Overview of Canada s Business Risk Management Programs

Overview of Canada’s Business Risk

Management Programs

Producer Savings Accounts (NISA: 1990 – 2002)

• Established in 1990, the Net Income Stabilization Account (NISA) program was Canada’s first national whole farm program

 provided assistance on an individual farm basis using income from all commodities rather

than support to specific commodities

 Encouraged producers to annually save a portion of their income (3% of eligible sales) that

could be drawn down in difficult periods

 Governments would match these contributions dollar-for-dollar up to a maximum of $7,500

each year

 Producer and government funds sit in an account, earning interest at a premium rate

 Producers could access these funds and stabilize their income whenever their gross margin

(income) fell below their five-year average or if their family income fell below $35,000

• While popular, most farmers viewed NISA as a retirement vehicle rather than income stabilization tool

 Many producers would not withdraw from NISA account in times of need ($4 billion in

accounts with calls for ad hoc assistance)

 The requirement to build-up a reserve of funds meant NISA could not provide assistance to

Margin-Based Programs (AIDA & CFIP: 1998 – 2002)

• In response to disasters in the hog and grain sectors, Canada introduced whole-farm margin based programming to backstop NISA

 First national program to provide support based on a historical reference margin

 Producers whose gross margin fell below 70% of their historical average received payments

from governments to bring their margins back up to 70%

 Example: if reference margin was $100,000 and current year margin fell to zero, programs

paid $70,000, restoring income to 70%

 Program design driven by WTO criteria – allow governments to profile significant portion of

assistance as “green” (trade neutral – no annual limits)

• Experience demonstrated that margin-based programs were much more effective at stabilizing income and targeting assistance to need. Several weaknesses needed to be addressed:

 Moral hazard – no deductible left program open to manipulation

 Gross Margin definition did not provide effective basis of support (included discretionary and

capital items like machinery / building repairs, non-arms length salaries, custom work)

 Programs did not have an adequate mechanism for dealing with expansion / adjustment  No effective linkages between NISA or Crop Insurance

Margin-Based Programs (CAIS: 2003 - 2007)

• In 2003, FPT governments implemented the Agriculture Policy Framework (APF).

 BRM programming focused on income stabilization and a more business-oriented lens that

encouraged proactive risk management.

• Canadian Agricultural Income Stabilization (CAIS) program was introduced.

 Replaced NISA , providing integrated stabilization and disaster protection in one program  Transition from income support entitlements to demand driven and targeted to need

- Level of assistance depended on the magnitude of a producer’s loss

- Smaller losses were shared equally between governments and producers. For larger losses,

governments covered a greater share of the producer’s loss - up to four times the amount absorbed by the producer

 Offered more broad and effective income protection for both newly established farms and

those experiencing back to back disasters

 Dealt with several weaknesses of disaster margin-based programs (introduced deductibles,

addressed expansion / adjustment, re-defined income measurement as production margin, program linkages)

 By basing support on historical reference margin, incentives were maximizing farm income  Recognition of support for growth (increased payment limits to $3 million)

CAIS Producer / Government Shares

Producer

Share

Government

Share

100%

85%

70%

0%

50%

50%

30%

70%

20%

80%

60%

40%

85%

Gov’t cheque for $7,500

Ex: reference margin = $100,000

Gov’t cheque for $10,500

Responding to Concerns

• From the outset, CAIS faced significant pressure and criticism

 Based on the tax system, which means that producers weren’t receiving payments until a

year after the event in most cases

 Income measurement did not account for price increases/decreases until commodities were

sold

• Considerable design improvements were made to address these concerns

 Interim and advance payment mechanisms were introduced

 New inventory valuation method was implemented to account for price fluctuations

• Nevertheless, governments and industry agreed that change was needed

 Launched just prior to BSE, there was recognition that a single program was not capable of

responding to all types of disasters -ad hoc programming continued

 Governments questioned whether they should be providing support on relatively minor

Growing Forward (2008-2013)

 BRM programs that are timely, responsive and predictable;

 Increased producer capacity to manage business risk from unexpected events;

 Reduction in the economic impact of disasters on producers and more rapid adjustment and

business resumption after a disaster; and

 Greater stability of producers’ incomes.

• New BRM suite is comprised of four core programs cost-shared on a 60:40 basis with provincial governments.

 AgriInvest - producer savings accounts for smaller margin declines (15% or less), which

replace the coverage previously provided under the top tier of CAIS

 AgriStability - an improved whole-farm, margin-based program to help producers with

larger margin declines (15% or greater)

 AgriRecovery - a disaster relief framework to ensure rapid assistance for producers hit by

natural disasters

 AgriInsurance – includes production insurance with ongoing work to expand to additional

AgriInvest

• Producer “rainy-day” savings account-started for 2007 tax year



Built on NISA program concept

- Producer deposits funds into an account which are matched by Governments

• Provides coverage for small income declines (i.e., first 15% of margin loss)



A more predictable/bankable vehicle to address small income declines

• Producers decide when and how much to withdraw



Allows flexibility to address income declines or make investments on the farm

• Policy improvements from NISA design



No “retirement savings” features of the program – no bonus interest or

withdrawal triggers



Support based on enterprise rather than individual

Translation: “free money”

AgriInvest…cont’d

• Annual deposit and contribution rate of 1.5% of their Allowable Net Sales (ANS) to a maximum ANS of $1.5 million; max contribution is $22,500 / year

• ANS = sales of agriculture commodities + AgriInsurance indemnities less commodities purchased

 does not include supply managed commodities (dairy, poultry, eggs)

• Average-sized farm has an ANS of approximately $120,000 resulting in an annual government contribution of $1,800, if a producer deposits his maximum contribution for the year.

• To smooth the transition from CAIS, federal government seeded accounts with $600 million (3% of ANS) & waived deposit requirement for first year

• AgriInvest Deposit Notices are sent based on tax filed information

 Producers have 90 days to make deposit at financial institution of their choice

• There are currently 145,000 AgriInvest accounts with balances of $1.281 billion

 Withdrawals to date account for another $1.2 billion  Annual government contributions in the $300m range

AgriStability

• Provides individual income protection for larger income declines (in excess of 15% of

the historical Reference Margin)

• Based on CAIS model – national, whole farm program cost shared 60:40



Uses production margin as measurement of income, and basis of support



Adopts CAIS enhancements to inventory valuation and interim/advance payments

Targeted to need, the amount of assistance available under the program depends

on the magnitude of a producer’s loss, government share varies with severity



Negative margin coverage available but only when farms have demonstrated

AgriStability - Producer / Government Shares

Cost share as current year margin declines below reference margin

Producer

Share

Government

Share

100%

85%

70%

0%

AgriInvest

30%

70%

20%

80%

60%

AgriStability – Reference Margins Example

2007 - $50,000 (lowest year) 2008 - $90,000

2009 - $150,000 (highest year) 2010- $110,000

2011 - $100,000

• Dropping the high and low years and averaging the remaining 3 years gives the producer a Reference Margin of $100,000

• If the producer’s 2012 Production Margin:

 Declined by $15,000 There would be no payment, the AgriInvest program provides

producers with funding which could be used to address small margins declines

 Declined by $30,000 A government payment of $10,500 (i.e., 70% of the $15,000

loss between 85% and 70% of their Reference Margin) would be triggered

 Declined by $100,000 A government payment of $66,500 (i.e., 70% of the $15,000

loss between 85% and 70% of their Reference Margin and 80% of the $70,000 loss between 70% and 0%) would be triggered

• If a producer falls into the Negative Margin payment tier their payment is

reduced if they failed to purchase an AgriInsurance product that would have

reduced their loss

 Encourages the continued use of AgriInsurance

AgriStability Annual Participation Process

•

Application and payment process generally span two years



Producers pay a fee (based on a percentage of their Reference Margin)

by April 30 of the program year



Producer completes the tax year before making final application

Producer submits the AgriStability/AgriInvest Harmonized Form by

September 30

-

Harmonized with the process for filing income tax



Payments are generally made within 75 days of the application

•

Average annual government payments of over $700m



Payments fluctuate with farm income, from as low as $450m to $900m

AgriRecovery

• With the introduction of the new suite, FPT Ministers directed officials

to develop a framework for disaster assistance which would:



Respond effectively to event-driven specified risks:

- Weather or Disease/Pest

- Threat to food security



Address gaps in current programming while ensuring producers are

not compensated twice for the same cost/loss

AgriInsurance

• AgriInsurance stabilizes a producer’s income by minimizing the economic impacts of production losses caused by adverse weather and other insured perils

 Expands coverage beyond traditional Crop Insurance to other commodities (bee

mortality, exploring livestock mortality and price insurance concepts)

• AI is actuarially sound, premium payments from producers and governments are pooled together into one fund which is used pay claims

 Allows claims for a small number of producers to be spread over all the producers in the

program; keeping costs stable and affordable

 Premium cost shares are generally 36% federal, 24% provincial and 40% producer  Government premium contributions in the $750m range annually

• Covers most commercially-produced crops in all provinces (90% of the value of all crops grown in Canada are insurable)

 65% to 70% of crop acres grown are insured  50% to 55% of Canadian farmers are insured