Overview of Canada s Business Risk Management Programs

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1 Overview of Canada s Business Risk Management Programs 1

2 Producer Savings Accounts (NISA: ) 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 new farms or once the reserve was depleted 2

3 Margin-Based Programs (AIDA & CFIP: ) 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introduced whole-farm margin based programming to backstop NISA First national program to provide support based on a historical reference margin Producers whose gross margin fell below 70% of their historical average received payments from governments to bring their margins back up to 70%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 3

4 Margin-Based Programs (CAIS: ) 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) Support and eligibility shifted from individuals to farm enterprise (removal of 10% rule) 4

5 CAIS Producer / Government Shares Producer Share Government Share 50% 50% 30% 70% 20% 80% 100% 85% 85% 70% Ex: reference margin = $100,000 Producer s Reference Margin Gov t cheque for $7,500 Gov t cheque for $10,500 Gov t cheque for $56,000 40% 0% 60% Negative Margins 5 5

6 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 income fluctuations (i.e., the first dollar of income loss) 6

7 Growing Forward ( ) Specific outcomes for BRM programs are: 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 commodities 7

8 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 8

9 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 9

10 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 viability and net of potential AgriInsurance indemnities 10

11 AgriStability - Producer / Government Shares Cost share as current year margin declines below reference margin Producer Share AgriInvest 30% 70% 20% 80% Government Share 100% 85% 70% Producer s Reference Margin 0% 60% Negative Margins 11

12 AgriStability Reference Margins Example A producer s Production Margins for the last five years were: $50,000 (lowest year) $90, $150,000 (highest year) $110, $100,000 Dropping the high and low years and averaging the remaining 3 years gives the producer a Reference Margin of $100,000 This is, in effect, the producer s level of support going into the 2012 program (tax) year 12

13 AgriStability Payments Example 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 13

14 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 th - 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 in a given year 14

15 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 - Assessment assumes full participation in existing BRM programs 15

16 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 16

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