AGRI Committee Report

Introduction

During its study of young farmers and the future of farming, the Standing Committee on Agriculture and Agri-food (hereafter the Committee) stressed that the sector must be profitable in order to attract the next generation of farmers. The economic difficulties in the beef and pork sectors in recent years have served as an example of how lack of profitability affects agricultural producers. Uncertainty and market fluctuation (changes in demand, value of the Canadian dollar, Country of Origin Labelling in the United States, H1N1, bovine spongiform encephalopathy, regulations notably on the removal of specified risk material, etc.) and the rising cost of inputs, including the price of feed grain, have reduced profits for beef and pork producers in recent years. The federal-provincial/territorial governments do however help support the agriculture sector through their programs. Since 2003, these programs have been part of a five-year strategic framework signed by the provinces, territories and federal government. Concluded in
July 2008 by the federal-provincial/territorial ministers of agriculture, Growing Forward is the second version of this federal-provincial/territorial framework.

The Committee believes it is essential to improve the programs created by Agriculture and Agri-food Canada (AAFC), including the Business Risk Management (BRM) programs, in order to improve support for the agriculture sector. The ability to endure the difficult circumstances facing certain industries, especially most recently the beef and pork industries, serve to gauge the effectiveness of these programs. As part of Growing Forward, AAFC created thirty or so different programs (BRM and non-BRM) designed to help the sector become more competitive, innovative, respectful of the environment and able to manage risks more proactively. These programs are delivered by AAFC, but sometimes also by the provinces or third parties. Since the Growing Forward framework agreement expires on March 31, 2013, our work will also help define the new series of programs for the next strategic framework.

The Committee held three public hearings in November 2010. The Committee met senior officials from AAFC and seven farmers from various regions of Canada who provided input from the various industries in the agriculture sector. This report begins with a description and objectives of the various programs discussed during the Committee’s hearings. The second part identifies the limitations of these programs as described by the witnesses as well as the suggested improvements. The recommendations are provided in the third and final part.

1. Programs examined

During the public hearings, the witnesses focussed primarily on the BRM programs. These programs are intended to protect farmers against various kinds of losses (drop in income, natural disasters etc.) and give them access to funds. There are four BRM programs under “Growing Forward”—AgriStability, AgriInvest, AgriInsurance and AgriRecovery—as well as an exclusively federal program, the Advance Payments Program (APP). This part describes the objectives of these programs and how those are achieved. Their limitations and proposed improvements will be discussed in the next part.

1.1 BRM programs under Growing Forward

The current BRM programs have evolved from those under the previous strategic framework on agriculture. They are not fundamentally different from their precursors but while improvements at the sector’s request have been implemented, there is still room for more. These programs are offered throughout Canada and are 60% federally funded and 40% funded by the provinces and territories. Although often criticized as a one size fits all approach, these programs were created primarily to prevent devastating interregional competition which, as AAFC officials noted, prevailed before the first strategic framework and which saw certain groups of products or industries being heavily supported as compared to others.

AgriStability is a margin-based program providing income support when production margins drop by more than 15%. The reference margin is calculated using the Olympic average margin (average production margin for three of the last five years, removing the highest and lowest margins). When production margins drop by less than 15%, farmers can draw on their AgriInvest savings account to make up the difference. Farmers can deposit up to 1.5% of their annual allowable net sales, up to a maximum of $1.5 million, with a matching contribution from the government. In this sense, the program is very similar to the former Net Income Stabilization Account (NISA) which ended in 2002. Farmers indicated that NISA was a well regarded program and that its framework should be incorporated into future programs.

Most of the witnesses see the AgriStability program as the same as the former Canadian Agricultural Income Stabilization (CAIS) Program, but with a new name. Significant changes were made however at the sector’s request in developing the Growing Forward framework:

Fundamental changes were made to margin-based programming under the AgriStability program. These include: better methods of valuing inventories; improved interim payment mechanisms; the broader criteria for negative margin coverage to allow support for those facing back-to-back losses; targeted advances to get money out quickly when disasters occur; and as well, some administrative streamlining.[1]

AgriInsurance is essentially an insurance program managed by the provinces with premiums paid by the federal government, the provinces, and the producers. It provides insurance against production and asset losses due to natural disasters. Producers may receive assistance by claiming a production loss during the year. AgriRecovery allows the federal and provincial governments to respond jointly to natural disasters not covered by AgriInsurance. AgriRecovery does not include cyclical factors such as price fluctuations, or long-term trends such as dropping prices. For natural disasters affecting just one province, the province must approach the federal government to seek assistance through AgriRecovery. The federal government evaluates how programs such as AgriStability and AgriInsurance can address the specific situation. If necessary, special measures for the specific situation are developed.

AAFC officials stated that these programs provide substantial assistance to the farming sector. Since 2007, Canadian farmers have received over $6.4 billion under this series of programs. AgriRecovery has provided assistance for more than 20 initiatives, including $450 million for the losses due to flooding in Alberta, Saskatchewan and Manitoba in 2010. Table 1 shows federal and provincial government contributions to farmers under these four BRM programs since 2007.

Table 1: Annual federal and provincial contributions for BRM programs
(millions of dollars), as of January 6, 2011.

Source: Agriculture and Agri-food Canada

NB:       (1) Figures have been rounded off so the sum may differ from the total indicated.

(2) For 2007, the figure includes AgriInvest contributions (federal and provincial) and AgriInvest Kickstart (federal only). The figures for 2010 are not available yet.

(3) For AgriRecovery, the data is by initiative and not by year.

The witnesses stated that transferring management of the programs to the regions improved their delivery a great deal. Departmental officials also reported that, with personnel in the field, farmers understand the details of the programs better.

From the farmers’ perspective, the witnesses stated that, although the programs do not always work for all sectors and types of farms, they do provide planning and risk management tools. AgriStability and AgriInvest are generally effective for specialized enterprises going through economic cycles, including the grain and oilseed industry, as Stuart Person stated:

These programs have significant advantages to producers and their ability to manage risk on today's farm from a grain farming perspective, and as a producer I use these programs to assist with risk management strategies on my farm every year. […] From my perspective, it does provide financial stability in times of volatile commodity markets and weather conditions. It provides a reduction in overall farm stress. It provides assistance with financing and cash flow planning. At the moment, it is encouraging farmers to make further investments and expansion in their grain farms. It does provide some assistance with succession planning and providing some stability in the profitability of the farm. For young and new farmers in a grain scenario, it is working at the moment in overall strengthening of our industry as a whole in terms of grain production in western Canada.[2]

A number of witnesses also pointed out that AgriInsurance is valuable for planning purposes since it is predictable and based on needs. All the witnesses agreed that AgriRecovery is an essential program that has proven indispensible in maintaining production capacity in affected regions, as Brian Gilroy, an apple farmer in a region hit by a tornado, noted in August 2009:[3]

When I researched what had happened before, when an orchard had been hit by a tornado like this, basically the farmers went out of business. I'm pleased to report that because of the assistance that ODRAP crop insurance and AgriRecovery were able to provide, none of the farmers affected will go out of business because of this event.

1.2 Advance Payments Program

The APP is the final BRM program. It is an exclusively federal program created under the Agricultural Marketing Programs Act (the Act). It is a financial loan guarantee program run by participating producer organizations that gives producers easier access to credit through cash advances. In operation since 2006-2007, it combines the former spring cash advances program and the advance payments programs, which originated in the 1980s, into a single program. Since 2007, the government has advanced a total of
$7.76 billion under the APP. Between 30,000 and 40,000 producers receive assistance under this program each year.

The rules of the APP are set out in the Act, but the government has some flexibility in responding to sectors in crisis. In the beef industry, for instance, the government changed the security requirements to provide an advance, delay repayment dates and reduce payment default penalties.

1.3 Non-BRM programs

In addition to BRM programs, Growing Forward includes programs relating to the environment, food quality and safety, and science and innovation. Although the witnesses did not speak about these programs very much, some stressed the need for research and innovation in order to remain competitive in the long term. In this regard, departmental officials touched on a few programs addressing this need, such as Developing Innovative Agri-Products, Canadian Agri-Science Clusters and Agri-Opportunities.

AgriFlexibility was also announced in the 2009 Budget, providing funding for new agricultural initiatives aimed at reducing costs, protecting soil, water and air quality, and marketing of new agri-food, organic or value added products. In launching the program, the government stated that AgriFlexibility would not be used to subsidize provincial risk management programs, although the industry had requested this.

According to the preliminary discussions on “Growing Forward 2” between the Department and the industry, non-BRM programs could become more important. During the initial industry consultation phase, the long-term challenges and opportunities for the sector were discussed. In short, with its arable land and water resources, Canada is in a strong position to meet the growing and changing demand for agricultural products. The challenge will be facing the competition from countries such as Russia and Brazil, while being more productive and innovative in production methods, products and business models.

2. Limitations and improvement of farm programs

While farmers recognize the benefits of these programs, they are also aware of limitations in their delivery. They would like to see improvements to these programs so they can more effectively meet their stated objectives.

2.1 Limitations of farm programs

2.1.1 Farm business risk management programs

Appearing before the Committee, the farmers identified a number of limitations relating primarily to AgriStability and the APP, and to a lesser extent to AgriInvest and AgriRecovery.

With regard to AgriStability, the witnesses commented on the way the reference margin is calculated, the “viability criterion” serving to cover the negative margin; and the exclusion of the production costs from the calculation of producer income support. They also testified on the increases of the maximum coverage.

The witnesses from the farming sector called for the method of calculating the reference margin to be reviewed. William Van Tassel[4] stated that, during an extended period of falling prices, farmers’ reference margins decline, in turn reducing the amount of support they receive. Other witnesses agreed:

You’re looking at an Olympic average reference margin, the middle three of your five years. What happens when you have three or four bad years in a row, for example? Now your reference margin goes to nothing.[5]

AAFC has admitted that the current calculation of the reference margin is problematic for the long-term application of the program.

The long-term margin decline is an issue, but the program is not intended to address long-term margin declines; it's intended to address short-term income volatility.[6]

The other issue with the reference margin is eligibility under the “viability criterion”. Farmers with a negative production margin are reimbursed 60% of their negative margin, but only if they meet one of the following conditions:

1. If they have a positive reference margin, or
2. If they have a negative reference margin as long as two of the three production margins used to calculate the reference margin are positive.[7]

This last condition, commonly known as the “viability criterion,” is difficult for farmers to meet if they have negative production margins for several consecutive years.

You have to have two positive margins in there. I can see why they would do that, because if you are an inefficient farmer and year after year after year you are not making any money, you should be gone. But year after year after year we were in a negative margin position because the prices were so low and it was absolutely beyond our control.[8]

The farmers also criticized AgriStability’s current coverage limits, both as regards the negative margin (60%) and the $3 million maximum compensation that a farmer may receive. With larger operations in various sectors of production, it was argued that the current maximum coverage is no longer sufficient.

We have heard a lot about raising the cap for the AgriStability program, which is currently sitting at $3 million. […] that’s one of the issues the industry has also asked us to look at for some of the larger livestock and horticulture operations. I’m glad to hear that now the grain operations are bumping up against that cap as well.[9]

The witnesses also questioned the flexibility of the APP. They argued that farmers will not be able to pay back all the advances received by the new payment deadlines the Minister announced on August 6, 2010.

Our producers have told us they are willing to repay the loans. When we took the loans out under the advance payment program, we realized they were loans and we would have to pay them back. But we cannot realistically afford to do so within the current proposed timeframe.[10]

It is however important to bear in mind that the government has some flexibility regarding the modalities of payment or reimbursement of cash advances.

Other criticisms of the BRM programs were made, including processing times for applications under the AgriInvest program and the lack of consistency of coverage under the AgriRecovery program.

AgriInvest processing as well was very slow in 2008. I’m sure you've heard this before, but some producers are just getting their notices for 2008 now. That's two years afterwards, which is just too slow.[11]

We still haven’t seen anything come out of AgriRecovery to deal with those non-economic issues we had in terms of H1N1 and circo. Yet when the grain farmers in western Canada had a need, the payments were out within 30 days.[12]

It must be noted that the processing time for applications also depends on how reactive the provinces are in approaching the federal government to seek assistance under AgriRecovery.

2.1.2 Non-BRM programs

With regard to non-BRM programs, the discussion pertained primarily to the AgriFlexibility program. The farmers complained that their recommendation to use this Program’s funding for risk management purposes was not taken into consideration in the development of the Program. In their view, their idea would have helped address specific and regional needs that are not addressed by the current national programs.

[O]n behalf of farmers, the Canadian Federation of Agriculture was calling for risk management measures under the agriflexibility program. The original version of the agriflexibility program would have provided producers with customized assistance specific to their sector and region, factors that cannot be taken into account under national programs, which are applicable from coast to coast.[13]

AAFC pointed out that they chose not to follow through on this recommendation so that Canada’s trading partners did not impose countervailing duties.

The minister had indicated from the get-go that AgriFlex would not be used for subsidizing provincial risk management programs, for the reasons I've already laid out on countervail.[14]

After outlining these various limitations, the witnesses recommended improvements to the current programs. Some of them have already been submitted to the federal-provincial/territorial governments for consideration. Any changes to farm programs must be approved by all three levels of government (federal, provinces and territories).

2.2 Suggestions to improve farm programs

The suggestions presented to the Committee pertained primarily to the BRM programs. The farmers took a unified stance on certain suggestions but opinions varied on others. For the AgriStability program for instance, some witnesses suggested that the reference margin be 10 years.

We have information all the way back to 2002, so why don't we just open it right up? Let's go with all the reference years and let's pick something that's going to give you what would be considered a normal profitable average, maybe a ten-year average, or you take your best six out of ten […].[15]

Other witnesses recommended however that producers have the choice between the Olympic average and the average of the last three years in determining their reference margin.[16] A third suggestion was that the Program be based on average production costs rather than production margins.

Base them on COP. I think that’s a good way of doing this.[17]

Margins are also problematic for young farmers who have to use the regional average, which includes less efficient farmers. To enhance the compensation level provided, it was suggested that these regional margins be based on the production margins of efficient farmers, who account for 50% of production.[18]

The witnesses unanimously called for the elimination of the “viability criterion” which in their view does not apply during long-term decline in market prices. They argued that eliminating this criterion would make the Program more functional. It was also recommended that coverage of negative margins be increased from 60% to 70%.

Mr. Person also suggested operational improvements to AgriStability. He suggested that audit requests be made for a shorter period of time so that farmers do not have to incur additional management costs. He also suggested that the Program consider the needs of specific groups such as the Hutterites. [19]

Another witness argued that the Program should reflect the diversification of certain agricultural operations. In his opinion, this diversification enhances the profitability of these operations.[20]

The witnesses also made suggestions regarding the AgriRecovery program. They would like the Program to provide consistent coverage and include the livestock sector. They maintained that the payments could have been more generous or provided more quickly in certain cases. AAFC pointed out however that the Program is not designed to compensate for lost revenue following a disaster but rather to help farmers move forward. In this regard, the Department stated that greater emphasis must be placed on conveying the Program’s objectives to farmers so as to prevent this kind of misunderstanding.

With regard to AgriInsurance, the witnesses argued that the Program should insure the livestock and poultry sectors for losses due to death.

Producers are especially grateful for the [AgriInsurance] program during years when Mother Nature is not so cooperative. It is the envy of producers in the cattle and poultry sectors. Although these industries are not as susceptible to yield fluctuations, they have long been calling for an insurance program modelled on the crop insurance program to help in those rare but devastating cases of livestock loss due to death. Such losses often occur when a known or unknown disease suddenly destroys a barn, a herd or an entire farming operation. For years, this has been a topic of debate, and the time has come to put forward tangible solutions in terms of equipping the cattle and poultry sectors with a tailored production insurance program that is effective and efficient.[21]

AgriInsurance I’m only going to touch on very briefly, because we've been talking about it since 2003. We still don’t have production insurance, and I see no indication that the government is getting off its ass and doing it in the meantime. I'm sorry, but that's a real issue, guys, and you folks here need to get it out there for the beef guys and the hog guys.[22]

3. Recommendations

The Committee wishes to thank the witnesses who agreed to appear. The Committee is grateful to the witnesses for pointing out the Program limitations and especially for their suggestions to improve these programs. The Committee makes the following recommendations in light of these observations.

Recommendation 1:

Since the AgriStability program is the main farm income support program in Canada, the Committee recommends that Agriculture and Agri-Food Canada conduct a comparative analysis of the application of the following calculation methods: calculation of reference margins over ten years rather than five; calculation of reference margins using the greater of the Olympic average or the average of the last three years; using the average of the last five years and seven years to determine the reference margin; and calculating support based on average production costs. The Department would then report the results of this comparative analysis to the Committee as soon as possible.

Recommendation 2:

The Committee recommends that the Minister of Agriculture and Agri-Food with the agreement of the provincial and territorial ministers of Agriculture revise the current “viability criterion” to reflect long-term price drops that negatively affect farmers’ production margins[23].

Recommendation 3:

The Committee recommends that the Minister of Agriculture and Agri-Food with the agreement of the provincial and territorial ministers of Agriculture revise the calculation method used for regional averages to ensure that they meet the needs of new farmers.

Recommendation 4:

The Committee recommends that Agriculture and Agri-food Canada work with its territorial and provincial counterparts to improve processing times for the payment of compensation to farmers, especially for the AgriInvest, AgriRecovery, and AgriStability programs.

Recommendation 5:

The Committee recommends that the Minister of Agriculture and Agri-Food with the agreement of the provincial and territorial ministers of Agriculture revise the AgriInsurance program so that livestock farmers are insured against mortality due to animal diseases.

Recommendation 6:

In view of some farms’ long-term financial difficulties, the Committee recommends that the Minister of Agriculture and Agri-Food extend the deadline for the repayment of the advances received in 2008-2009; and increase the maximum cash advance.

Recommendation 7:

Given the various levels of support given by provinces and territories, the Committee recommends that the Minister of Agriculture and Agri-Food and its provincial/territorial counterparts discuss the problem of trade distortion that may be caused by the discrepancies in farm programming between provinces/territories.

Recommendation 8:

Given recommendations made by producers’ associations, the Committee recommends that the Minister of Agriculture and Agri-Food consider modifying the AgriFlexibility program in order to enable it to fund regional flexible programs including business risk management.

Conclusion

Although they cannot take the place of profitability in farming, farm programs play a major role in supporting farm production capacity in Canada. With annual government contributions of approximately $2 billion, the BRM programs provide useful planning and management tools and are offered uniformly across the country. As the federal- provincial/territorial governments begin their work to renew these programs as part of “Growing Forward 2”, the Committee’s hearings yielded suggestions to improve programs by providing better coverage for farmers and helping farmers address the challenges in the domestic and export markets.