The Expansion and Modernization of the Farm Improvement and Marketing Cooperatives Loans Act (FIMCLA) Program

As a result of the March 29, 2006 announcement of the continuation of the Farm Improvement and Marketing Cooperatives Loans Act (FIMCLA) program, Agriculture and Agri-Food Canada (AAFC) is considering new directions for the future of the FIMCLA program. AAFC invites financial institutions involved in delivery of the program, producers, provincial governments, producer groups and co-operative association representatives to comment on the proposals suggested in this document. These proposals are based on the evaluation conducted on the FIMCLA program in 2004, indications coming from an on-going credit needs assessment for beginning producers, including inter-generational farm transfers, and agricultural co-operatives being conducted by AAFC officials, and stakeholder recommendations.

FIMCLA Program Background

The FIMCLA program was enacted in 1987; it replaced the Farm Improvement Loans Act (FILA), which was introduced in 1944. The FIMCLA increases the availability of capital for tangible asset farm improvements through a federal loan guarantee at 95% of the value of the loan issued through authorized financial institutions. Loans are granted for up to 80% of the purchase price or the appraised value of the asset (whichever is less).

Loans for the improvement and development of farms may be issued to producers for up to $250,000 and for terms up to 15 years. Loans for the processing, distribution or marketing of farm products can also be issued to co-operative associations. These loans can be for up to
$3 million for terms up to 20 years. All shareholders of a co-operative association must be actively engaged in farming at the time of the loan.

Loans can be issued for equipment, building/construction, additional land, livestock for breeding purposes, consolidation/refinancing, and many other purposes. FIMCLA loans may not be issued for improvements to the family dwelling, quota purchases of all kinds, operating loans and loans for the purchase of short-term feeder livestock.

A registration fee is charged which is equal to 0.85% of the amount of the loan. The registration fee is deposited into the Consolidated Revenue Fund (CRF) and any claims for default paid under the program are paid out of the CRF. A study conducted by the Thomsen Corporation in 2001 concluded that with this fee amount, current rates of claims paid and recoveries, a long-term annual volume of $230.1 million in registrations was needed to satisfy an objective of cost recovery. The program had been allotted $1 million annually to administer the program, although this is now reduced through the Expenditure Review Committee (ERC) exercise in 2005 by $400,000.

Since 1988, loans worth over $4.1 billion have been issued and registered under FIMCLA. The loans outstanding are estimated at $760 million. Loans to co-operative associations have been relatively minimal, with only approximately 80 loans issued for $30.5 million.

For the fiscal year ending March 31, 2005, 2,829 loans totaling approximately $105.1 million were guaranteed under FIMCLA. This figure is down from 3,155 loans totaling $105.6 million made in 2003-2004, a decrease of 0.5% in the value of loans registered. Default claims paid were $1.62 million while registration fees were $897,000. The majority of loans were issued in the province of Saskatchewan with 70%, followed by Ontario and Manitoba with 9.3% and 7.2% respectively. The majority of the loans were issued in the grains and oilseeds sector which comprised 58% of the portfolio, followed by the beef sector with 27%. The predominant reason for loans issued was farm implements which accounted for 53% followed by additional land and consolidation/refinancing with 14% and 9% respectively. These trends are consistent with previous years; however, consolidation/ refinancing has overtaken equipment and livestock this year as predominant reasons. A description of the FIMCLA Program (Appendix A) and a breakdown of program activity for the last five years (Appendix B) are attached.

The demand for FIMCLA loan registrations has been declining steadily from 16,000 loans issued in 1996 compared to 2,128 loans in 2005 as interest rates and other factors have changed. As a result of the decreasing activity and requests for program changes, such as increasing loan limits, an evaluation of the program was conducted in 2004.

The evaluation, conducted by a private consultant, recommended suspending the program until a credit needs assessment for agricultural producers be performed with a view to identifying gaps in support for target groups such as beginning producers, including inter-generational farm transfers, and agricultural co-operatives. The FIMCLA legislation does not currently allow guarantees on loans to purchase farm assets for potential new producers and will only support co-operatives that are 100 percent producer owned. Adjustments to the program were recommended as urgently required if the program was to be maintained.

Following the evaluation, the FIMCLA program was cancelled in the 2005 Budget, resulting in representation from various stakeholders recommending that the program be continued to address some of the current economic situations faced by producers. Subsequently, the program was extended to March 31, 2006 so that FIMCLA, or a similar instrument, could be examined to potentially respond to the debt access challenges of the target groups identified in the evaluation.

The continuation of the FIMCLA program was approved on March 29, 2006, with the understanding that formal consultations would be conducted on proposed changes to program parameters and on the modernization of the delivery of the program.

Considerations for the FIMCLA Program

This consultation is designed to discuss potential enhancements to the program which are being considered and to provide input to support co-operative development. The morning will consist of consultation on proposed FIMCLA program parameter changes. The afternoon will feature concurrent sessions. The first session will concentrate on the implementation of an on-line initiative to ease administrative burden under the FIMCLA program; this session will be directed to financial institutions using the program. The second session will focus on co-operative development issues in order to generate options to support co-operative development; this session will be directed to co-operative association representatives and other stakeholders.

In response to the recommendations for the FIMCLA program suggested in the evaluation and indications from the ongoing credit needs assessment being conducted by the Department, the following are considerations for the FIMCLA program for your comments:

Discussions with all stakeholders in the morning:

1. 1. Expand the program to include beginning producers, including inter-generational farm transfers.

Currently, to be eligible as a borrower under the FIMCLA program, an individual must be actively engaged in farming for the purpose of earning a profit in Canada at the time the loan is requested. To be actively engaged in farming, the applicant must either own or have a leasehold interest in the farm land on which the farming activity is being performed and be in possession of the assets necessary to be engaged in the farming activity. If a producer actively engaged in a farming activity decides to incorporate his farm operation, the newly formed incorporated company does not qualify as a borrower under the FIMCLA program as it is classified as a start-up operation and cannot, as a newly formed legal entity, demonstrate a farming history.

By allowing the eligibility of ‘beginning producers’ under the FIMCLA program, an applicant would avoid having to demonstrate farming history and would not have to be in possession of the assets necessary for the farming activity. Although this may be reasonable in some situations, such as in which a son or daughter who has been helping on the family farm for years wants to purchase it, in others, the risk of loan repayment may substantially increase if the applicant has little or no farming experience. By allowing ‘beginning producers’ under the FIMCLA program, the need to maintain paperwork to demonstrate that an applicant is a producer would be eliminated.

The following are questions to consider when providing your input to the consultation process:

• Do you have any concerns if ‘beginning producers’ are allowed as eligible applicants under the FIMCLA program?
• Should there be a higher/lower eligible rate of loan amount (currently 80%) for ‘beginning producers’?
• Should there be a higher/lower guarantee amount (currently 95%) for ‘beginning producers’?
• In order to alleviate cash flow difficulties, should there be an interest-only repayment option available for beginning producers? If so, how long should this option be available for (ie. 1 year, 2 years, 3 years, 4 years)?
• Should ‘beginning producers’ be required to demonstrate that they possess the ability and/or experience to engage in the farming activity (ie. agricultural certificate, diploma, degree)?
• Should ‘beginning producers’ be required to participate in other Renewal programs, such as the Canada Farm Business Assessment Service (CFBAS) or the Canadian Agricultural Skills Service (CASS) in order to be considered as eligible under the FIMCLA program?

1. 2. Expand the program to allow more flexible eligibility rules for co-operatives.

Currently, to be eligible as a member of a farm products marketing co-operative in relation to the processing, distribution or marketing in Canada of the products of farming under FIMCLA, one must be a producer actively engaged in a farming activity. The co-operative is viewed as an extension of a member’s farming operation. This requirement restricts the ability of non-producer members to be shareholders in a co-operative venture and thus restricts non-producer investment in the co-operative.

Since FIMCLA was enacted, there has been change in the economic environment of co-operative development and co-operatives may look at outside investors to grow and expand. As a result of this, some provinces have changed co-operative legislation to allow outside investors.

The following are questions to consider when providing your input to the consultation process:

• What changes in the eligibility criteria under the FIMCLA program should be considered?
  • With respect to non-farmers as members and/or investors in an agricultural co-operative?
  • With respect to the category of co-operatives eligible? Are there any concerns if non-producer members are allowed as eligible applicants in a farm products marketing co-operative under the FIMCLA program?
• Should there be a requirement that co-operatives be majority owned by producers? If so, what percentage of majority ownership should be considered (ie. 50% plus one, 60%, 75%, 80%)?

1. 3. Increase the aggregate loan limits for producers and co-operatives.

Currently, under the FIMCLA program, individual producers are eligible for loans up to an aggregate of $250,000 and farm product marketing co-operatives for loans up to an aggregate of $3 million. These limits have been in place since 1988. In today’s farming environment, many farm assets can individually sell for prices over the $250,000 limit, such as a combine or land purchase, and many purchases when aggregated will exceed this limit. As well, loans for co-operative ventures, especially on start-up, will exceed the $3 million limit.

According to the Farm Financial Survey, from 1991 to 2004, the average Canadian farm size has approximately doubled, with average farm assets increasing from $562,443 to $1,134,600, average farm liabilities increasing from $106,230 to $236,969 and average net worth increasing from $456,213 to $897,630. If we also consider the effect of inflation, according to the Bank of Canada, a basket of goods costing $100 in 1988 cost $148 in 2004, meaning that an asset purchased today has increased in price by almost 48%. Given this, an increase to FIMCLA’s aggregate loan limits has been recommended by many lenders and borrowers.

The following are questions to consider when providing your input to the consultation process:

• Do you have any concerns if these aggregate levels are increased?
• If these aggregate loan limits are increased, will program usage increase?
• To what level would you suggest raising this aggregate limit for individual producers (ie. $400,000, $500,000, $750,000, $1 million)?
• To what level would you suggest raising this aggregate limit for farm products marketing co-operatives (ie. $5 million, $7 million, $10 million)?
• Do you have any concerns if the registration fee is increased in conjunction with an increase of these limits?
• Do you have any concerns if the eligible purchase amount (currently 80%) is decreased for higher loan amounts?
• Do you have any concerns if the guarantee amount (currently 95%) is decreased for higher loan amounts?
• Should additional security be required for higher loan amounts?

1. 4. Increase the eligible rate of loan amount (ie. from the current lesser of 80% of the appraised value of the property for which the loan was made or the purchase price of the asset).

Currently, under the FIMCLA program, the eligible amount of the loan is the lesser of 80% of the appraised value of the property for which the loan is to be made or the purchase price of the asset. There have been suggestions that this amount should be increased in order to reduce the

equity requirement for producers, especially as the asset is usually taken as security for the loan.
Without focusing on the previous discussion regarding beginning producers, the following are questions to consider when providing your input to the consultation process:

• Do you have any concerns if the eligible rate of loan amount under the FIMCLA program is increased?
• If the eligible rate of loan amount is increased, do you expect the program usage to increase?
• To what level would you suggest raising the eligible loan amount (ie. 85%, 90%, 95%)?
• Increasing the eligible rate of loan amount will inherently increase the cost of claims to the Department. Do you have any concerns if AAFC increases the registration fee to help offset these potential costs?

1. 5. Modify the registration fee to incorporate different risk categories/amounts of loans.

Currently, under the FIMCLA program, the registration fee required to participate under the FIMCLA program is 0.85% of the amount of the loan. With certain changes to program parameters, such as allowing beginning producers, including inter-generational farm transfers, and increasing loan limits, the risk for more and higher claim amounts is inherent. As the FIMCLA program has been attempting to move toward full cost recovery, consideration may be given to increase the registration fee for all producers, or perhaps to increase the fee for certain types of riskier loans or certain loan amounts.

The following are questions to consider when providing your input to the consultation process:

• Do you have any concerns if the registration fee under the FIMCLA program is increased?
• If the registration fee is increased, do you expect the program usage to decrease?
• To what level would you suggest raising the registration fee if it is to be raised for all types of loans?
• If it is considered to increase the registration fee for only certain types of loans, what types of loans should these be?

Discussion with financial institutions in the afternoon:

1. 6. Implement an on-line initiative to ease administrative burden under the program.

We live in a world that is increasingly connected by the World Wide Web. An integral part of that connectivity is the opportunity to do business online through electronic commerce. Canadians expect the government of Canada to leverage this connectivity to streamline the delivery of programs and alleviate the burden that accompanies paper-based administration. The development of an on-line initiative that would address these expectations by electronically enabling key functions in the delivery of the FIMCLA program is a key consideration.

In 2001 a business case for developing on-line business operations was developed with a view of developing an on-line system for the delivery of the FIMCLA making it much easier for the Canadian producer to do business with AAFC. As part of the completion of the business case an
initial stakeholder assessment was undertaken. The assessment echoed many of the findings of the FIMCLA evaluation most importantly that the program was onerous and inefficient. Suggestions from stakeholders included automating key components of the program including the submission of registrations, claims and default proceedings in order to ensure the accurate transmission of information and consistent delivery by all financial institutions and program officials.

In order to more effectively align the FIMCLA with the goals and priorities of AAFC and the Government of Canada, there is a need for the FIMCLA program to improve its client service delivery model in a manner that is more consistent with the Government of Canada vision and stakeholder expectations. One imperative goal of AAFC is to develop a service culture that is characterized by fully integrated, online transaction-based programming, personalized to the client's needs and preferences. The development of an on-line initiative would align the FIMCLA with APF goals, and could be formally linked to other initiative projects such as My Account and the APP/SCAP Electronic Delivery System.

A fully internet based delivery system has recently been developed and deployed for the Advance Payments Program (APP) and the Spring Credit Advance Program (SCAP). Any FIMCLA initiative could leverage the work completed for this project providing a benchmark for functionality and requirements. In 2002-2003, system requirements were defined as part of the design phase for an on-line FIMCLA delivery system. The project was terminated following the program evaluation. These initial requirements and design work could be resurrected and reviewed allowing for an accelerated approach to the building and deployment of an on-line system for the FIMCLA. The new system would potentially provide for the online registration of loans and their pre-approval. As well, the system would provide for the online submission of claims and default proceedings along with the subsequent payments being electronically submitted to the appropriate lending institution.

The following is a question to consider when providing your input to the consultation process:

• Do you have any concerns with this type of direction and, if so, what are your concerns?

Appendix A

FIMCLA Program Description

The Farm Improvement & Marketing Cooperatives Loan Act (FIMCLA) is a Government guaranteed loans program for both producers and their marketing co-operatives to help them with their financing needs by increasing the availability of credit. Established in 1988, FIMCLA has helped more than 130,000 farm operations grow their businesses by guaranteeing loans through lending institutions.

Eligibility: Individual producers, farm partnerships, farm corporations, and producer-owned co-operative associations are eligible. Applicants must be actively engaged in farming in Canada with the intent of making a profit; "start up" farm loans are ineligible for this program. To be actively engaged in farming, the applicant must have a land base, either owned, rented or leased. Assets financed under FIMCLA must be used in the applicant’s farming operation. For example, loans for farm equipment, construction, additional land, livestock, and consolidation/refinancing are eligible under this program. Conversely, FIMCLA loans may not be issued for improvements to the family dwelling, quota purchases, short-term operating loans, and loans for the purchase of short-term feeder stock.

Financial Information: A producer may have one or more guaranteed loans at any time, but the total cannot exceed the maximum of $250,000. The maximum amount available to producer-owned co-operatives is $3 million. Loans can be made for up to 80% of the purchase price or the appraised value of the property, whichever is the lesser. The maximum term for repayment is 15 years for additional land, and 10 years when the loan is for any other purpose. For co-operative loans, the maximum repayment term is 20 years for land and buildings and 10 years for all other purposes. There must be at least one instalment applied to principal paid each year.

Interest to be paid on a floating rate is a maximum of the lender's prime rate plus 1%. Interest to be paid on a fixed term rate uses a formula based on a maximum of the lender's residential mortgage rate plus 1%.

The producer is required to pay a fee to have the loan registered and guaranteed under FIMCLA. This fee is 0.85% of the amount of the loan. The lender may also charge an administration fee of 0.25% of the amount of the loan to a maximum of $250 (these fees can be financed as part of the total loan).

How to Apply: The producer applies for a loan from any lending institution authorized to make loans under the provision of FIMCLA. Authorized institutions are chartered banks, Alberta Treasury Branches, and designated credit unions, caisses populaires, trust companies, loan companies and insurance companies.

For more information about FIMCLA: Contact your bank or lending institution, visit the FIMCLA website at www.agr.gc.ca/nmp/fimcla , or call the FIMCLA toll-free help line at 1-888-346-2511.

Appendix B

- Claims paid amount in 2002-03 has been updated to reflect claims amounts not paid that had been in the review process.
- Claims paid amount in 2003-04 includes the amount of claims still in the review process of $978,013 which may or may not be paid in full by the Department depending on the eligibility of the claim.
- Claims paid amount in 2004-05 includes the amount of claims still in the review process of $729,658 which may or may not be paid in full by the Department depending on the eligibility of the claim.
- Claims paid out in a fiscal year are not necessarily related to loans issued in the same year and could include claims paid out against guarantees issued under FILA.

Appendix B (cont'd)

Note: Total may not sum to 100% due to rounding.
*The database contains 147,947 registrations, including 76 registrations that were subsequently cancelled. Therefore, this document reports on 147,871 valid registrations.

FIMCLA Loan Purpose, All Registrations, 1988-2003

Purpose	Percent
Implements	47.1%
Livestock	11.8%
Equipment	5.8%
Buildings	6.9%
Additional Land	19.4%
Improvement / Development	1.2%
Major Repair / Overhaul	0.5%
Consolidation / Refinancing	5.6%
Vegetables	0.0%
Other	1.5%
Unknown	0.2%
Total	100.0%