NISA As Sole Safety Net for Grains & Oilseeds Problems and Remedies

by Brian Doidge, OCPA Economist & Market Analyst

Under the new Agricultural Policy Framework to be implemented in April, 2003, it is proposed that safety net programs for Canadian farms be restricted to an enhanced version of the existing Net Stabilization Income Account (NISA) program (sometimes referred to as super-NISA) along with Crop Insurance. In the following article, OCPA Economist and Market Analyst Brian Doidge examines the problems with NISA as the sole safety net program for the grains and oilseeds sector. OCPA’s analysis of the U.S. Farm Bill and its impact on Ontario grain and oilseed producers will be continued in subsequent issues of the Ontario Corn Producer.

1. Under NISA, the amount of government support is a function of price. As prices decline, the value of government’s matching NISA contribution declines.

Impact
When support is most needed, support from NISA is eroding rather than expanding.

Solution
A counter-cyclical program is required in conjunction with NISA.

2. Under NISA, support is based on revenues. Where prices are artificially depressed by non-market forces, such as U.S. ag policy, gross sales are artificially depressed, and therefore NISA-eligible net sales are depressed as well.

Impact
- minimizes contributions and therefore government matching NISA contributions
- constricts ability of producers to contribute, benefit, or to build account balances

Solution
A counter-cyclical program where support is determined by factors other than revenues is required in conjunction with NISA.

3. For those sectors where U.S. ag policy artificially depresses prices for years on end, operating margins are also artificially depressed (or eliminated as per AAFC study).

Impact
- minimizes or eliminates ability to make NISA contributions (requires profits over time)
- NISA account balances are less than adequate and difficult to rebuild once withdrawn
- ‘operating margin contribution’ under ‘Super NISA’ will only compound inadequacy

Solution
A sector-specific, counter-cyclical program where support is determined by factors not affected by U.S. ag policies and programs is required in conjunction with NISA.

4. NISA favours those sectors/ enterprises generating high revenues, regardless of profitability, because higher revenues generate higher eligible net sales, attracting more government matching contributions.

Impact
- attracts inordinate government matching funding regardless of efficiencies of sector

Solution
An insurance-type (i.e., premium-based), sector or commodity-specific, counter-cyclical program where support is determined by factors not affected by U.S. ag policies and programs, is required in conjunction with NISA.

5. NISA favours those sectors where the business environment and therefore operating margins have not been artificially depressed or eliminated by U.S. ag policy. Where there is no injury to offset, NISA becomes counter to the rationale for taxpayer involvement in safety nets, which is to offset injury caused by factors beyond an individual grower’s ability to combat.

Impact
- NISA becomes a reward system for those sectors not oppressed by U.S. ag policy

Solution
A counter-cyclical program offsets need in time of injury, but payments disappear when the need disappears rather than remaining as an entitlement program. Therefore, a counter-cyclical program in conjunction with NISA is preferable to an enhanced NISA.

6. NISA provides assistance to all, regardless of need. NISA rewards those doing well (assuming higher revenues and therefore higher eligible net sales indicate a higher probability of profitability) by providing larger government matching contributions. NISA penalizes those most in need (assuming lower revenues and therefore lower eligible net sales indicate a lower probability of profitability) by providing reduced government matching contributions.

Solution
An insurance-type (i.e., premium-based), sector or commodity-specific, counter-cyclical program where support is determined by factors not affected by U.S. ag policies and programs, is required in conjunction with NISA.

7. NISA provides proportionately less support to commercial-scale agriculture than to small, part-time agriculture. However, commercial-scale operations use NISA as intended, while smaller operations treat NISA as a government-matched retirement fund.

Impact
• 51% of NISA account holders have annual sales less than $50,000:
- account for only 5.9% of gross farm sales
- but have 16% of NISA account balances
- average account balances at or above 100% of their 5-year operating margins but took only 24% of triggered withdrawals.
• 49% of NISA account holders have annual sales greater than $50,000:
- account for 94.1% of gross farm sales
- have 84% of NISA account balances
- but their account balances are only 73% of their 5-year operating margins (but percentage declines as size increases)
- and they took 43% of triggered withdrawals (percentage increases as size increases).

8. NISA caps on eligible net sales and account balances discriminate against commercial-scale agriculture. Smaller, part-time operations do not hit these limits as readily as do larger operations. Limits on eligible net sales limit annual contributions, while limits on account balances limit the ability of the NISA account to offset declines in operating margin.

Impact
- 36% of grain and oilseed farms with sales over $100,000 have inadequate NISA accounts where the account balance is less than 10% of their 5-year average margin
- for those with sales < $50,000, average account balance is 100% of 5-year margin
- for those with sales > $50,000, average account balance is only 64% of 5-yr margin

Solution
Minimum level of annual sales for NISA eligibility needs to be higher than currently.

NISA withdrawals should be mandatory when triggered and should accrue to the taxation year when triggered.