Safety Nets – Difficult Discussions Lie Ahead
You can’t sustain a strong, competitive agricultural economy based on government safety net programs alone. But as events of the past decade have shown, neither can you do it without them. Hundreds, if not thousands, of Ontario farmers would be out of business now if not for safety net programs. This help was especially crucial during the global-grain-war, low-price era of the late 1980s and early 1990s, and in poor-weather years such as 1992.
The introduction of the Gross Revenue Insurance Program (GRIP), which is better known in Ontario as Market Revenue Insurance, and the Net Income Stabilization Account (NISA) programs, in 1991, created stability and predictability in grain farm income. These initiatives effectively ended the need for ad hoc government programs which were so dominant a decade ago. Improvements in crop insurance were equally important, as shown by a comparison between 1988 -- when $1 billion in ad hoc drought assistance was provided across Canada because of crop insurance deficiencies -- and 1992, when none was provided (or requested by farm groups) despite devastating weather effects on crop yields.
The existence of quality safety net programs is a key reason for the improved confidence and optimism which now characterizes cash-crop agriculture in Ontario. The programs are there to provide reasonable financial security in the event of major price- or weather-related stresses. Farm planning activities and management expertise can be concentrated on the introduction of new technology or farming ventures designed to improve farm profitability over a multi-year time frame.
It would be nice to think the era of price wars and income depression is long past, and that safety nets, (especially those related to grain prices), are no longer necessary. But as shown in recent analyses by Doug Mutch of the Canada Grains Council (see related article elsewhere in this issue) and Brian Doidge (see January newsletter comparing corn safety net programs in Ontario with those in the United States, Europe and Quebec), this is not the case.
Depressed prices caused by large global grains stocks (relative to global demand), are as likely to be part of the future as the past. And support levels remain high in competing countries and provinces.
It would be tempting to seek a simple continuation of the status quo when the existing federal-provincial agreement on farm safety net programs ends in March 1999. But it is not so easy.
While the Canadian government reports Canada’s farm safety net budget is $600 million per year, actual expenditures in 1996/97 and 1997/98 (and projected for 1998/99) are in the range of $660 to more than $700 million, with all of the excess having gone to the Prairie provinces. Expect lots of Western screams when the feds attempt to eliminate such so-called "transition support" beginning in 1999/2000.
Despite the disproportionately large share of federal safety net funds going West, Prairie farmers remain very vulnerable to depressed grain prices, a result (among other factors) of the elimination of Prairie GRIP programs and the apparent euphoria which followed a one-time tax-free payment of $1.6 billion in "WGTA-compensation" funds. Vulnerability also stems from expected lower prices (farmers now pay the full cost of grain transportation), and the fact that a very large portion of federal safety net funds have been used to reduce crop insurance premiums paid by farmers in Manitoba and Saskatchewan. There seems to be a general expectation in Western Canada (especially the eastern Prairies) that NISA accounts will provide needed funds during one year of depressed prices, and that the federal government will provide ad hoc assistance ("as it always has") if depressed conditions persist.
Another effect of the "use federal funds to cut crop insurance premiums" approach of Manitoba and Saskatchewan has been the re-allocation of a disproportionate and growing share of the base $600-million federal safety net budget to these provinces. The allocation formula assigns funds for crop insurance (plus NISA and advance payments) first, before distributing the remaining money for so-called companion programs such as GRIP, research, and market development. In essence, Manitoba and Saskatchewan are using federal funds (including "transition" money) to reduce crop insurance premiums, increase the government expenditure for crop insurance, and channel a higher percentage of federal safety net funds to those provinces. Not surprisingly, the portion of total federal safety net funds coming to Ontario is projected to drop to about 15 per cent in 1997/98 and 1998/99, compared to Ontario’s production of about 22-24 per cent of the Canadian output of non-supply-managed farm commodities.
Another complication involves the 3 per cent interest bonus on "Fund 1" (i.e., producer contributions). This bonus was introduced as an offset for the fact that NISA contributions are after-tax money rather than before-tax money, as was the initial program intent. However, growing NISA account balances mean that this interest-bonus expenditure is ballooning (expected to reach $35 million, nationally, in 1998/99), meaning less money for other safety net programs. Bonus interest has also caused some other side effects, including the fact that many farmers do not withdraw NISA funds (especially Fund 1 money) -- even when payouts are triggered -- because money can be borrowed at a lower interest rate than is being paid on NISA accounts (especially if NISA accounts are used as collateral). The result can be growing operating loans as well as NISA account balances.
Safety net discussions in 1998 will be difficult. They are also critical. Ontario grain farmers do not relish a return to conditions of the dirty 1980s, when long-term planning meant economic survival for one more year, and government support was driven by civil unrest and begging.