AGRI Committee Report
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INTRODUCTION
During every business cycle, farm income sometimes experiences downturns significant enough to attract the attention of the agri-food industry, governments, and parliamentarians. After trending upward for five years, net farm income in Canada dropped by 53.4% in 1997, mainly because of a significant change in grain inventories. Oddly, this drop in net farm income attracted little attention at the time, even after being confirmed by a May 1998 update of agricultural statistics. However, when 1998 Agriculture and Agri-Food Canada (AAC) estimates of realized farm income - which do not take the change in inventories into account - confirmed this drop, and as the first effects of the economic crises in Asia and Russia on expected prices for major export commodities, particularly grains and pork, began to be felt, the farm income situation in Canada became a subject of growing concern. The Canadian Wheat Board's September Pool Return Outlook, which showed that wheat prices were down $4-$20 per tonne for the 1998-1999 crop year, further increased that concern. In October 1998, when the United States (US) announced an extraordinary assistance program for its agri-food industry totalling nearly $6 billion, more than half of it earmarked for direct support of income affected by the present collapse of commodity prices, the term "upcoming farm income crisis" became current.
Despite a full agenda resulting from its mandate to hold "take note" hearings on the next round of multilateral trade negotiations, the Standing Committee of the House of Commons on Agriculture and Agri-Food responded to the upcoming farm income crisis by holding a series of public hearings with representatives of various groups in the agri-food industry. At the hearings, held from November 3 to December 2, 1998, the Committee heard from 19 farm groups. The Committee also heard from the Honourable Eric Upshall, Saskatchewan Minister of Agriculture and Food, whose province is hard hit by falling commodity prices. The hearings ended with the appearance of the Honourable Lyle Vanclief, federal Minister of Agriculture and Agri-Food.
As the Committee's Order of Reference notes, the upcoming crisis in farm incomes is the result of a worldwide collapse of commodity prices. However, since farm income is made up of much more than market prices, the Committee's hearings also made it possible to scrutinize and criticize US and European Union (EU) agricultural subsidies and also Canada's farm income safety net.
THE FARM INCOME SITUATION IN CANADA
No sooner were the initial 1997 agricultural figures published by Statistics Canada, than certain signals were indicating that farm income was entering a period of disruption. For example, after trending upward from 1991 to 1996, in 1997 total net farm income in Canada dropped by 53.4%, from $4.337 billion in 1996 to $2.020 billion in 1997. This drop in total net farm income was the result of a 16% decrease in inventories of major grains and oilseeds, itself the result of smaller wheat and barley harvests and more grain marketing in the fall of 1997 - possibly an early market signal of lower prices to come. Total net farm income was negative in Saskatchewan for the first time since 1988, and dropped in Manitoba and Alberta by 57% and 55% respectively.
When initial Statistics Canada estimates indicated total farm cash receipts of $14.1 billion for the first quarter of 1998, 5.1% less than for the same period in 1997, and a particularly marked decrease in farm cash receipts in the Prairie provinces, it became clear that a major market correction was taking place for certain commodities, particularly grains and pork. As the Canadian Pork Council representatives pointed out, this market correction is particularly harsh since it is the result of a unique combination of a number of price-depressing factors, including a world surplus of pork, competition from other meats, a sudden export decline, and unfair export competition. The most recent Statistics Canada figures on farm cash receipts for the first three quarters of 1998 confirm that this trend is continuing, with decreases of 9.0% in Saskatchewan, 6.7% in Manitoba, and 2.9% in Alberta.
Agriculture and Agri-Food Canada estimates indicate that realized net income1 for all farms in Canada could decrease by 17.3%, from $3.226 billion in 1997 to $2.669 billion in 1998. Although, as is often the case, these estimates do not necessarily indicate a farm income crisis since these income levels are still within the extremes of past fluctuations, the national total partially masks what is happening in Saskatchewan and Manitoba, which appear to be experiencing realized net income decreases in 1998 of 72.2% and 69.2% respectively. In addition, according to Agriculture and Agri-Food Canada's estimates, many Canadian producers' financial difficulties, apparently the result of a worsening worldwide economic situation, are to persist in 1999.
Income stability in some other agricultural sectors, particularly those with the advantage of supply-management, may also contribute to the illusion that the farm income situation in Canada as a whole is not very serious. However, the Committee's hearings showed that, although not all agricultural sectors are as hard hit as the grains and pork sectors, cascading effects of the collapse of prices for these commodities will eventually be felt throughout the structure of Canada's agri-food industry. As was noted by representatives of Agricore, a new co-operative resulting from the merger of the Alberta and Manitoba pools, such a sudden drop in farm income has already meant lower farm investment, the effects of which may long be felt throughout the structure of Canada's agri-food industry. This situation has led the Canadian Federation of Agriculture (CFA) to wonder whether Canada can still achieve its objective of capturing 4% of world agri-food markets by 2005. And, as the representative of the Union des producteurs agricoles [Quebec union of agricultural producers] put it, "The farm income crisis is not merely upcoming: it is very real".
Although the collapse of certain commodity prices is mainly the result of an unfavourable economic situation worldwide, the use by US and EU of export subsidies, denounced by every witness appearing before the Committee, only aggravate the situation.
The figures most often submitted to the Committee indicate that EU export subsidies amount to as much as CA$60 per tonne for wheat, CA$108 per tonne for barley, and CA$139 per tonne for malt barley, and that direct support to EU grain producers totals CA$175 per acre. EU subsidies directly influence seeded acreage, which has steadily increased since 1993-94 and thus boosted EU wheat production to a record 103.4 million tonnes in 1998. In comparison, in Canada where producers are market-responsive, seeded acreage of wheat is at its lowest level since 1979.
As the Saskatchewan Minister of Agriculture and Food noted, Canadian producers are efficient, aware of normal production risks, and prepared to compete, but they cannot compete with US or EU public treasuries.
In 1998, the US maintained a US$320 million budget for its Export Enhancement Program, a perpetual threat to Canadian producers. As well, some US grain price support programs, such as the Loan Deficiency Payment Program (LDPP) with its budget of about CA$6 billion, set a base price for producers but not a base export price. Therefore, the LDPP allows US exporters to sell grains on the world market at prices lower than those received by producers; in other words, the LDPP is an export subsidy. Furthermore, the recent US government decision to boost its 1998 agriculture budget by nearly US$6 billion could be an additional source of world market distortion.
It seems, then, that the US and the EU are preparing to fight to defend their shares of a world market that is trying to absorb surpluses of wheat and pork. As mentioned by Agricore, the most recent trade war between those two entities clearly showed that export subsidies have only a marginal effect on market shares, but do depress commodity prices, which result in persistent market distortion.
Although US and EU export subsidies are within the support limits allowed under the World Trade Organization Agreement on Agriculture (WTO Agreement), the Committee considers that the commodity market distortion resulting from export subsidies and its short- and long-term impact on farm income deserve special attention. Since the next round of multilateral trade negotiations is to begin soon, the Committee believes that the present farm income crisis provides an excellent opportunity to pay attention to export subsidies.
Although the present crisis affects mainly farm cash receipts, many witnesses told the Committee that disbursements, too, could be part of the solution to the farm income crisis. A number of points were raised, of varying relevance to the Committee's mandate; among these points, cost recovery for government services provided was often mentioned.
As is shown by many discussions and reports on the subject, over the past 10 years the Committee has often concerned itself with farm input costs. Two years ago, on December 10, 1996, the Committee organized a round table on cost recovery. In its Report dated January 8, 1997 to the President of the Treasury Board and the Minister of Agriculture and Agri-Food, the Committee described the situation resulting from cost recovery and the pressure that policy was exerting on producers and the entire agri-food industry.
In that Report, the Committee urged the Treasury Board to carry out a impact study cumulative and by industry, of the possible cascading effects of cost recovery in Canada's agri-food industry. In April 1997, the President of the Treasury Board took the opportunity of an appearance before the Committee to announce a new federal cost recovery policy. Under the new policy, federal departments and agencies are to work closely with their clients in applying cost recovery guidelines, and to study the impact of cost recovery on the industries they serve. Following this announcement, Agriculture and Agri-Food Canada set up a task force to carry out a cumulative impact study of cost recovery in the agri-food industry.
Although the Committee was one of the first stakeholders to request a cumulative impact study of cost recovery in the agri-food industry, it has received no relevant information on the progress of this study. Many witnesses from various sectors of the agri-food industry nevertheless continue to point out that the cost of government services is steadily increasing. According to some witnesses' estimates, cost recovery in the agri-food industry could reach $130 million.
At the Committee's hearings on the farm income crisis, a number of witnesses requested a freeze on cost recovery because of its impact not only on farm income, but also on the agri-food industry's competitiveness. Although this request seems legitimate, before making a decision about a cost recovery freeze, the Committee would like to ascertain the actual situation regarding cost recovery in the agri-food industry.
CANADA'S FARM INCOME SAFETY
NET
For the first time since the April 1991 passage of the Farm Income Protection Act, which provides the framework for all federal farm income security programs, Canada's farm income safety net is being seriously stretched. The Committee's hearings showed that the holes in the net may be a little too large to provide the protection producers need if commodity prices drop and stay low.
Canada's farm income safety net has three components: the Net Income Stabilization Account (NISA); crop insurance; and provincial companion programs. Each year, the federal government injects $600 million into these programs, while the provinces contribute a total of $400 million. The most important of the three components, NISA, allows individual producers to contribute as much as 3% of proceeds from eligible net sales, to a maximum of $7,500 annually. A matching federal-provincial contribution is made, and a 3% interest bonus is paid on the producer's contribution. The most recent AAC estimates, published in October 1988, indicate that the approximately 143,000 NISA participants had accumulated $2.5 billion in their NISA accounts.
Most witnesses spoke highly of Canada's farm income safety net, telling the Committee that each component was of use; others pointed out that the present national programs had not been designed to deal with such a sudden, marked drop in commodity prices. In addition, as the National Farmers Union told the Committee, NISA is of no use to young producers, for example, or persons who have recently invested in their farms. Since the farm income safety net does not seem strong enough to provide adequate support for producers, the Canadian Federation of Agriculture proposed to the Committee a National Farm Income Disaster Program. The Program, available to all producers and based on a reference margin for each producer, would support whole farm income in case of disaster.
Although the Committee's hearings showed that there is solid support for a third line of defence for farm income, the Committee also heard energetic defence by some agri-food groups of existing provincial farm income protection programs. For example, Ontario producers of corn, grains and beans did not reject a national program as long as it did not interfere with the Ontario Market Revenue Insurance Program. As well, the representative form the UPA mentioned that Québec's Assurance-stabilisation du revenu agricole provides better protection to producers than other programs, and therefore it should not be jeopardized by a new national program. The Western Barley Growers Association supported Alberta's Farm Income Disaster Program (FIDP), noting that it was effective, need-oriented, and classified "green" under WTO criteria.
The Committee's discussions with representatives of groups in the agri-food industry have clearly shown that Canadian producers do not want ad hoc deficiency payments. While noting the urgency of the present situation, every witness emphasized that a short-term solution should also form the basis of a long-term strategy. The Committee endorses this approach and therefore:
Since the program proposed by the CFA is much like Alberta's tried-and-true
FIDP, and since the National Safety Nets Advisory Committee has already
studied terms and conditions for an Income-Based Disaster Program, all
the elements of a short-term solution that could form part of a long-term
strategy seem to be present. As well, when the Honourable Lyle Vanclief,
federal Minister of Agriculture and Agri-Food appeared before the Committee,
he suggested that such a Program could be readily converted into cash for
producers at financial institutions very shortly after it was announced.
Although setting up such a Program might require federal-provincial negotiations,
the Committee considers that in a crisis all stakeholders must show creativity
and flexibility. The Committee believes that adding another component to
the present farm income safety net will address the urgency of the present
situation and provide better long-term protection for Canadian producers.
The Program would have to meet certain criteria. It would have to be flexible, effective, and available to all Canadian farmers. Moreover, it must not undermine existing components of the farm income safety net, particularly the incentive to invest in one's NISA. The Committee believes that a maximum limit on the amount received by a producer from a farm income disaster relief program must exist, and that such a program should be cost-shared by federal-provincial governments on a 60\40 basis. Most importantly, it would have to respect clearly Canada's international trade obligations. The Program would become a genuine ``third line of defence'' for the farm income of all producers in Canada. The Committee therefore makes the following recommendation.
The Western Canadian Wheat Growers Association's (WCWGA) eight point plan
for improving farm profitability, which includes a reform of the Canadian
Wheat Board (CWB) and an increase in the CWB cash advance loan rate, also
endorses a re-engineering of the NISA and the crop insurance programs.
According to the WCWGA, the efficiency of these two programs could be improved
without requiring additional funding. Next year, federal-provincial agriculture
ministers are supposed to agree on a new agricultural safety net framework.
The Standing Committee on Agriculture and Agri-Food urges the National
Farm Income Safety Nets Advisory Committee to pursue all avenues that would
result in a safety net better targeted to the needs of Canadian farmers.
The present farm income crisis has shown that Canadian producers are more vulnerable to market fluctuations than are US and EU producers, whose safety nets are so tightly knit that they act as a trampoline, making them "bounce back" on markets. Nevertheless, Canadian, US and EU producers find themselves defending their respective shares of the same market. On the eve of the next round of multilateral trade negotiations, Canadian producers cannot afford to be too far behind their competitors in terms of income support. The present farm income crisis has major effects on the family farm that must be offset. Discussions at the Committee's hearings noted the importance of maintaining a critical mass in the agri-food industry. The Committee recognizes how difficult it is to compete with US or EU treasuries, but believes that Canada can still offset the effects of market distortion created by these two entities' subsidies to their producers. The aggregate measure of support for agriculture in Canada, now worth approximately $2 billion, amounts to slightly more than half of the support limits allowed under the WTO Agreement. Recent injections of money into US agricultural programs and generous EU subsidies show that Canada's competitors are making full use of WTO Agreement limits in supporting their producers' income. The Committee therefore makes the following recommendation.
Lastly, discussions at the Committee's hearings noted other producer countries'
subsidization of humanitarian food aid. The Committee considers that, without
exception, food aid must not be tied or used for trade purposes. However,
Canada is responsible for ensuring that it is always able to provide food
aid. As Keystone told the Committee, the present farm income crisis could
lead to an attrition of 30% of producers over the next five years; the
Committee wonders how that restructuring would affect Canada's ability
to provide food aid.
When commodity prices are low, or even lower than the costs of production as it is now the case, food aid budgets do not compensate producers for the actual value of their crops. Producers need not work harder than other Canadians to provide food aid: the Committee believes that providing food aid is the responsibility of all Canadians. As Canada's Action Plan for Food Security points out, "Each country must implement agricultural and rural development policies and encourage appropriate investment to support those communities and people in food producing areas." From this perspective,
This Report shows that, for the first time since its inception in 1991, Canada's farm income safety net is being seriously stretched. Although by far most witnesses spoke highly of the farm income safety net, they did point out its limitations. The present farm income crisis is not solely the result of normal market fluctuations: major US and EU subsidies to their producers are further depressing world commodity prices.
Canadian producers are efficient and prepared to compete on world markets but, when market rules are being manipulated, they need a safety net that will allow them to weather the crisis while maintaining a sound, dynamic, and sustainable structure for Canada's agri-food industry.
1 Realized net income includes all types of farm income, less depreciation, but excludes changes in inventories. Realized net income is an indication of a farm's profitability.