Canadian Direct Payment Farm Programs: 1981-2010 James Vercammen Sauder School of Business/Food and Resource Economics University of British Columbia Growing Our Future Policy Conference April 5, 2012 (Ottawa)
Background The Canadian government has a long history of supporting and stabilizing farm income with direct payment programs While some programs such as crop insurance and farm input rebates are "permanent", most programs have had short life spans The nature of the intervention has evolved considerably over the past 30 years due to trade rules, increased focus on the environment and many other factors
Background, Cont n Current direct payment programs are coordinated through the Business Risk Management (BRM) and various non-brm programs within a 5-year joint federal - provincial initiative called Growing Forward (2008-2012) Since 2007, over $7 billion in federal and provincial funds has flowed to producers from BRM programs Non-BRM programming allocates about $1.3 billion annually (cost-shared 60:40 between the federal and provincial/territorial governments).
Example (Ontario) In Ontario Agricorp delivers a variety of direct payment programs, which include the national BRM suite and other non-brm programs which are unique to Ontario The main non-brm program is the Risk Management Program, which is funded by a combination of producer premiums and the Ontario government The Risk Management Program pays out (livestock, grains, oilseeds and horticulture) if a commodity s market price drops below a threshold, which depends on the cost of production and coverage chosen by producer
Presentation Outline Direct payments demand and supply How has this support evolved over the past 30 years (analysis of Federal Direct Payment Data)? What are the social costs and concerns over federal direct payment programs?
Farm Level Demand for Intervention Agricultural producers vary with respect to degree of price and production risk All sectors are subject to short, medium and long term price and production shortfalls A 2008 representative grain farm in British Columbia s Peace River District is used to illustrate the farm-level demand for farm income support and stabilization Financial vulnerability is significant after subtracting $115,000 from farm income to account for return on equity and management (no depreciation allowance)
Wheat Barley Peas Oats Canola Seed(1) Fallow Total Acres 600 300 100 200 700 500 100 2500 Yield (bu/ac) 40 60 40 75 30 6.67 0 Price ($/bu) 6 4 4 2.25 11 24 0 Wghted Avg Revenue ($/ac) 240 240 160 168.75 330 160.08 0 230.72 Direct Cost ($/ac) 193 175 134 143.5 232 109.5 91 174.66 Gross Margin ($/ac) 47 65 26 25.25 98 50.58 91 56.06 Figure: 2008 Peace River Case Farm Assumptions
Low debt (Debt/Equity = 0.2) Yield Price 20% Base 20% 20% (135,889) (43,603) 48,683 Base (43,603) 71,755 187,113 20% 48,683 187,113 325,543 Medium debt (Debt/Equity = 0.4) Yield Price 20% Base 20% 20% (173,874) (81,588) 10,698 Base (81,588) 33,770 149,128 20% 10,698 149,128 287,558 High debt (Debt/Equity = 0.6) Yield Price 20% Base 20% 20% (211,859) (119,573) (27,287) Base (119,573) (4,215) 111,143 20% (27,287) 111,143 249,573 Figure: Case Farm Results
Interest Group Demand for Intervention Farm interest groups lobby for direct payments (e.g, NFU, Canadian Dairy Network, Canadian Organic Growers, Horticultural Crops Ontario, Ontario Forage Council) Arguments are easy to make, and the non-farming community has generally been sympathetic NFU has been very vocal; e.g., June, 2010: "Analysis of public data shows that farmer prices are down, grocery-store prices are up, and others in the supply chain must be taking a bigger chunk. We need the government to intervene in the beef supply chain on behalf of the farmer and rancher."
Government Supply of Intervention Two extreme views of the supply side of support and stabilization "Self-willed" government (maximizes a weighted sum of producer and consumer surplus) "Clearing house" government (responds to lobbying in a bid to secure resources and votes) In most countries, including Canada, actual policies are somewhere in between and include fiscal constraints A long term decline in prices help explain governments attempts to support income to historic levels
8,000,000 Market Net Income Total Net Income 6,000,000 4,000,000 Thousands of Dollars 2,000,000 0 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981-2,000,000-4,000,000-6,000,000 Figure: Market and Total NFI for Canada
8,000,000 Market Net Income Total Net Income 6,000,000 4,000,000 Thousands of Dollars 2,000,000 0 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981-2,000,000-4,000,000-6,000,000 Figure: Market and Total NFI for Canada, 2002 Dollars
Objectives of Graphical Analysis This section examines direct payments broken down by commodity sector, region and various other dimensions Time lines for the various programs are also examined Direct payments are presented against a historic events backdrop to help us understand how external factors shape the level of payment
100% Federal Stabilization Provincial Stabilization Crop Insurance Other 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 Figure: Break Down of Federal Direct Payments
Figure: Regional Recipients of Federal Direct Payments 100% Quebec Ontario Prairies Other 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981
1981 1991 2001 2010 Canadian Agricultural Income Stabilization (CAIS) Program Crop insurance Agri-Stability Special Canadian Grains Program Farm Income Payment Gross revenue insurance plan (GRIP) Provincial stabilization programs AgriInvest Net income stabilization account (NISA) Transitional Industry Support Program (TISP) Grains and Oilseeds Payment (GOPP) Farm Support and Adjustment Measures II Farm input rebates Dairy subsidy Special Drought Assistance Western grain stabilization 2003 Transition Funding Farm Income Assistance CAIS Inventory Transition Initiative (CITI) AgriRecovery Beef Cattle and Sheep Support Canadian Farm Income Program (CFIP) Bovine Spongiform Encephalopathy Recovery Program Agricultural Income Disaster Assistance program (AIDA) Tripartite payments Freight Cost Pooling Assistance Program (FCPAP) Canada-Saskatchewan Assistance Program (C-SAP II) Figure: Time Span of Current Federal Direct Payment Programs
90 80 70 60 Frequency 50 40 30 20 10 0 1 2 or 3 4 or 5 6 or 7 8 or 9 > 9 Program Duration (Years) Figure: Distribution of Programs by Program Age
50 6,000,000 Number of Programs 45 40 35 30 25 20 15 10 5 Number of Programs Value of Programs 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 Total Direct Payments to Canadian Farmers (000s of Dollars) 0 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Figure: Number and Value of Federal Programs
8,000,000 Deficit > 5% GDP Deficit about 5% GDP Budget Surplus 7,000,000 6,000,000 Debt to GDP > 90% -G -G -G =Negative Growth in GDP -G Liberal Conservative Liberal Conservative Thousands of Dollars 5,000,000 4,000,000 3,000,000 Canada-U.S. Free Trade Agreement Signed NAFTA & GATT BSE Crisis Begins Signed 2,000,000 1,000,000 "Crow" Transportation Subsidy Abolished Major Drought in Western Canada 0 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 Figure: Federal Programs with Historic Events Backdrop
0.7 Quebec Ontario Prairies 0.6 0.5 0.4 0.3 0.2 0.1 0 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 Figure: Ratio of Producer Premiums and Federal Payments
Evidence of Stabilization and Support Has the federal government successfully supported Canadian farm income? Has the federal government successfully stabilized Canadian farm income? The analysis is most relevant for the period preceding the recent price boom.
6,000,000 5,000,000 Direct Payments (Thousands of Dollars) 4,000,000 3,000,000 2,000,000 1,000,000 0-5,000,000-4,000,000-3,000,000-2,000,000-1,000,000 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 Market Net Farm Income (Thousands of Dollars) Figure: Scatterplot of Market NFI and Direct Payments
8,000,000 6,000,000 Total Net Farm Income 4,000,000 Thousands of Dollars 2,000,000 0-2,000,000 Market Net Farm Income -4,000,000-6,000,000 Figure: Actual and Fitted Values of Market and Total Net Income: Canada
1,200,000 1,000,000 800,000 Thousands of Dollars 600,000 400,000 200,000 0-200,000-400,000 Figure: Actual and Fitted Values of Market and Total Net Income: Quebec
1,200,000 1,000,000 800,000 Total Net Farm Income 600,000 Thousands of Dollars 400,000 200,000 0-200,000-400,000 Market Net Farm Income -600,000-800,000 Figure: Actual and Fitted Values of Market and Total Net Income: Ontario
7,000,000 6,000,000 5,000,000 4,000,000 Total Net Farm Income Thousands of Dollars 3,000,000 2,000,000 1,000,000 0-1,000,000-2,000,000 Market Net Farm Income -3,000,000-4,000,000 Figure: Actual and Fitted Values of Market and Total Net Income: Prairies
Transfer Efficiency Previous concerns about trade distorting impacts of direct payments have diminished Still lots of concern about domestic taxpayer efficiency Rude and Ker (2011) estimated that a marginal payment of one dollar in the federal government s AgriStability program resulted in a mere 39 cent net gain to farm households Inefficient targeting of direct payments is a major concern in the U.S. because program recipients are often absentee land owners (Goodwin et al. 2011)
Asymmetric Information Moral hazard results when farmers take high-risk actions because programs offer protection Adverse selection results when low risk farmers self select out of programs, and the remaining pool is above average risk Both help to explain why private markets for risk transfer fail to exist Both also reduce the overall effectiveness of direct payment programs
Delay in Payments Direct payments often have significant administrative delays AgriStability payments based on income tax (collected typically 10-15 months after the loss occurs) Vercammen (2011) estimates that a one million dollar decline in Canadian market NFI results in an immediate $772,000 decrease in total NFI (23% protection) A permanent one million dollar decrease in market NFI results in a permanent decrease in total NFI equal to $312,600 (69% protection)
Capitalization of Support Payments into Land Prices Program payments are expected to result in higher land prices Farmers who pay an inflated price for land require the direct payment to service the added debt The original benefit of the direct payment is therefore diluted Turvey et al. (1995) estimate that a 1 percent increase in payments raises the price of farmland by 0.5 to 0.6 percent in the long run
Inefficient Outcomes due to Rent Seeking and Lobbying Farm groups lobby the federal government for more lucrative programs and larger ad hoc payments Governments may respond with inefficiently high payments to maintain rural support This problem is particularly acute in the U.S. Resources are wasted both in terms of inefficient program design and excessively large transfers
Highly leveraged farmers operate on thin margins Farms are vulnerable to negative price/production shocks Federal direct payments have been quite successful with respect to income support, and moderately successful with respect to income stability Despite the need for direct payments, there are many sources of market failure which dilute the overall benefit of direct payment programs The Federal Government needs to continually "simplify" programs and achieve more efficient targeting