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Business risk management options for Canadian farmers in 2018

Government farm business risk programs are evolving, especially in Quebec

As farmers know well, risks to financial success in any year are many. Weather, crop and livestock health issues, market factors and spiking input costs are perennial threats, and they are all as large or larger than ever in 2018.

It’s why business risk management (BRM) programs are so very important.

Federally, AgriStability provides support when a large margin decline occurs, AgriInvest provides cash flow to help farmers manage income decline, and AgriInsurance provides cost-shared insurance against natural hazards.

Enrolment in AgriInvest and AgriInsurance has remained relatively stable over the last several years, according to Agriculture and Agri-Food Canada (AAFC). “For the 2015 program year, approximately 80 per cent of farms were participating in AgriInvest,” reports AAFC senior media relations officer Patrick Gerard. “For 2015-16, the value of insured production compared to total value of all agricultural products (excluding forage and livestock) was 76 per cent.”

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AgriStability, however, has been declining. Currently, only about one-third of producers across Canada participate, with the 75 per cent of market revenues covered by the program in 2007 plunging to 55 per cent in 2015, the last year for which figures are available.

This trend is attributable to a number of factors, says Girard, including positive and persistent market conditions which may have caused some producers to feel that support offered under AgriStability is not required. However, he notes that the timeliness of the program, as well as unpredictability and complexity, are also factors in enrolment decline.

It’s better in Quebec

Participation in AgriStability fell even in Quebec, but not by as much as in other parts of Canada.

“First of all, Quebec offers the Farm Income Stabilization Insurance (ASRA) program, which covers production costs,” says Cynthia Byrne, communications officer at La Financière agricole du Québec, which manages BRM programs in that province.

“In order to obtain 100 per cent of their ASRA compensation,” Byrne explains, “producers who participate in the program must also participate in the AgriStability program.”

“If not, their payment is reduced by 40 per cent.”

Second, Quebec created the Agri-Québec Plus program to compensate producers already enrolled in AgriStability for the recent loss in coverage: 70 per cent of a farmer’s historical reference margin rather than 85 per cent and limited to allowable expenses.

In that context, it doesn’t make sense for Quebec farmers to opt out of AgriStability. Besides, to make it even more attractive, producers there file only one statement for the AgriStability, Agri-Québec Plus, AgriInvest and Agri Québec BRM programs.

The new AgriStability cap

Starting this year, a cap has been placed on the Reference Margin Limit (RML) in AgriStability, which provides producers with 70 per cent of their calculated historical reference margin. AAFC says this was done to ensure producers from all sectors have improved access to support, regardless of their cost-structure.

“The RML (has been and still) is effective in targeting assistance to significant income losses threatening the viability of producers’ farms and that are beyond their capacity to manage,” says Girard. “However, it had some unintended consequences, particularly for sectors with low allowable expenses, like the cow-calf sector.”

How expenses are factored in, therefore, has also been changed.

“AgriStability payments are made when a producer’s net income falls below 70 per cent of their reference margin, which is set using the average of their net income or expenses — whichever is less,” explains Stacey Edwards, corporate and customer communications officer at Agricorp, the agency that manages BRM programs in that province. “New in 2018, a minimum may be applied to that average. This minimum guarantees that a producer’s reference margin is at least 70 per cent of their average net income — no matter how low their expenses are. The new minimum lessens the impact of extreme differences between average net income and expenses.”

Some want the margin losses in AgriStability to return to 85 per cent, but AAFC does not agree. Girard says producers are expected to manage normal business risks on their farm and have tools available to do so. “BRM programs continue to focus support toward severe losses that threaten the viability of farms,” he says. “For that reason, the AgriStability margin coverage has remained unchanged at 70 per cent.”

Late entry updates

Another change to AgriStability that started this year is the allowance of provincial and territorial governments to request late entry to the program. Late participants, however, will receive a 20 per cent reduction in their calculated benefit to encourage proactive enrolment and to ensure all producers can access AgriStability support in times of real need.

The decision to trigger late participation rests with individual provinces/territories and can only be requested by the Minister of Agriculture in response to extreme events. By press time, the Government of Sask­atchewan has so far stated that it won’t offer late enrolment. On July, 19, 2018, the Governments of Canada and Nova Scotia agreed to allow late participation this year for producers there to address severe weather challenges they faced in June.

Girard reports that provinces and territories have until November 30 to make a request to the federal Minister of Agriculture for late enrolment during this program year.

Work of panel

It seems that other changes to AgriStability may be coming. AAFC admits that the program “requires significant documentation from producers to support program calculations, which means the program can be complex and takes time to respond.”

These and other issues, says Girard, have been identified by agriculture sector stakeholders and an external expert panel consisting of producers, academics and global experts that conducted a review of federal BRM programs over the winter.

The panel created a set of recommendations that it released in July.

In addition to addressing challenges reported with AgriStability (including complexity, timeliness and predictability), the recommendations include developing management tools to cover risks not covered by the current suite of BRM programs, developing approaches to improve program equity, modernizing the premium setting for AgriInsurance and improving risk management communication/education. Proposals are also being sought for industry-led projects to develop new and innovative BRM tools.

Other issues with AgriStability

In terms of whether changes to ease the filing requirements for AgriStability might be considered (right now, producers have to fill out forms in September related to the previous year, which is particularly difficult for cattle producers), AAFC at this point is not in favour.

Girard points out that individual forms are typically available in February of each year and corporate forms are often available much earlier. He adds that the completion of program forms can generally be done shortly after producers have completed their fiscal year.

AAFC does recognize, however, that AgriStability requires detailed information from farmers on their financial situations, which adds complexity to the program and that improvements on this front are being examined. These could include making the AgriStability program based on gross margins instead of net margins, with costs based on representative numbers from each producer’s municipality. This means that producers wouldn’t have to wait for income tax records and therefore payouts could be made much sooner.

In Quebec, statements are filed based on the accrual method of accounting (rather than on the cash method) and include a statement of inventories. Moreover, Byrne notes that participants can send their financial information as soon as their fiscal period comes to an end and can apply for advance payments. “The delay in payment is not seen as a major irritant in Quebec,” she says. “The main irritants are the program’s complexity and unpredictability.”

In Ontario, it’s now easier for new participants or for those who would like to re-enrol in AgriStability because less information about their farming history is required to determine their fee and their reference margin (less paperwork). “Program fees will be calculated using industry benchmarks, instead of producers’ individual past records,” notes Edwards. “New participants will only have to submit their current productive capacity.”

AgriStability affects AgriInvest

In contrast to AgriStability, AgriInvest has proven popular with producers because of its predictability and ease of use.

However, AgriInvest’s allowable net sales eligibility has been reduced from $1.5 million to $1 million, and annual government matching contributions will drop from $15,000 to $10,000.

This was necessary, notes Girard, in order to make coverage under AgriStability more accessible and to ensure a more equitable level of support for all producers. “To address these concerns,” he says, “changes to AgriInvest were necessary to reallocate funding to where it was needed most.”

However, AAFC does not expect this to affect participation in the program. Girard says the new maximum contribution level ensures that substantial annual payments are still available to large producers to manage income declines and make investments in their farms.

The degree to which AgriStability and the other BRM programs available to Canadian farmers will evolve remains to be seen, says Guelph’s Alan Ker. “Time will tell.”

Put to the test

Alan Ker agrees that the recommendation calling for addressing the challenges reported with AgriStability is a good one, but the director of the University of Guelph’s Institute for the Advanced Study of Food and Agricultural Policy doesn’t think lessening the burdensome nature of the paperwork will be an easy fix.

Ker is also somewhat skeptical about the recommendation to develop tools to cover risks not covered by the current suite of BRM programs. “This sounds un-actionable,” he says. “I am not sure what the panel has in mind for this. It sounds good but the reality is the government has a fixed budget for these programs, and if we fund something else, where will the money for new coverage come from? Until more money comes in, we’re talking about trade-offs.”

He also isn’t sure what the recommendation to improve program equity is all about. “Do they mean equity across regions or across crops?” he asks. “There are many ways we can use to try and achieve equity, but it depends on how we define it. And trying to fix one inequity can cause other inequities. Figuring out what’s equitable actually means would be the first step.”

In addition, Ker is puzzled by what is meant by “modernizing the premium setting for AgriInsurance.” Modernizing is a very generic term, he says, and also notes that in his view, the program is already very competently underwritten by AAFC.

Improvements in risk management communication/education is sorely needed, according to Ker. “If I was to compare what we have here with what they have in the U.S., there is a lot more information available there about risk management tools,” he explains. “Farmers there can plug in their information online to see what each program can do for them. Some online tools like that would be good to have for Canadian farmers.”

Regarding the seeking of proposals for industry-led projects to develop new and innovative BRM tools, Ker presumes this means the idea that commodity groups could develop a tool and see if the government would underwrite it. He thinks it’s a good idea, as farming groups know their particular risks better than anyone else.

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