grow. We plan
to make every effort to lead this market.
Indeed, our agribusiness lending often relates to a farm
client's evolution into an agribusiness. Simpson Seeds in
Moose Jaw is a fine example. They have grown from seed production
to processing peas, lentils and chickpeas for export markets.
This kind of innovation is happening all across the country.
The Mason family in Atlantic Canada, RBC clients since the
1940s, has been growing apples for many years. Awhile back,
they planted 25 acres of a new apple variety called Honey
Crisp. This variety has a high sugar content, and stays crunchy
for much longer than other varieties. This is the type of
apple that consumers want nowadays, and Mason apples are selling
very well at local supermarkets.
It is perhaps understandable that the mainstream media tend
to focus on the income crisis, weather calamities and trade
challenges in their coverage of agriculture. These are important
elements of your businesses and your lives. But there are
a lot of good-news stories out there too - stories that demonstrate
that Canadian farmers are progressive, self-determining business
people with tremendous prospects and good reason for being
And one conclusion is beyond doubt: the future will belong
to those who embrace change and lead the way; those who know
their customers and understand and appeal to their wants.
It is impossible to predict how Canadian farmers and ranchers
will do overall as an industry. But I feel very confident
in saying that there will be major opportunities for those
able to spot them, who are determined to pursue them, and
who are willing to innovate to achieve them. We can't bring
back the past, but there is still time to embrace the future.
I talked earlier about Canada's physical advantages for agricultural
production: soil... water... climate... infrastructure. These
are essential elements of a strong sector but they are not
the root cause of our optimism. Next to these measurable
resources, there's an intangible factor at work that
trumps everything else. That factor is the ability of the
Canadian farmer to adapt within a fast-changing environment.
Change brings challenge. We all understand that. But it also
brings opportunity for those with a commitment to ingenuity,
creativity and determination. I would add hard work to that
list, but you're farmers and ranchers, so that seems kind
As we look to the future from an uncertain time, I think
it's important that you understand where we're coming from
at Royal Bank. Over the past six years, we have seen significant
growth in our overall agricultural loan portfolio. For several
years running, in fact, our book has grown faster than the
industry as a whole. In 2005, our portfolio grew by several
times the industry's growth rate.
For us, it's always been more important to work with quality
producers than simply with those who happen to be in the hot
sectors. Regardless of what you produce, if you have a well-managed,
well-financed operation, we want to deal with you. If you're
a top producer, we want to provide you with banking, financing,
insurance, currency hedging and more. In return we make this
pledge: we will be committed to you for the long haul.
We won't go running for the hills when things get a little
Beyond that, we understand that modern agriculture isn't
just about getting your hands dirty. It's about marketing
and promoting, adding value, managing risk. It's about assessing
and adopting new technologies. Thinking strategically. Planning
long-term. And then improvising and adapting for the short-term.
Nowadays, when the time comes to make a big decision, you
are going to need to rely not only on your own instincts but
on the advice and counsel of others: the banker, the accountant,
the production advisor, the agribusiness supplier. This is
part of the progressive Canadian farmer adapting to change,
and making it work for him.
I think of a client here on the Prairies, a family who operates
a grain farm and also has a hand in dairy. After much analysis,
and counsel from RBC, this family is diversifying into the
In Quebec, a first-rate soybean producer was determined to
add value and secure a market, so with our help he joined
forces with a tofu maker. Now, he's an agribusiness.
An Alberta greenhouse producer started out growing plants
from seed. Today, the business imports specialized cuttings
from around the world. They grow a higher value product, and
they earn more for doing so.
That's innovation. Those are farmers who are riding the wave
of the future, rather than waiting for it to wash over them.
Here's another example: When high land prices prevented an
Alberta producer from buying land for "cow-calf,"
they didn't complain. Instead, they hunted for the best and
cheapest suitable land in Western Canada. They found it -
hundreds of kilometres away - in northwestern Manitoba. They
bought, they moved, they set up and today they're thriving.
That's the same kind of rapid response and flexibility that
we saw during the BSE crisis. Once it was clear that Canada
needed to be processing more of its own cattle, and shipping
fewer "on the hoof," the response was swift and
sweeping. Now, with more processing capacity, we can sell
more of our beef either live or boxed, as the market dictates.
BSE has also prompted advances in livestock identification
and the use of technology, innovations that will serve the
industry very well in the long term.
Indeed, even during the darkest days of the BSE crisis, producers
never lost their creativity. Consider an RBC client in Saskatchewan.
When BSE cut his income from calves, he went looking for alternatives.
He hooked up with university research programs. Using his
own stock, he's doing contract research work in animal science.
In Manitoba, a family began to sell their farm-raised beef
direct to consumers. In Nova Scotia, another farm family made
a big push to ship hay to Quebec and the U.S.
When you consider these success stories, it's clear that
the producers have much in common. They've found themselves
confronted by a formidable obstacle, one not of their own
making. They've reviewed their assumptions and options going
forward. They've thought creatively about what to do. They've
acted decisively, but not rashly. They've had due regard for
risk management. That is the path to a successful future.
Just as your industry is changing, so is ours - and I would
argue that it's altering and improving our relationship. Banking
by phone or over the Internet can save you money and time
- no more drives into town for basic account management. But
even in the face of changing technology, we will never fail
to remember the importance of a face-to-face relationship.
In fact, we're investing in that relationship because we believe
that you need to view your banking relationship as added value.
If you consider a loan to be a bulk commodity, one that you
could get anywhere, then what is RBC's value-added? It is
the expertise of our people, a resource we are constantly
developing. Royal Bank was the first Canadian bank to provide
specialized services and advice to farmers and ranchers. In
1980, we opened Canada's first dedicated Agricultural Banking
Centre, in Red Deer. During the 1990s, we started to invest
heavily in training and developing our agricultural bankers,
to take their expertise to a higher level.
Today, we lend a lot of money to agriculture and increasingly,
provide risk management services like currency hedging as
well. Because we understand the importance of human relationships,
we've dedicated ourselves to breaking down the old ways of
our banking culture and now make it possible for account managers
to stay and to thrive in their local areas - working with
you over years and even decades.
You want to deal with a banker who understands your business
and your industry. We get that. That's why we've added depth
and knowledge in selected farm sectors. In Central Alberta,
for example, we have two staff members who are credit specialists
in the dairy industry. This is brainpower that local account
managers can call on when needed.
And like you we're focused on the future. Our specialization,
in fact, goes beyond farm sectors. In the future, carbon credits
could provide major economic value to Canadian farmers. RBC
wants to understand this issue in depth. On our staff now
is a Ph.D. in environmental management, who is a specialist
in carbon trading. As the market in carbon credits evolves,
RBC will be able to help our agriculture clients make the
most of it.
Our value-added thinking comes down to this: We understand
that you are increasingly looking for ways to maximize your
return, save time, reduce your risk and be more effective
as a business. And we admire that. In our view, producers
who think in these terms are likely to be the industry's long-term
When we evaluate our client base, we're not just concerned
with how many bushels of canola people can produce. Excellent
production skills are simply table-stakes in a much bigger
As a lender, we want to know what sort of risks our clients
are facing. Are they nimble enough to prosper in the face
of change? Do they see the importance of working with suppliers,
processors and other producers up and down the value chain?
How are they managing their price risk? What are they doing
about the relationship between the Canadian and U.S. dollars?
To illustrate this growing basket of services, let me tell
you about a producer we know in Atlantic Canada. For years,
this producer grew bulk, undifferentiated potatoes for various
markets. Through his own initiative and determination, this
producer found an amazing business opportunity. Last February,
he shipped 600 containers of potatoes to a potato chip plant
...in Indonesia. At that time of year, the plant finds it
hard to get a supply closer to home. This producer has a 37-day
window in which to get his potatoes overseas.
This is not a slam-dunk by any means. If the potatoes lose
condition during shipping, he doesn't get paid. The potatoes
need to be shipped in an air-conditioned container, and they
need to arrive on time. Even if the potatoes arrive on time
and in good shape, our client still has the risk of late payment
or non-payment. Assuming our client gets paid, and paid on
time, there's still a big risk of currency fluctuation.
This is a huge opportunity. But he needs friends. In the
past, when this client was a straight producer of commodities,
RBC could provide operational financing. Today, this producer
may need trade financing, currency hedging, payroll, insurance
and other services.
After a successful shipment in February, this producer is
thinking about contracting his potato production to other
growers. He is fast becoming, in short, an agribusiness. In
fact, he's done so well, he's paid off his loans with us.
That's how it goes: less financing, perhaps, but more risk
management. In time, we hope to have a very satisfied and
prosperous wealth management or private banking client.
To serve clients well and lead the market, we must continue
to provide a basket of financial products and advice that's
constantly growing. This will include services you might not
associate with a bank, such as succession planning. Billions
of dollars of farm assets will be transferred to a new generation
over the next 10 to 20 years. And we are developing new services
to help our clients achieve their succession goals. Overall,
as your industry evolves, we will too. We'll evolve together.
Ladies and gentlemen, I've talked this morning about Canadian
agriculture's road to the year 2016. And I've subtly added
a very persuasive example or two of RBC's commitment to you
and to this important industry.
From our perspective, the bottom line is this: RBC Financial
Group lends more money to farmers and ranchers than any bank
in Canada. And believe me: as much as we like you personally,
we don't do it out of the goodness of our hearts. We do it
because we believe in Canadian agriculture, and we believe
in you. We believe our country has the potential to become
a world leader in the new agri-business, growing food ever
more efficiently, safely and sustainably, and adding value
in a way that resonates with consumers here and around the
We live in a dynamic age, and 10 years is a long time. The
coming decade will be a time of profound change in terms of
products, markets and technology. What won't change
is the creativity and innovation shown by Canadian farmers.
That is your ultimate competitive advantage. And it's why
we're bullish on your industry and bullish on you.