Farm Income
Safety nets - OCPA’s Position
by Brian Doidge, General Manager, OCPA
One of the primary
purposes for the existence of OCPA is to improve the potential profitability of
grain corn production in Ontario. One way to enhance potential profitability is
to enhance price. Price for Ontario grain corn consists of two components: price
in the U.S. plus costs of inbound freight, handling, storage and currency exchange.
It is as simple as that. It can also be expressed as Chicago futures contract
price (the benchmark for price in the U.S.) plus basis (the difference between
price in Ontario and price in Chicago). Since OCPA does not actually market corn
or set prices, our efforts to enhance price must focus on one or both of the two
components of price for grain corn in Ontario: we must attempt to enhance price
in the U.S. and/or enhance basis.
In the April issue of the Ontario Corn Producer, we outlined the rationale behind
OCPA’s long-standing policy of expanding domestic consumption of corn rather
than pursuing export market opportunities for bulk grain. The bottom-line message
was that expanding domestic consumption of corn in Ontario (through expanded industrial
processing and feed demand) enhances basis, ideally to the maximum possible level
- the ‘import price ceiling’ or ‘import basis’.
There is nothing that OCPA can do to enhance the other component of price in Ontario,
the price in the U.S. (expressed as Chicago futures contract price). We are a
minor player compared to the U.S., and therefore can have no impact on the price
for corn there. The largest crop ever produced in Ontario is less than the volume
of corn lost through the back end of U.S. combines during a typical corn harvest.
Although we cannot influence price in the U.S., the U.S. price has a massive impact
on the price for corn in Ontario.
Factors driving U.S. price impact us here. Need proof? Dr. Daryll E. Ray, University
of Tennessee, constructed a price index of the six major U.S. cereal export crops
weighted by value of production and indexed to 1996=100. He produced a chart that
shows an almost direct correlation between world (which obviously includes us)
and U.S. prices. He then makes some sharp observations: “It seems apparent
as well that year after year, world prices stepped in the U.S. price footprints.
If it is true that the U.S. is the dominant player in cereal markets, it is no
wonder that U.S. policies, which lower farm prices, mean lower prices for all.
It also explains why we [the U.S.] are currently getting so much flack internationally.
The change in U.S. policy has driven down their prices as well as U.S. prices.
As devastating as the low prices have been in the United States, farmers in less
developed countries do not receive ‘mailbox’ revenue to help compensate
for low prices.”
A study done by the U.S. Institute for Agriculture & Trade Policy, a Minneapolis-based
think-tank, adds another link to the chain. It concludes that the U.S. is guilty
of dumping wheat and other crops on world markets. The report concludes that because
of U.S. ag policies and programs, the U.S. has been selling “wheat for an
average of 40% less than the cost of production in recent years, soybeans 25%
less and corn 30% less.”
Here are the linkages so far:
• the U.S. price for corn dictates price for corn in Ontario
• U.S. policies result in lower farm prices for all
• U.S. policies have artificially pushed U.S. prices 30% below the cost of
production for corn in the U.S.
The cost of production for grain corn in Ontario is essentially the same as cost
of production in Michigan or northern Ohio or northern Indiana. Therefore, U.S.
policies have artificially driven price for grain corn in Ontario far below the
cost of production.
Obviously, the injurious impact of U.S. policies accumulated over a great number
of years is far beyond the capability of an individual Ontario corn producer to
combat. Ag Canada’s own analysis of Subsidy Injury Calculations indicates
that foreign subsidies resulted in $456 million in lost revenue for Ontario corn
producers over the years 1996 - 2001. That’s an average of 31.7 cents per
bushel ($12.48/tonne) for every bushel produced in that time period!
Is this chain of connection recognized by our politicians and agricultural officials?
In a speech to an audience at Harvard University November 12, 2002, Agriculture
Minister Vanclief said that “exorbitant farm subsidies provided by the U.S.,
European Union and Japan are distorting market prices around the world and are
making it nearly impossible for farmers in developing countries to make a living
in agriculture.” They are making it nearly impossible for farmers here too!
What has this got to do with OCPA’s goal of improving the potential profitability
of grain corn production in Ontario? What has this got to do with OCPA’s
position on safety nets? OCPA believes that the only valid reason for taxpayer
assistance to agricultural producers is to offset the injurious impact of factors
beyond the reasonable ability of an individual producer to combat. Government
has an obligation to assist in those things that producers cannot reasonably be
expected to do for themselves. That is the rationale behind Crop Insurance. It
should also be the rationale behind government-supported safety net programs.
Since an individual corn producer is powerless to combat the long-term pervasive
injurious impact U.S. policy continues to have on price, OCPA believes that government
MUST offset that injurious impact, especially since governments, not individual
producers, negotiate the trade agreements that deal with foreign domestic subsidies
and their impact. When that injurious impact is muted or eliminated through successful
WTO negotiations, government support offsetting that impact can also be muted
or eliminated. Until a successful WTO agreement brings meaningful reform to U.S.
ag policy, thus lessening the injurious impact on the profitability of corn production
in Ontario, there remains an obligation for government to offset the injury.
OCPA’s position on safety nets flows from this assessment. Crop Insurance
remains a vital component of the Ontario safety net package in order to offset
the impact of environmental factors beyond an individual farmer’s ability
to combat. Income support provided by government remains an equally vital component
in order to offset the injurious impact of U.S. ag policies on price. Since OCPA
is attempting to expand domestic consumption of corn in order to increase basis,
yet can do nothing to enhance U.S. prices, Canadian and Ontario governments have
an obligation to offset the impact of U.S. ag policies on price. Individual corn
producers are powerless to counter the impact of that component of price; governments
are not.
At this time, neither level of government in Canada is willing to address the
issue of trade injury in the design of new safety net programs proposed under
the Ag Policy Framework. In his speech to Harvard University, Minister Vanclief
said that rather than join the ‘subsidy party’, “Canada has instead
introduced the Agricultural Policy Framework which takes a more long-term, less
trade-distorting and strategic approach to helping farmers become profitable.”
The Minister described “food safety and quality, business risk management,
the environment, science and innovation, and sector renewal as the five key areas
of the APF” and noted that “commodity subsidization is not on the list.”
Providing income support to offset trade injury is not part of the APF. Providing
income stability IS a stated objective of the APF (and the George Morris Centre
study for Ag Canada says the APF provides stability), but because U.S. ag policies
artificially depress corn prices, what is the value of being stabilized at an
artificially low level? OCPA believes that income support to offset trade injury
needs to be provided outside the scope of the Business Risk Management programs
of the APF until such time as meaningful WTO reform eliminates the detrimental
impact of U.S. ag policies.
In summary, OCPA has a two- pronged approach to improving the potential profitability
of grain corn production in Ontario:
1. expand domestic consumption of corn in order to increase basis
2. garner income support from governments to offset the impact of artificially
depressed U.S. corn prices until such time as trade negotiations eliminate that
impact.
