Impact of the APF-Business Risk Management Programs on Ontario Agriculture. Larry Martin Al Mussell

Transcription

1 Impac of he APF-Business Risk Managemen Programs on Onario Agriculure Larry Marin Al Mussell Augus 5, 2003

2 Forward This sudy was an ineresing experience. When Miniser Johns and he Onario Agriculural Commodiy council asked us o do i, we hough i would be a good es because i gave us a chance o see wheher wha we hough was he case really was rue. In he earlier work we did wih IBM Business Consuling, we could only do concepual analysis and a lile empirical work from 40,000 f. Wih his sudy, we had access o daa from over 11,000 Onario farms. We were able, hrough Onario Minisry personnel o es our concepual analysis in a big way. The analysis confirms wha we hough abou he Business Risk Managemen program. Bu i also allowed us o go a lo farher and make some suggesions o improve he program. We acknowledge he Onario Miniser of Agriculure and Food and OACC for sponsoring he projec. The echnical working group of OACC provide considerable inpu ino earlier drafs of he repor. Sephen Duff and his colleagues a OMAF were invaluable in using he daabases o conduc he analysis. We are graeful o all of hem. Larry Marin, CEO Allan Mussell, Senior Research Associae Augus, 2003

3 Execuive Summary - Conclusions and Recommendaions This repor is he resul of a sudy commissioned by he Onario Miniser of Agriculure o provide an analysis of he Business Risk Managemen program (BRM), which is a key componen of Canada s proposed Agriculural Policy Framework (APF). This secion summarizes he objecives, mehods, resuls, conclusions and recommendaions. Purpose, Objecives, and Approach The purpose of his sudy was o provide an in-deph analysis of he proposed BRM program on Onario agriculure as a complemen o he sudy conduced on behalf of AAFC earlier his year. The objecives of he sudy were he following: To deermine he exen o which he proposed program would sabilize individual farm incomes in Onario for he various secors; To deermine he exen o which he proposed program would change he disribuion of governmen funds beween secors, regions, and farmers wih varying level of income decline and impac on he compeiive advanage of Onario producers versus hose in oher regions of Canada; To deermine he exen o which he proposed program would reduce program overlap, mainain appropriae linkages beween governmen programs and wih privae risk managemen mechanisms, and suppor good risk managemen pracices; To deermine he exen o which he proposed program would appropriaely rea farms wih supply managed producion; To deermine he exen o which he proposed program would offse he impac of programs in compeing jurisdicions; To deermine he exen o which he proposed program would incorporae insurance-like principles; To deermine he exen o which he proposed program would disor producion or markeing decisions; To deermine he exen o which he proposed program would reduce he poenial for rade dispues; To deermine he exen o which he proposed program would be easy for farmers o undersand and paricipae in, in a cos effecive manner; To deermine he exen o which he proposed program would provide a smooh ransiion from presen programming; and To deermine he exen o which he proposed program would conribue o beer farm managemen decision making and planning. To sugges improvemens o he proposed program To answer he quesions posed in hese objecives, he design of he proposed program was described, analyzed concepually, and esed using daa from exising farm programs. Onario farm daa from crop insurance, OFIDP, NISA, and companion programs was used o simulae he proposed program, and o compare i wih curren programs. In addiion, he daa was used o consider varians of he proposed program. i

4 The design and operaion of he proposed program is presened in secion 2.0. Secion 3.0 provides he empirical analysis of he proposed program and he comparison wih curren programs. In secion 4.0, he disribuion of program paymens by farm ype and region is presened. Secion 5.0 presens a concepual analysis of incenives and disorions under he proposed program. In secion 6.0, he differences in inerpreaion beween simulaions using cash and accrual accouning are deermined. Secion 7.0 provides an analysis of he operaion of he proposed program for supply managed indusries. The risk of rade realiaion under he proposed program is discussed in secion 8.0. Secion 9.0 considers he robusness of he proposed program o disorionary impacs of agriculural policies in oher jurisdicions. The linkages beween crop or producion insurance and he proposed program are discussed in secion Program adminisraion under he proposed program is described and analyzed in secion Secion 12.0 provides empirical analyses of some varians on he proposed program. The affordabiliy of he proposed program relaive o curren programs is analyzed in secion Secion 14.0 provides a discussion and analysis of programming alernaives in he period of ransiion beween curren and proposed programs. Conclusions The descripion of he operaion of he proposed program in secion 2.0 shows a number of differences beween curren programs and he proposed programs: The proposed program provides program paymens based on acual losses (wih loss defined as a producion margin below he reference producion margin); curren programs (noably NISA, SDRM, and NISA op-up programs) provide an enilemen regardless of a loss concep. In order o be eligible for governmen suppor, he producer mus se aside cash devoed o margin loss coningencies; his is unlike he curren OFIDP program. Aspecs of he proposed program are confusing; noably, he concep of coverage under he proposed program is enirely misleading. The concep of deposi level is far more inuiive. Reference o he proposed program as New NISA is also confusing because i brings o mind old NISA. The proposed program is in fac very differen from NISA. Secion 3.0 provides exensive empirical analysis and esing of he proposed program relaive o curren programs. The analysis applied daa from applicans o he OFIDP program from , daa from NISA paricipans from for whom links o crop insurance and companion programs could be made, and daa from coninuous OFIDP applicans from These daa were sored by farm ype, and where possible, size. In all hree daa ses, he level of program paymens ha would have been made under he proposed program was compared wih acual paymens under curren programs; for hose in which a ime series was available (he NISA paricipans and coninuous OFIDP applicans), measures of sabiliy in gross and producion margin were made. The resuls were surprisingly unanimous across daases of farm records: ii

5 The proposed program would have provided greaer suppor in Onario han did curren programs. Program funding according o farm ype is generally no dramaic, alhough i appears cash crops, cow-calf, and feedlos would have received significanly more funding, while he fruis and vegeable, and greenhouse segmens would have received less funding. These general commens do no hold across all farm sizes. There is a endency for he greaes benefis o accrue o smaller and larger farms, bu even his generalizaion does no hold across all farm ypes. The analysis oversaes he benefis of he curren programs because special measures increased paymens, especially for hog producers, in 1998/99. Moreover, he ime period included in he analysis saw remendous expansion in he hog, frui and vegeable, and greenhouse indusries. Expanding farms were able o increase heir funding under srucural adjusmen procedures of he curren programs. While he proposed program includes srucural adjusmen procedures, i canno be included in our analysis. Producion margin is almos universally more variable han gross margin, so i is a more sensiive rigger for program paymens han gross margin. The proposed program does a much beer job of sabilizing eiher gross margin or producion margin han curren programs. This resul was robus across farm ypes and sizes. Secion 4.0 provides an analysis of program paymen shares across commodiies. I shows ha: Funding shares in Onario are relaively sable comparing curren wih he proposed program, wih slighly larger shares going o grains and beef under he proposed program. I appears ha he share of program paymens going o horiculural farms would decrease. Naionally, he share of funding o Saskachewan would increase and oher provinces funding shares would decrease slighly, alhough his observaion should be reaed wih cauion because crop insurance daa were excluded and daa for Quebec was largely unavailable. Secion 5.0 considers he poenial for he proposed program o convey incenives ha would influence farm managemen decisions. The analysis suggess ha he use of he Olympic average concep in he reference margin could produce incenives o periodically magnify losses. This sems from he fac ha he reference margin effecively excludes he minimum of he previous five years margins. As such, i could creae perverse incenives ha a simple moving average would no. In secion 6.0, a comparison is made beween he paymens ha would have been paid ou under he proposed program using cash-basis farm records relaive o hose under accrual farm records. This is an imporan consideraion because he proposed program uses modified accrual farm records, bu almos all of he ime-series daa used o simulae he program is based on cash farm records. Based on he se of farms ha coninuously applied o OFIDP from 1998 o 2001 (mos of which were cash crop farms), he resuls show ha: iii

6 Using cash basis daa as a proxy for accrual daa (which is wha was done in he analysis using he NISA daa base in secion 3.0) undersaes he acual program paymens - by abou 18% on he sample farms. This reinforces he observaions on secion 3.0 ha he proposed program will pay more o farmers han he curren programs. Secion 7.0 considers he proposed program as i relaes o supply managemen. The conclusions are: Farms wih supply managed sales are sufficienly diversified in he producion of oher producs o need farm risk managemen proecion in addiion o ha provided by supply managemen. The proposed program for supply managemen conains some significan design flaws. Specifically, he pro-raing of claims in he sabilizaion iers according o he proporion of non-supply managed sales, combined wih he lifing of all pro-raing once claims penerae he disaser layers creaes a significan incenive for farmers o inenionally magnify losses. The prospec of rade realiaion by oher counries due o he proposed program is invesigaed in secion 8.0. Two issues are considered; a WTO challenge o he level of green box paymens under he proposed program, and he poenial for bilaeral counervailing rade acion by he US. As o he firs issue, he mehodology used by AAFC o deermine green box paymens gives a much higher level of green box paymens han under curren programs. Even if he mehodology applied by AAFC were challenged (which has never occurred), he proposed program would have higher green box paymens is in disaser porion. Thus, wih regard o aggregae measures of suppor, i appears ha he proposed program is a leas as resisan (if no more resisan) o rade challenge as curren programs. In he second case, he relevan quesion is wheher he paymens under he proposed program accrue disproporionaely o a given commodiy. The evidence on he proposed program shows ha here is lile change in he share of program paymens across commodiies relaive o curren programs. Moreover, he proposed program wih inegraed disaser and sabilizaion componens may be less vulnerable if he so-called Peace Clause does no appear more likely o rigger US counervail han curren programs. The abiliy of he proposed program o proec agains he marke disorions of farm programs in oher counries is considered in secion 9.0. The conclusions are: I is no possible o conclude wheher he proposed program is beer or worse over ime. The analysis shows ha during here was essenially no correlaion beween corn, soybean, and whea prices and he producion margins on Onario cash crop farms. A he same ime, here was a posiive correlaion beween producion margin and gross sales. Therefore, during his period, paymens riggered by losses in he producion iv

7 margin would have had a greaer sabilizing effec, which is wha was found in secion 3.0. In oher words, reducions in producion cos more han compensaed for any decreases in income caused by declining prices. This suggess ha reference producion margins would provide some relief when foreign farm policies depress prices. Bu, a he limi, his resul canno always apply. In he final analysis, since a wide range of facors affec grain prices and coss, he effeciveness of he proposed program in his regard likely depends on he paern of price variaion. Secion 10.0 considers he role of expanded producion insurance and is linkage o he proposed program. There is poenial o expand producion insurance o include: Livesock moraliy insurance Negaive margin insurance, especially for finishing livesock, bu also for oher producs if feasible. Weaher (e.g. rainfall, emperaure) insurance for horiculure Addiional crop insurance producs for horiculure An insurance produc o replace he curren Marke Revenue Insurance An opion ha would call farmers deposis from he opion provider when he farmer has a claim agains he proposed program. In addiion, we sugges in his secion ha here may be no need o use deposis, and ha an alernaive would be o esablish fees based on risk and frequency of claim. A he limi, especially if he same organizaion ha adminisers he program is also he insurance provider, his and he opion above converge a leas in he sense of calculaing he cos. A number of alernaives exis for linkage beween he proposed program and crop/producion insurance. Based on our analysis and observaions: The curren concep of linking BRM paymens o producion insurance by couning insurance payous as income and insurance premiums as coss is a good sar. Bu, in order o provide an incenive for farmers o maximize use of producion insurance, heir premiums should be rebaed o farmers when PI saves paymens from BRM. In he case of processing vegeables, he Onario Board believes PI should be required for a producer o be eligible for BRM. Adminisraion under he proposed program is analyzed in secion The proposed program will carry a processing fee, which is nominal. Unlike curren disaser programs, producers will no apply when hey believe hey can rigger a paymen; raher, filings will occur every year. Because of his feaure, i is likely ha as he program runs, he undersanding of i will improve and compliance will become easier. In conras, under curren programs a greaer variey of forms and poenial confusion is involved. Adminisraively, he proposed program will require producers o file accrual accouning figures every year. This means a slighly higher cos o paricipae. Two imelines have been discussed for producer filing, he firs by OMAF and he second by AAFC: v

8 OMAF approach: o Mar. 31: Signup, choice of deposi level, deposi due, accruals due for pas year o Cheques issued by Sepember AAFC approach o Mar. 31: Signup, choice of deposi level o Dec. 31: one hird of deposi due, accruals due o Cheques issued following December. Because he OMAF approach pus lile addiional pressure on he producer in erms of iming or affordabiliy, subsanially reduces adminisraive coss, and would reurn paymens more quickly, i appears ha he OMAF approach is preferred. Secion 12.0 provides analysis of variaions on he proposed program. These variaions include moving hired labour ino he caegory of ineligible expenses, combining he wo sabilizaion layers ino a single layer funded 40% by producer deposis and 60% by governmen, and he analysis of he relaive effec on he asses of producers under he proposed program compared o he NISA program. In all cases, analyses were conduced using he NISA daabase. The conclusions are: Excluding hired labour as an eligible expense increased aggregae program paymens slighly o mos farm ypes and sizes. However, for frui and vegeable farms and greenhouses, making hired labour ineligible reduces program benefis quie subsanially for he larges farms, bu provides greaer benefi for mos size caegories. Combining he wo sabilizaion layers resuls in a sligh increase in aggregae program paymens, and has no clear impac on sabiliy. The indusry proposal (NISA 1-2-3) consised of coverage below 70% of reference producion margin enirely financed by governmen, wih companion programs mainained and he mainenance of a NISA-ype program wih governmen maching of producer conribuions up o 3% of eligible ne sales wih no cap. To compare he asse-building and enilemen aspecs of NISA relaive o he proposed program, he governmen maching conribuions under he indusry proposal were compared wih paymens in he sabilizaion layers of he proposed program using he NISA daabase. The resuls are ha aggregae paymens in he sabilizaion ier of he proposed program would have been abou $50 mil greaer o Onario farmers during han under NISA. All farm ypes riggered more paymens under he proposed program, excep for fruis and vegeables, greenhouse (who would have los SDRM), and dairy. The issue of affordabiliy of he proposed program is addressed in secion The issue of affordabiliy is no one of cos: he cos o producers is an annual $50 regisraion fee and ineres on he deposi. vi

9 The real issue is wheher he cash ied up in deposis is a wise use of cash. One issue is how many farmers in Onario have sufficien balances in heir NISA accouns o fund heir deposi requiremens for he proposed program. To consider he exen o which farmers have access o he cash required o fund heir required BRM deposis under he proposed program, curren NISA balances were compared wih minimum and maximum deposis required under he proposed program. A relaed issue is wheher here are alernaive ways o provide he deposi requiremen, or wheher a deposi is he mos appropriae way o encourage farmers commimen o risk managemen. These quesions are considered in he secion. Conclusions are: 63-68% of producers had sufficien Fund 1 (non-axable) NISA balances o fund minimum deposis under he proposed program. Couning Fund 2 (he ax deferred porion), 72-75% of producers had sufficien funding for deposis. The only commodiy groups ha showed a significan lack of funding from NISA sources were farms in supply managemen. Wha he foregoing means is ha a subsanial amoun of addiional cash will be required for deposis. A leas hree addiional mehods could be used o provide he deposis o Financial insiuions believe he proposed program has so much meri ha hey would, in general, be willing o loan farmers heir deposi money, usually above normal line of credi limis. This would make he cos o farmers who have he cash available, he spread beween he borrowing rae and he savings rae. o By he same oken, as a way o reduce he amoun of cash ied up (and likely he cos), he loan could be made as guaraneed Leer of Credi ha would be drawn only when here is a claim under he BRM. o The derivaive discussed in secion 10.0 ha could be a produc of an insurance provider could be used for he deposi, wih he derivaive s premium being based on risk and frequency of use. We do quesion wheher a deposi is he appropriae way o handle farmers commimens o risk managemen, he saed reason for he deposi in he firs place. A deposi provides no incenives o improve privae risk managemen. A fee srucure, based on insurance principles would provide an incenive if he fee was based on individual and aggregae risk. This is enirely possible o do wih he hisory ha is available from he NISA daabase. Eiher a fee calculaed and charged by he adminisering agency or he derivaive discussed above are he only wo alernaives ha would provide risk assurance, bu encourage farmers individually and in he aggregae, o privaely manage risk beer. Secion 14.0 addresses he ransiion from curren programs o he proposed programs. The socalled wedge funding available for ransiion is less han wha would have been spen on MRI, SDRM, NISA op-ups and he miscellaneous small programs, so some choices will need o be made. The observaion ha emerges is ha some of his ransiion funding would be well used o help esablish new producs ha can be used o replace hose ha are being phased ou, paricularly wih respec o MRI. Wih specific regard o SDRM ransiion, several opions were suggesed: vii

10 Issue cheques in he amoun of NISA op-up money ha would have been paid had NISA been coninued. Creae new maching accouns o which SDRM funds would be paid, wih wihdrawal riggers based on specified perils. Roll he SDRM porion of NISA accouns forward, and carry he funding (or some proporion of i) forward hrough he ransiion period. Gaps and Overlaps Based on he foregoing, here are some gaps and overlaps eviden under he proposed program. These are he following: As i has been pu forward, he language used o describe he proposed program (paricularly he use of he erms New NISA and coverage ) is needlessly confusing. This creaes a gap in undersanding beween governmen and producers. A major cavea ha should be added o conclusions abou he efficacy of he proposed program is ha, as designed, i canno deal well wih subsanial disasers such as he curren BSE problem. In his case, we have a major expor produc for which access o he expor marke was los. If his occurs for a proraced period of ime, he program will run ou of money and many producers will have negaive margins. As we indicaed in he ex, here are disasers and here are disasers. Disasers of he magniude ha BSE can be if borders are no reopened will require more resources han are available in he BRM, if i is he public s goal o suppor he indusry. Horiculural and greenhouse producers are worse off under he proposed program if marke condiions remain as during because i does no adequaely replace SDRM. The Olympic average applied in he reference margin calculaion creaes an opporuniy for producers o periodically magnify losses wihou a reducion in fuure reference margin. This represens an incenive gap in he proposed program. Similarly, i creaes a huge moral hazard for supply managed indusries. The proposed program, as i would apply o farms wih supply managed sales, is simply poorly designed. I represens an incenive and coverage gap in he proposed program. As i is currenly designed, wih producion insurance premiums as eligible expenses and indemniies as eligible revenue, he proposed program has some overlap wih crop/producion insurance. Bu his is an overlap ha is good and needs o be exended. Under he proposed program, Marke Revenue Insurance would be erminaed. However, he proposed program does no respond o changes in he prices of grains and oilseeds in he same way ha MRI did. Thus, a gap exiss. The design of he proposed program calls for producers o make cash deposis. However, as suggesed above, here are several alernaives o cash deposis ha sugges hey are likely redundan uses of capial. Wih producers liquidaing heir NISA accouns over he nex five years, being eligible for paymens under he BRM, and wih ransiion funds available, here will be hree years of program overlap wih large amouns of cash available. viii

11 Recommendaions Based on he above, he following recommendaions emerge: Numerous ess and simulaions sugges ha he proposed program operaes a leas as well as a sabilizaion program as he curren programs do (wih he excepion of he horiculure and greenhouse indusries). This is eviden from he analysis of paymens and margin sabiliy, using a number of differen daa ses. We believe i is concepually a good program given he policy objecives. I can be beer if he gaps and overlaps idenified above can be overcome. Therefore, he following recommendaions should be implemened along wih he basic program A clear policy posiion needs o be developed regarding disasers such as BSE, in which rade is curailed and major losses are incurred by an indusry. This may no be a unique occurrence; a long erm disease and marke disaser policy needs o be developed in addiion o he sabilizaion policy. In he shor erm, he BSE siuaion underlines he need for a commimen regarding he curren siuaion in he beef indusry, as well as a commimen o develop means of insuring agains negaive margins, especially in he livesock indusry. As described above, he language applied in he proposed program is needlessly confusing. An alernaive name for he program, which makes no reference o NISA, should be devised (his has apparenly been done). The coverage erminology should be replaced wih deposi, proporional deposi, or some oher alernaive which reflecs he acual operaion of he program. The use of he Olympic average as par of he reference margin adjusmen mechanism could lead o manipulaion of he program by some. A useful improvemen o he program would be o replace he Olympic average wih a simple five-year average in he reference adjusmen formula. The proposed program is no well designed for supply managemen. We recommend ha eiher he indusries proposal o make supply managed commodiies ineligible for he program be acceped, or a leas rever o he former approach making i available in he disaser porion and hen pro-raing in he sabilizaion porion. Link he proposed program and crop/producion insurance by mainaining he curren linkage, and add a rebae of up o he amoun of he premium when producion insurance saves he BRM money. There is also a case for making producion insurance mandaory for processing vegeables. The proposed program does no serve o replace Marke Revenue Insurance. We recommend ha a successor o MRI should be developed as an insurance produc along he general lines of he Albera produc. Cash deposis for he producer porion is a very poor use of capial. We recommend ha alernaives o cash deposis be developed. Our preference would be a fee based one, on risk and use. The second alernaive is a derivaive ha provides he deposi when here is a claim. Leers of Credi and loans from financial insiuions are less preferred alernaives, bu are much beer han ying up farmers money. The iming of aciviies under program adminisraion will be criical in making he program ransparen, and in providing producers wih imely paymen. We recommend ix

12 ha he schedule of aciviies suggesed by OMAF saff be implemened in program adminisraion. The ransiion period during which curren programs will be phased ou will be imporan. Transiion funds can flow o farmers, along wih oher sources of funding. Alernaively, a porion of he ransiion funds can be used o build devices ha have a posiive longer erm impac. In order o maximize he value of he ransiion funds, we recommend ha consideraion be given o he following: o The frui/vegeable and greenhouse secor appears o receive less in erms of program paymens under he proposed program han under curren programs. This may be because hese secors did no experience major perils in he period of ime of he analysis, or because he proposed program does no fully replace SDRM. In eiher case, we recommend ha hese secors be prioriized under he ransiion, and ha alernaives o SDRM be developed, especially insurance producs ha are ailored o he indusry s needs. o Developmen of an insurance produc o replace MRI. o Deermine wheher i is feasible o delay par of he income for ransiion programs unil afer he programs cease o exis. In oher words, if a program will be phased ou over hree years, hen income from ha program may be delayed unil he beginning of he fourh year in order o spread he income over more ax years. x

13 Table of Conens Execuive Summary - Conclusions and Recommendaions... i 1.0 Inroducion Objecives Approach Organizaion of he Repor The Proposed Business Risk Managemen Program The Measure of Producer Income Trigger Mechanism of Proposed Program Operaion of he Proposed Program Relaive Effeciveness of he Proposed Program Analyses of Proposed Program Using OFIDP Daabase Comparison of Curren and Proposed Programs Analyses of Proposed Program Using he NISA Daabase Comparison of Curren and Proposed Programs Curren and Proposed Programs Across Farm Size Ranges Margin Sabiliy Under Curren and Proposed Programs Refined Analysis Wih Accrual Daa Using OFIDP Daabase Disribuion of Program Benefis Under Proposed Program Analysis of Disribuional Consequences of Proposed Program Disribuion of Paymens Under Curren and Proposed Program Disribuion of Proposed Program Paymens Relaive o Farm Cash Receips Summary Implicaions of he Olympic Average Concep Summary and Implicaions Inerpreing he Proposed Program under Cash-basis vs. Accrual Accouning Supply Managed Indusries Under he Proposed Program Needs of Supply Managed Secors Suppor o Supply Managed Indusries Under Curren Programs Operaion of he Proposed Program on Farms wih Supply Managed Producs Trade Risk and Program Design Program Design Alernaives for Supply Managemen Onario Supply Managemen Boards Proposal Observaions Poenial for Trade Dispues Under Proposed Program Green and Amber The Counervail Issue Summary Impac of Oher Jurisdicions Farm Policies Under he Proposed Program Insurance Issues and Opporuniies Enhanced Insurance Producs Linkages Beween Producion Insurance and BRM Transfer Paymens Developing A Deposi Insrumen The Opion As an Adminisraion Fee Summary... 78

14 11.0 Program Adminisraion Under Proposed Program Producer Applicaion and Compliance Under he Proposed Program Varians o he Proposed Program Treamen of Labour in Proposed Program Combining he Sabilizaion Layers under he Proposed Program NISA Observaions Abou Program Varians Affordabiliy of Proposed Program Transiional Programming: Alernaives and Analysis Appendix I Appendix II. Albera Spring Price Endorsemen and Revenue Insurance Coverage Compared o MRI

15 Lis of Tables Table 3.1 Composiion of Farms in OFIDP Applican Daabase, Table 3.2 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- All Farm Types, Table 3.3 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Apple Farms, Table 3.4 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Cow-Calf Farms, Table 3.5 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Feedlo Farms, Table 3.6 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Dairy Farms, Table 3.7 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Cash-crop Farms, Table 3.8 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Greenhouse Farms, Table 3.9 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Mixed Farms, Table 3.10 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Hog Farms, Table 3.11 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Poulry Farms, Table 3.12 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Oher Livesock Farms, Table 3.13 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Tobacco Farms, Table 3.14 Paymens Made Under Curren and Proposed Programs, OFIDP Daabase- Oher Horiculural Farms, Table 3.15 Composiion of Farms in he NISA Daabase Table 3.16 Toal Paymens by Segmen, , Curren and Proposed Programs Table 3.17 Average Paymen per Farm by Segmen, , Curren and Proposed Programs Table 3.18 Suppor Under Curren and Proposed Programs, Field Crop Farms, Table 3.19 Suppor Under Curren and Proposed Programs, Frui and Vegeable Farms Table 3.20 Suppor Under Curren and Proposed Programs, Greenhouse Frui and Vegeable Farms Table 3.21 Suppor Under Curren and Proposed Programs, Poulry Farms Table 3.22 Suppor Under Curren and Proposed Programs, Dairy Farms Table 3.23 Suppor Under Curren and Proposed Programs, Hog Farms Table 3.24 Suppor Under Curren and Proposed Programs, Beef Farms Table 3.25 Suppor Under Curren and Proposed Programs, Tobacco Farms Table 3.26 Margin Sabiliy, Cash Crop Farms Table 3.27 Margin Sabiliy, Frui and Vegeable Farms Table 3.28 Margin Sabiliy, Greenhouse Farms Table 3.29 Margin Sabiliy, Poulry Farms... 32

16 Table 3.30 Margin Sabiliy, Dairy Farms Table 3.31 Margin Sabiliy, Hog Farms Table 3.31 Margin Sabiliy, Hog Farms Table 3.32 Margin Sabiliy, Cow-Calf Farms Table 3.33 Margin Sabiliy, Feedlo Farms Table 3.34 Margin Sabiliy, Tobacco Farms Table 3.35 Breakdown of OFIDP Sample Table 3.36 Comparison of Program Paymens Beween Curren and Proposed Programs, Average per farm Toal Table 4.1 Disribuion of Governmen Paymens o Producers by Commodiy Type and Province, Average Shares Table 4.2 Disribuion of Governmen Paymens o Producers by Commodiy Type and Province, Average Amouns Table 4.3 Onario Commodiy Shares of Farm Cash Receips, (Thousand Dollars). 46 Table 4.4 Farm Cash Receips Relaive o Program Paymens Table 6.1 Breakdown of OFIDP Sample Table 6.2 Paymens Under Proposed Program on Cash vs. Accrual Basis, Toal Table 7.1 Diversificaion of Farms Wih Supply Managed Sales Based on 2001 Tax Year NISA Daa Table 7.2 Diversificaion of Farms Wih Dairy Sales Based on 2001 Tax Year NISA Daa Table 7.3 Diversificaion of Farms Wih Poulry Sales Based on 2001 Tax Year NISA Daa Table 7.4 Paymens Under Curren Programs, Farms wih Supply Managed Sales>51% Farm Sales Table 7.5 NISA Fund Balances For Supply Managed Operaions, 2001 Tax Year Table 7.6 NISA Fund Balances For Dairy Operaions, 2001 Tax Year Table 7.7 Alernaives for Supply Managemen Under Proposed Program Table 8.1 Esimae of he Share of Paymens o Various Commodiies Under he Curren and Proposed Programs, NISA Paricipans Table 9.1 Producer Suppor Esimaes for he US and he EU, and , Percenage Table 12.1 Comparison of Program Paymens Wih and Wihou Labour as an Eligible Expense, Combined Toal Table 12.2 Suppor Under Curren and Proposed Programs Wih and Wihou Labour as an Eligible Expense, Field Crop Farms Table 12.3 Suppor Under Curren and Proposed Programs Wih and Wihou Labour as an Eligible Expense, Frui and Vegeable Farms Table 12.4 Suppor Under Curren and Proposed Programs Wih and Wihou Labour as an Eligible Expense, Greenhouse Farms Table 12.5 Suppor Under Curren and Proposed Programs Wih and Wihou Labour as an Eligible Expense, Poulry Farms Table 12.6 Suppor Under Curren and Proposed Programs Wih and Wihou Labour as an Eligible Expense, Dairy Farms Table 12.7 Suppor Under Curren and Proposed Programs Wih and Wihou Labour as an Eligible Expense, Hog Farms Table 12.8 Suppor Under Curren and Proposed Programs Wih and Wihou Labour as an Eligible Expense, Beef Cow-calf Farms... 87

17 Table 12.9 Suppor Under Curren and Proposed Programs Wih and Wihou Labour as an Eligible Expense, Beef Feedlo Farms Table Suppor Under Curren and Proposed Programs Wih and Wihou Labour as an Eligible Expense, Tobacco Farms Table Margin Variabiliy Wih and Wihou Labour as Eligible Expense, Cash Crop Farms Table Margin Variabiliy Wih and Wihou Labour as Eligible Expense, Frui and Vegeable Farms Table Margin Variabiliy Wih and Wihou Labour as Eligible Expense, Greenhouse Farms Table Margin Variabiliy Wih and Wihou Labour as Eligible Expense, Poulry Farms Table Margin Variabiliy Wih and Wihou Labour as Eligible Expense, Dairy Farms Table Margin Variabiliy Wih and Wihou Labour as Eligible Expense, Hog Farms Table Margin Variabiliy Wih and Wihou Labour as Eligible Expense, Beef Cow-Calf Farms Table Margin Variabiliy Wih and Wihou Labour as Eligible Expense, Beef Feedlo Farms Table Margin Variabiliy Wih and Wihou Labour as Eligible Expense, Tobacco Farms Table Toal Program Paymens Under Curren Programs, Proposed Program, and Proposed Program Wih Sabilizaion Layers Combined, Table Suppor Under Curren and Proposed Programs wih Sabilizaion Layers Combined, Field Crop Farms Table Suppor Under Curren and Proposed Programs wih Sabilizaion Layers Combined, Frui and Vegeable Farms Table Suppor Under Curren and Proposed Programs wih Sabilizaion Layers Combined, Greenhouse Farms Table Suppor Under Curren and Proposed Programs wih Sabilizaion Layers Combined, Poulry Farms Table Suppor Under Curren and Proposed Programs wih Sabilizaion Layers Combined, Dairy Farms Table Suppor Under Curren and Proposed Programs wih Sabilizaion Layers Combined, Hog Farms Table Suppor Under Curren and Proposed Programs wih Sabilizaion Layers Combined, Beef Cow-calf Farms Table Suppor Under Curren and Proposed Programs wih Sabilizaion Layers Combined, Beef Feedlo Farms Table Suppor Under Curren and Proposed Programs wih Sabilizaion Layers Combined, Tobacco Farms Table Margin Variabiliy Wih Combined Sabilizaion Layers, Cash Crop Farms Table Margin Variabiliy Wih Combined Sabilizaion Layers, Frui and Vegeable Farms

18 Table Margin Variabiliy Wih Combined Sabilizaion Layers, Greenhouse Farms Table Margin Variabiliy Wih Combined Sabilizaion Layers, Poulry Farms Table Margin Variabiliy Wih Combined Sabilizaion Layers, Dairy Farms Table Margin Variabiliy Wih Combined Sabilizaion Layers, Hog Farms Table Margin Variabiliy Wih Combined Sabilizaion Layers, Beef Cow-calf Farms Table Margin Variabiliy Wih Combined Sabilizaion Layers, Beef Feedlo Farms Table Margin Variabiliy Wih Combined Sabilizaion Layers, Tobacco Farms Table NISA Maching Funds Relaive o Triggered Sabilizaion Paymens Table 13.1 Curren NISA Balances by Commodiy Segmen, $ Table 13.2 Curren NISA Balances by Commodiy Segmen, $ Table 13.3 Sufficiency of NISA Fund Balances Relaive o BRM Funding Requiremens Table 13.4 Sufficiency of NISA Fund Balances Relaive o BRM Funding Requiremens by Farm Sales Caegory Table 14.1 Governmen Conribuions o Companion Programs, o Lis of Figures Figure 7.1 Program Paymens riggered According o Producion Margin Loss for a Farm Wih Supply Managed Produc Sales... 63

19 Impac of he APF-Business Risk Managemen Programs on Onario Agriculure Larry Marin and Al Mussell 1.0 Inroducion The Business Risk Managemen (BRM) program ha is proposed under he Federal-Provincial Agriculural Policy Framework (APF) presens a fundamenal change from exising safey ne programming. I shifs programming from a blend of programs, provincial and naional, o one wih only wo naional componens afer a hree-year ransiion period. Effecively, his will eliminae region-specific programming. The proposed program will also firmly esablish producer paricipaion (hrough cash deposis), and will be governed under a firmer funding envelope han previously. A a broad level, he proposed BRM program has been reviewed by a hird pary (Marin, Brown-Andison, Soddar, Mussell) and found o be consisen wih he objecives laid ou for safey ne programs by he federal and provincial minisers of agriculure. Based on he informaion and erms of reference presened o hem, he hird pary review concluded ha he proposed BRM program is likely o obain he objecives laid ou by he agriculure minisers a leas as well, if no beer, han curren safey ne programming. However, while he hird pary analysis provides an assessmen of he proposed programs a a broad level, i conains gaps ha can be only be filled wih addiional applied research. These include: Impac of he proposed BRM program on specific commodiy segmens in Onario agriculure Impac of he proposed BRM program on rade dispues, and he poenial for program design o miigae rade dispues Thus, he purpose of his projec is o build on he recenly compleed hird pary analysis o consider issues ha are imporan o Onario agriculure. 1.1 Objecives The overall objecive of his sudy is o deermine he impac of he proposed Business Risk Managemen Program on Onario agriculure, given he objecives agreed o by he federal and provincial minisers, and he erms of reference specified by OMAF in conjuncion wih Onario s farm commodiy organizaions. Thus, he general objecive is o idenify he poenial effecs on specific segmens of Onario agriculure, o es wheher some program parameers can affec hose impacs, and recommend changes o he proposal ha would improve program 1

20 performance. The specific objecives are o analyze he exen o which he proposed programs would: Sabilize individual farm incomes in Onario for he various secors; Change he disribuion of governmen funds beween secors, regions, and farmers wih varying level of income decline and impac on he compeiive advanage of Onario producers versus hose in oher regions of Canada; Reduce program overlap, mainain appropriae linkages beween governmen programs and wih privae risk managemen mechanisms, and suppor good risk managemen pracices; Appropriaely rea farms wih supply managed producion; Offse he impac of programs in compeing jurisdicions; Incorporae insurance-like principles; Disor producion or markeing decisions; Reduce he poenial for rade dispues; Be easy for farmers o undersand and paricipae in, in a cos effecive manner; Provide a smooh ransiion from presen programming; and Conribue o beer farm managemen decision making and planning. 1.2 Approach To mee he above objecives, he following approach is employed. A brief descripion of he proposed program is developed. The concepual basis for he program, and an illusraion of how he program would perform on a sylized farm is presened o provide conex. To deermine he empirical implicaions of he proposed program on income sabilizaion, Onario daa from he NISA and OFIDP programs are used in models consruced o simulae he proposed BRM program and curren programs. The resuls of hese simulaions are inerpreed in he conex of average farm incomes and appropriae measures of risk in farm incomes across commodiies, and farm sizes. In addiion, muli-year daa from individual farm records are analyzed o undersand he implicaions of he proposed program a a deailed level. The resuls of he above analysis are aggregaed o deermine he anicipaed cos of he proposed BRM program. This is compared wih he funding envelope ha is available, and he cos of curren programs. The resuls are inerpreed in he conex of oal funding received by individual commodiy segmens under he curren and proposed BRM program. In paricular, very lile is known abou how well he proposed program will perform as a replacemen for SDRM in he horiculural indusry. One aspec of he analysis will be o specifically compare he wo and compare he proposed program wih and wihou hired labour as an eligible expense. A concepual analysis of he impac of he proposed BRM program on farms wih supply managed producs will be conduced. This will be done o undersand he impacs on supply managed and non-supply managed producs produced on he same farm, and he relaive ease of reporing supply managed earnings separaely from non-supply managed earnings. This will be 2

21 bolsered by empirical examples drawn from farm records on farms wih supply managed and non-supply managed income. In addiion, one issue is wheher he BRM program mees he objecives of supply-managed indusries from he perspecive of poenial inernaional rade conflics. This will be addressed in he research, a leas o he exen of undersanding he amoun of governmen money ha would suppor supply managemen. The BRM is inended o be a risk managemen program. I conains producion insurance and has he inen of developing addiional producion insurance producs. In addiion, here is ineres in adding insurance-like principles o he ransfer paymen componen. One possibiliy is o replace he deposi wih an insurance or opion insrumen. The sudy considers poenial exensions of insurance producs, and an opion concep o replace he deposi. Disorion of producion, markeing, and farm srucure decisions relaes o he exen o which he proposed BRM program influences decisions made by farmers on inensiy and scale in he producion of a produc, or on which producs o produce. A concepual analysis will be compleed of he incenives in he proposed BRM program o disor hese decisions, building on he analysis in he recen hird pary review. To assess he exen o which he proposed BRM program could cause rade dispues, payous by various componens of he program and by commodiy secor over he pas five years are esimaed. This is done o deermine he disribuion of paymens under he green and amber aspecs, and by indusry o es he possibiliy of riggering a dispue. Less is known abou he specifics of he design of safey ne programs during he ransiion period beween he curren programs and he proposed BRM program. To assess alernaives for he design of he ransiion programming, focus groups will be conduced wih he working group on companion programs and OMAF adminisraors o undersand he alernaives, consrains, and funding issues ha will occur in he ransiional period. The findings of hese focus groups will be documened and assessed. Based on he resuls, alernaives for ransiional programming will be developed. If appropriae, he daabases described above will be used o simulae he impac and cos of he ransiional funding. Similarly, he proposed program promises o broaden and enhance he range and deph of producion insurance. Moreover, governmen has promised o link producion insurance and paymens under he Business Risk Managemen program. We will conduc inerviews wih program adminisraors o deermine wha is feasible in hese wo areas. 3

22 1.3 Organizaion of he Repor Secion 2.0 of he repor provides an overview and descripion of he mechanics of operaion of he proposed program. Secion 3.0 provides a summary and analysis of he disribuion of suppor under he proposed program relaive o curren programs. Secion 4.0 provides an analysis of he effeciveness of he proposed program in sabilizing farm income. The impac of he proposed programs in conveying incenives for risky farm enerprises is presened in Secion 5.0. Secion 6.0 considers he differences beween cash-basis and accrual accouning in inerpreing he comparison beween he proposed program and curren programs. Secion 7.0 provides a descripion and analysis of he proposed program as i will operae for farms wih producion of supply managed producs. The poenial for he proposed program o rigger rade dispues is assessed in Secion 8.0. Secion 9.0 discusses he impac of oher jurisdicions farm policies on he effeciveness of he proposed program. Secion 10.0 considers he linkage beween he proposed program and crop/producion insurance programs. Secion 11.0 considers he impac of he proposed program on farmer decision-making and he coss of applicaion and compliance. Secion 12.0 provides an analysis of alernaives for ransiion programming beween curren and proposed programs. Finally, Secion 13.0 provides observaions, suggesions for improvemen, and conclusions of he sudy. 4

23 2.0 The Proposed Business Risk Managemen Program 1 The proposed BRM program has wo componens. One is producion insurance. I consiss of currenly exising producion insurance producs, as well as sill-o-be-defined addiional producion insurance producs. The second is a ransfer paymen componen i.e. a program ha ransfers money from governmen (shared by producers) when producers experience a loss of income as defined by an accouning margin. Poenial new insurance producs will be discussed in laer secions of his repor. In he evaluaion of he program in his and he nex hree secions, we assume ha he exising producion insurance programs remain in place, and ha heir payous are no affeced by he ransfer componen. The proposed BRM ransfer componen differs from he curren suie of programs in several ways: The suie of disaser, income sabilizaion and companion programs is replaced by a single mechanism wih boh disaser and sabilizaion componens. The measure of income ha is used o rigger governmen paymens differs from he suie ha is currenly being used. The cos sharing relaionship beween governmens and farmers conribuions differs beween he proposed program and curren programs. The producer financing of program paymens differs beween he proposed program and curren programs. The remainder of secion 2.0 explains he ransfer componen of he proposed BRM. 2.1 The Measure of Producer Income Under he proposed program, he measure of income ha is used o rigger paymens is he producion margin, calculaed using modified accrual accouning procedures. Paymens can occur in a year when an individual farmer s producion margin falls below a reference margin (explained in secion 2.2). Wih he BRM, here will be only one riggering mechanism. I will replace he curren suie of programs ha have a variey of riggering mechanisms: The disaser (OFIDP in Onario) program riggers paymens wih a gross margin, also based on modified accrual accouning, bu somewha differen han he modificaion in BRM. NISA riggers governmen conribuions ino a fund, o a limi based on ne sales, ha mach producer conribuions. A producer can access he governmen conribuion when hey experience a loss measured by a gross margin calculaed using cash accouning, or when he 1 Porions of his secion are adaped from he Third pary Review by Marin, Brown-Andison, Soddar, Mussell 5