The new CAIS program is supposed to protect against drops in farm income because of production issues. You are given a reference margin based on previous year's production figures, and if your current year's margin goes below a level you have pre-selected, you may receive government assistance. An example may be of assistance in understanding the issues. I used the following assumptions to establish a corn-only Huron County farm with a $200,000 reference margin, and used the rules in the federal CAIS Program Handbook.

(a)income - 130 bushels of corn @ $3.85 (2002) = approximately $500/acre
(b) seed costs (BT corn) - $66 per acre
(c) fertilizer costs - $73 per acre
(d) herbicide costs - $33 per acre
(e) crop insurance - $16 per acre
(f) drying costs - $35 per acre
(g) fuel costs - $5 per acre all to total $228 per acre.

The $200,000 reference margin would then require a 735 acre farm ($200,000 divided by $500 minus $228). In 2003, two things change -drying costs go to $70 per acre, and price drops to $3.15 per bushel. The 2003 revenue is now approximately $410 per acre - (130 bushels at $3.15). The new costs are $263 per acre (last year's cost of $228 plus $35 in incremental drying charges) for a 2003 production margin of $410 minus $263 = $147 per acre X 735 acres = approximately $108,000, a drop from his reference margin of $200,000. To be even able to enroll in the CAIS program, this farmer will have to put up $28,000 of his own money - it's not a tax deductible expense, but he needs to put up only one third (about $9,300) this year. The balance has to be put up in subsequent years. To get his income back up to even the most basic level of coverage (70% of his reference margin of $200,000 = $140,000) from his actual $108,000 level, he will receive $6,400 of his own money back, plus $25,600 of government money (a 20:80 cost split). However, he will have to put his own $6,400 right back into the program in order to be able to stay in the program. At its simplest, he has to put up $28,000 of his own money (albeit only a third of that this year) to get back $25,600 of government money in tier 3. It would appear that the balance of his $28,000 deposit could trigger another $21,000 in government contributions for tier 2, and another $12,600 for tier 1, to bring him back up to 100% of his reference margin. This would give him a total of $58,200 of new government money, which when added to his actual income of $108,000 = $166,200. The problem is he's still got $33,800 less in cash than he had last year when he made $200,000. The claim that he gets back to 100% of his reference margin is by using the farmer's own money, which isn't new at all, but simply an internal transfer. Even if the farmer gets this money from himself, he's got to put it back into CAIS to stay in the program. Further complicating the situation is that one section of the CAIS handbook would seem to say the farmer can get 100% coverage (as in the above example) for a $28,000 deposit, whereas another section of the Handbook says that in order to get 100% coverage, he will have to have $52,000 (provincial program) on deposit. That's a huge difference which simply has not been explained. It should be noted that if his production margin had gone to zero (impossible for people with crop insurance) he would qualify to get a limit of 92% of his loss addressed; instead of the 100% he would get for only a partial decline. However, I have used a corn-only farm, the extreme example of non-diversity. Most grains farmers have corn, soybeans, wheat, and maybe straw sales to balance out revenue declines in any one crop, in any one year. I suggest it's very unlikely any diversified crop farmer with crop insurance will ever go below the 70% level in the first place - however, everyone should evaluate their own situation. The well-known opening balance sheet problems create an even lesser chance of getting below the 70% level. In the above example, if the farmer carried 50% of his 2002 corn crop into 2003, he would face the following adjustment. On his 47,775 bushels of 2002 corn sold in 2003, he will have to value it, at January 1, 2003, at the December 31, 2003 price of approximately $3.15, even though it was worth closer to $3.85 on January 1, 2003, a difference of some 70 cents per bushel. If he sold this corn in early 2003 for $3.85 per bushel, he would have to value it at $3.15 per bushel resulting in an artificial increase in his 2003 production margin of 47,775 bushels times 70 cents = approximately $33,400, which, when added to his actual margin of $108,000, puts him at $141,400, well above the 70% level of $140,000, meaning his $28,000 CAIS deposit is of questionable benefit. The opening inventory calculations artificially turns a 54% ($108,000/$200,000 X 100%) margin into almost a 71% margin, simply resulting in less chance of ever getting any money. Grains farmers who are serious about what they do are going to have to consider forming a corporation to select a fiscal year end at some time when they normally have no inventory. Those who do not want to set up a limited company, and who are then forced to use a December 31 year end, are going to have to get used to selling their entire crop before year end, if the CAIS program is going to have any meaning for them at all. And, changing the way you file your income tax returns, from cash to accrual, is going to be challenging, because if you change tax accounting methods during the life of the CAIS program, you have to convert everything in CAIS back to the "modified accrual" system which posed challenges. Grains farmers have the option of changing their fiscal year end (albeit only through a corporation) to a time when they have no inventory. Livestock farmers, with inventory year round, have no such option, so there's no advantage to forming a corporation to mitigate CAIS accounting challenges. Simply stated, livestock, and hog farmers are at a permanent structural disadvantage when trying to make a CAIS claim. To put it all into perspective, I think it's extremely doubtful I will be in CAIS for my own corn/soybean/wheat/hay/straw farm. It's diversified enough, and with crop insurance, I don't see any chance whatsoever of getting below this 70% figure. In closing, I should make it clear the opinions are my own, everyone should consult their own advisors -everyone's situation is different. I can be contacted at rsthompson@bmts.com if anyone has questions pertaining to this article.