Status of Safety Nets as the APF Approaches
by Brian Doidge, OCPA Economist and Market Analyst

Inadequate funding:
What is proposed is that funding for business risk management tools (programs that used to be referred to as safety nets) be frozen at ‘current rates’ of approximately $1.1 billion Federally matched (assuming usual 60:40 Fed/Prov sharing) by $733 million Provincially. Page One of the discussion paper claims “the total risk management funding could be over $1.8 billion a year over the next five years.” Problem is that this is actually less than current expenditures as per the table below, taken from Page 3 of the same document.

Proposing $1.833 billion in total business risk management funding when current core funding exceeds $1.960 billion should be an early indicator that something is amiss.

And indeed it is. The grain and oilseed sector (at least in Ontario) achieved approximate equity with support provided by Quebec and the United States in 2001/02 only because of the $1 billion/year in additional support provided by Transition Program funding ($600 m Fed; $400 m Prov). This additional funding was provided in theory as a transition to the APF, but also resulted at least in part from the work done by OCPA and the Grain Growers of Canada to demonstrate annual trade injury of approximately $1.2 billion/year using Ag Canada’s own analyses. That trade injury has not disappeared, and will continue for at least the duration of the 2002 U.S. Farm Bill through 2007; however, trade injury compensation funding (whatever it may be named) will disappear. Without continuation of this Transition Program funding, the grain and oilseed sector once again slips back far below support provided to our competitors and to imported U.S. grains and oilseeds that flow freely across our open border.

Inadequate programming:
Taxpayers fund agricultural safety nets because society has agreed there is an obligation on government to assist in mitigating risks beyond the ability of an individual grower to combat. As the following chart demonstrates (see p. 11), the existing suite of Ontario safety net programs mitigates those risks reasonably well, whereas programs as proposed under the APF leave a gaping hole.

Because of the Federal government’s refusal to address injury caused by foreign domestic subsidies which artificially depress grain and oilseed prices and revenues, income support programming is absent from proposed business risk management programming under the APF. For example, the current counter-cyclical income support program (MRI) ends March 31, 2003, meaning the crop harvested in 2002 is the last one protected. In fact, all ‘companion programs’ such as MRI are discontinued under the APF. The current ‘disaster’ program (OFIDP/CFIP) ends December 2002. The income support program SDRM, for those crops with inadequate or no crop insurance program, ends with the 2002 crop.

Under the APF, only two programs will be funded: crop insurance will be expanded into Production Insurance to cover more crops and also livestock; NISA will be substantially changed to create a ‘super’ NISA. However, neither of these addresses the risk to income currently offset by companion programs such as MRI, SDRM or disaster programming.

Not much analytical work has been completed to date on the proposed Production Insurance, and certainly not enough to provide any assessment of coverage extension for livestock operations.
Inadequate analytical work also plagues the proposed ‘super’ NISA. However, we can make the following observations:

1. The ‘minimum income trigger’ is eliminated.

2. The 3% interest bonus is eliminated.

3. Filings will be based on accrual accounting, not cash accounting.

4. Contributions based on eligible net sales will be eliminated, replaced by contributions and withdrawal triggers based on ‘production margin’. Essentially, AAFC wants to include only those items over which you have minimal discretionary control, and ignore those that you can manipulate or allocate. The net result is that your potential Production Margin is larger than your current Gross Margin. However, variability in annual results is much lower which dramatically lessens the probability of triggering a withdrawal using the proposed Production Margin rather than the current Gross Margin. The likelihood of negative margins is virtually eliminated.

5. A ‘disaster’ component is proposed to be incorporated within ‘super’ NISA. As currently proposed, whenever your Production Margin falls below your historic average, you trigger a withdrawal, but 70% of the payment comes from the account holding your own deposits. You get your own money back. Only 30% of the payment comes from government funds. However, whenever your Production Margin falls below a pre-determined ‘disaster’ threshold, the ratio changes such that 30% of the payment will come from your own account, while 70% comes from government funds. Compare this to the current situation where disaster payments are 100% government-funded.

6. Government funds will no longer be deposited into an account you control. Government funds will be pooled, and triggered only on withdrawal. Government matching of producer deposits occurs not on deposit as at present, but only on withdrawal. What this means is that government does not actually put up any money when you make a deposit, only accumulates a ‘contingent liability’, or obligation, to be paid when a withdrawal is triggered.

7. You do not take government funds with you into retirement. You take only your own remaining deposits plus interest earned.

8. The amount of the government payment is determined by:

a) the amount of the triggered
withdrawal which will vary depending on the amount by which your Production Margin falls below your historic average

b) the amount of deposits you have
accumulated in your account

c) will be pro-rated downward if total
triggered withdrawals exceed committed annual government funding (capped at $1.1b Fed + $0.733b
Prov).

What this really means is that while demand for support varies year to year as financial circumstances change, supply of support is capped.

Inadequate allocation:
Under the current Federal/Provincial safety net agreement, Ontario receives a specified share of Federal funding designated for NISA and Crop Insurance (‘allocation’). In addition, Ontario’s share of disaster funding for CFIP is determined by the amount of payments triggered within the Province (‘demand-driven’). Whatever available total funding not taken up to match NISA deposits, make Crop Insurance claims, SDRM payments, and other smaller program payments, is deposited into the MRI account. This specified allocation of Federal funding (based on Ontario’s share of national cash receipts excluding supply-managed receipts) ensures that Ontario receives its fair share of Federal support.

However, the proposal under the APF is for all Federal funding to be ‘demand-driven’, with no provincial allocation specified. Funding goes to wherever NISA withdrawals are triggered or Production Insurance claims filed, with Production Insurance claims having first claim on available funds. This means NISA withdrawal payments are pro-rated down to equal the amount of annual Federal funding remaining after Production Insurance claims are paid. The problem arises from the fact that under the APF, funding is capped (at $1.1 Federally) while demand for that funding is not capped.

This creates two problems:
• if Production Insurance claims are large in any given year, NISA payments could be substantially reduced through pro-rating so that total Federal payouts do not exceed $1.1 billion
• Ontario is likely to receive substantially less Federal funding than at present, especially if Crop Insurance programs such as currently exist in Ontario (an actuarially lower risk area because of our diversification) are applied across Canada even in actuarially higher risk cropping areas such as Saskatchewan (minimal diversification out of cereals).

Inadequate time for proper analysis:
Because neither Production Insurance nor ‘super’ NISA has been proposed in detail, adequate analysis has not yet been completed. Nor can such detailed assessment be completed until the proposed programs have been finalized, which appears to be some time in the future, especially for Production Insurance. Time is needed to conduct proper analysis of the impact these proposals will have on individual grain and oilseed farms in Ontario. That analysis must compare the benefits flowing under the current suite of safety net programs (including MRI, SDRM and ‘disaster’ programming) versus benefits under the proposed two-program scenario. APF must show unequivocal improvement over the existing suite of safety net programs. Time is needed to develop programs that are demonstrably better.
Haste makes waste; better to get it done right than merely get it done quick.

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