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About RBC > Media Newsroom > Speeches > Harvesting Opportunities Royal Bank of Canada's Long-Term View on Agriculture and Banking

Harvesting Opportunities Royal Bank of Canada's Long-Term View on Agriculture and Banking

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Barbara G. Stymiest
Chief Operating Officer
RBC Financial Group
Pike Management Group Summer Conference 2006

July 6, 2006
Lethbridge, Alberta

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 coat.

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 we are.

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 desperation.

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 confident.

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 of redundant.

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 tough.

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 hog business.

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 leaders.

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 game.

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 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 world.

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.

Thank you.