Final Report of the
Ontario Business Risk Management
Advisory Committee

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Final Report of the
Ontario Business Risk Management
Advisory Committee
As Presented to the Honourable Steve Peters,
Ontario Minister of Agriculture and Food
June 20, 2005

The Committee's Mandate

The Business Risk Management (BRM) Advisory Committee was established in early March, 2005 to provide advice to the Ontario Minister of Agriculture and Food. Specifically, the Minister sought the assistance of the Committee "on how to move forward with the implementation of the business risk management component of the Agricultural Policy Framework (APF) in a way that will ensure a strong and viable agricultural industry for Ontario, but also be sustainable in terms of cost". In fulfilling its mandate, the Committee was to take into account the following:

• The government's goal to establish a system of safety nets that will support a strong and viable agricultural industry for Ontario that is sustainable for taxpayers;
• The federal government's responsibility and fiscal capacity to deal with issues regarding farm income; and
• The objective and principles Ontario has agreed to as part of the APF agreement.

As part of its review, the Committee consulted with Ontario commodity organizations, general farm organizations as well as farm lenders and accountants. The Committee would like to thank all of those people that made a contribution to this process. While the Committee appreciated the input from these people, the recommendations below are those of the BRM Advisory Committee.

Broad Recommendations Regarding BRM Programming

As a broad approach, the Committee concludes that the current set of two national programs - Canadian Agricultural Income Stabilization (CAIS) and Production Insurance (PI) - could provide effective support for Ontario producers over the long term if the following recommended changes to each of the programs are adopted by both levels of government. BRM support should encourage a high level of participation and producer satisfaction with these two programs. The Committee thinks that BRM programs should:

• Stabilize income, but not mask long-term market signals;
• Minimize the risk of trade problems;
• Be simple and easy to understand;
• Be responsive/make payments in a timely way; and
• Not discourage innovation.

As well, the Committee thinks that government should continue to make other investments in the agricultural sector that would increase returns from the market place. This would include efforts to expand markets for Ontario agricultural products through a focus on healthier diets and the development of the bio-economy, including bio-fuels and other new products.

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Canadian Agricultural Income Stabilization Program

The CAIS program has the potential to be an effective income stabilization tool for farmers, but the program needs to be simplified and delivered in a more timely and transparent fashion. Some changes need to be made at a national level, involving program policy changes. Other changes can be made in how the program is delivered in Ontario within the current rules. The Committee recommends that where changes to national agreements or policy is required, that the Ontario government pursue this in federal-provincial negotiations. If the province has the authority to move ahead with a change on its own, the Committee would recommend that the Ontario government do this unilaterally.

Producer Deposit:

The producer deposit should be eliminated and should not be replaced by a fee or deductible.

Reference Margins/Production Margin:

Currently, only PI claims are included in the production margin and the reference margin. All other government payments are excluded from the reference margin. Some government payments (i.e. BSE assistance) are included in the production margin, while others (provincial companion programs) are excluded. To simplify the program, all government payments (except payments under CAIS) should be included in the reference margin and production margin. The Committee recognizes that this recommendation may not be fully consistent with the World Trade Organization (WTO) Annex on agriculture. However, this must be balanced against the need to create a program which is more consistent and rational in its consideration of benefits from other farm income programs. As well, the risk of countervail action is primarily from U.S. producers based on U.S. trade law, which may not reflect the strict interpretation of WTO rules.

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Inventory Valuation:

The program should move towards an accrual basis. Currently, the change in inventory levels is valued using the year end market price (P2 method). The Committee recommends adopting the P1/P2 approach for market inventory. This would involve valuing inventory at the start of the year using the market price at that time (P1) and valuing again at year end employing the market price at that time (P2). For productive assets like breeding stock, the current P2 method should be used. As well, the Committee recommends that there be consistency in the treatment of inventory between production margin and reference margin. This recommendation is consistent with the recommendation put forward by IBM in a report on this issue.

Advance Payments:

Producers should have an option of applying for a partial payment within the year of the loss. Such interim payments are allowed under the program nationally, but this mechanism has not yet been implemented in Ontario. The province should introduce and widely publicize the interim payment option that would include an application deadline of three months before a producer's year end. The administration should commit to making payments to producers before their year end. The Committee is not supportive of making automatic payments to producers based on industry-wide parameters. It was felt that producers that need money should take action to justify an advance (active participation). There is also a concern that automatic payments result in overpayment problems which in turn hurt program credibility.

Structural Adjustment:

Currently, structural adjustment is applied if the operation has changed by 5% or more. For the 2003 program year, over half of the operations were subject to structural adjustment. This suggests that the 5% threshold may be too sensitive. Analysis should be conducted to see if the 5% rule should be relaxed somewhat. As well, the structural adjustment process needs to be more open and transparent, and not discourage innovation. This includes making all benchmark production units used in the process available publicly and including a structural adjustment calculator on the web site. In cases where producers are considering major changes to their operation, program staff should be available to meet with them before the change is made to review the implication of the changes to future CAIS support. Producers should be prepared to provide five year business plans to assist this process.

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Communication and Education:

Ontario should prepare an updated CAIS Handbook and distribute it widely. Program administrators should also hold a series of information meetings for producers, accountants and farm lenders on an annual basis. The administration also needs to prepare and distribute regular information bulletins that deal with different aspects of the CAIS program (e.g. amendment/appeal process, structural adjustment). All payments, whether CAIS , PI or other programs should be accompanied by a letter explaining in some detail what the payment is for and the basis of the calculation for the payment.

Program Deadlines:

Program deadlines should be linked to producers' fiscal years. The deadline for applying for an advance payment should be three months before a producer's year end and the normal application deadline should be six months after a producer's year end. This would mean that the administration would need to have the applications available to producers much earlier so producers with a January year end could apply within six months of that time.

Coverage Selection:

If the CAIS deposit is eliminated as recommended above, coverage selection is no longer an issue. All producers should automatically receive 100% coverage.

CAIS-Production Insurance Linkage:

Ontario's current linkage involves refunding part or all of a producer's PI premium in cases where a crop loss claim reduces their CAIS payment. This is viewed as a simple and effective way to encourage producers to retain PI coverage. This should continue in Ontario and be considered for adoption nationally.

Negative Margin Coverage:

Currently, producers with a negative reference margin are not eligible for support under the program. This is intended to limit program benefits to more economically viable operations (reasonable expectation of profit). The Committee recommends that producers in this situation should have the opportunity to appeal their eligibility based on the capacity to demonstrate a reasonable expectation of profit as shown through a longer period of historical financial data and a five year business plan.

In addition, the coverage level for negative margins should be increased to a maximum of 70%, respecting the condition that total benefits under CAIS cannot exceed 70% of total loss for any producer.

Appeal Process:

Ontario should establish its own appeal committee, ideally linked to the National CAIS Committee.

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Production Insurance

Plans for Fresh Market Horticultural Crops:

Moving forward with the improvement of existing plans and the development of new plans needs to be a very high priority.

Production Insurance for Livestock:

The Ministry and Agricorp should move forward, with the Ontario livestock industry, to identify production perils that should be covered and work to design appropriate plans within the PI framework.

Revenue Component of Production Insurance:

The Government of Alberta provides a Revenue Insurance Coverage program for grain and oilseed producers that participate in the PI program. Providing floor price protection for producers that participate in PI would be an effective way to target assistance to sectors suffering from low prices, especially those caused by U.S. subsidy policies, and encourage participation in PI programs. At this point, the federal government does not cost-share the Alberta program. The federal government should provide its 60% share of the cost of a national floor price system, linked to PI participation.

If the federal government is not prepared to move in this direction, the province should offer an add-on of its own to production insurance. The modified program should generally provide floor price equivalency to that provided with target prices in the U.S., which directly affect the price of Ontario grains and oilseeds. This concept should also be extended to fresh fruit and vegetable PI plans. Floor prices with the Ontario PI add-on could be chosen to consider:

• Consistency across related commodities (e.g. horticultural crops)
• Potential to distort production; and
• Potential for the support to be bid into the industry cost structure.

Regarding the range of commodities to which floor price support would be extended, the following should be taken into consideration:

• Potential for attracting trade challenges;
• The extent to which support programs in other jurisdictions are distorting commodity prices; and
• The administrative feasibility of delivering the program (e.g. determining the actual market price).

Floor price support should not be provided for commodities subject to supply controls or for which producer prices are negotiated with buyers. In addition, it would be administratively unreasonable to offer such add-ons for all small volume commodities.

The new add-on feature could incorporate many of the features of Market Revenue Insurance now familiar to many farmers - including historical farm yields, current seeded acreages, and the potential for interim payments. If floor prices are established at levels similar to those in the U.S., then other features of the U.S. program could also be considered including the absence of co-insurance premiums, minimal enrolment fees and payment caps.

This benefit should only be offered as an add-on to PI (i.e., crop insurance for crop producers) and be conditional on enrolment in the total PI program.

The chart below provides a summary of the program coverage that the Committee is recommending.

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Self-Directed Risk Management

The Committee's preference is for all crops to benefit from a PI program. In some cases there may be too few producers to run an effective PI plan. Only crops that do not have access to a traditional PI program should be provided with some variation on the current Self-Directed Risk Management (SDRM) program.

Program Coverage Summary

* Established and/or minimum grade prices already offered in the form of pre-planting contract prices.
** It is expected that a revised SDRM would provide some coverage for losses related to low yield and prices.
Note: This assumes a return to normal trade in red meat products.

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Additional Business Risk Management Support

Ad hoc payments delivered using a percentage of historical eligible net sales are not well targeted to those people or sectors in need. As well, they provide support to retired farmers and provide no support for beginning farmers. It is the Committee's view that, under exceptional circumstances, providing additional assistance is justified. This support should not be delivered based on historical eligible net sales.

Opportunities Beyond Business Risk Management

Business risk management programs are very important for the sustainability of Ontario agriculture in tempering the effects of calamities over which farmers have no control and in dampening high year-to-year variability in annual farm income. However, these programs by themselves cannot ensure continued viability for many farmers. Because of the continuous increase in the efficiency of modern agriculture - the result of both improved technology and the skills of farmers - Canada and other developed countries now have an abundance of high quality foods. Even many so-called lesser-developed countries such as Brazil and China have now become major exporters of farm products. And as productivity continues to grow while the rate of population growth slows in these countries, the balance between food supply and demand means ever-declining real prices for basic food commodities. While good news for consumers, the negative effects on farm income have proven to be severe, especially when coupled with the effects of U.S. and European farm subsidy programs which have encouraged greater global production.

Any strategy for Ontario farm income enhancement must include efforts to develop new markets. These can include new and specialty food products and services for which additional consumer dollars can flow through to farmers. Examples include organic produce, direct retailing to consumers, and new and exotic food items. This effort should also focus on enhancing health benefits of eating Ontario agricultural commodities. The ministry should play an even greater role in encouraging Ontarians to consume healthier diets and in enhancing the nutritional benefits of the foods they eat.

However, even larger opportunities may exist through the expansion of non-food uses for farm produce.

The floriculture business has flourished in recent years and the number of nurseries continues to swell. However, the appreciation of the Canadian dollar has hurt profitability in recent months. There may be other opportunities for these sophisticated growers, especially in the production of bio-pharmaceuticals and other health and consumer products.

Bio-fuels, including ethanol and biodiesel, offer major opportunities as non-food uses for farm crops and market opportunity for byproducts. Fuel ethanol has already had a major positive effect on grain corn prices in Ontario, even if masked by the larger effect of global oversupply of grains. Biodiesel offers similar potential for oilseed growers and for the use of rendered products from deadstock and meat processing wastes. These bio-fuels also offer major environmental advantages over fossil fuels, and Ontario must continue to encourage new plant construction.

Indeed, the whole issue of bio-based materials in manufacturing is gaining momentum throughout the technologically developed world as commodities such as iron ore and crude oil have skyrocketed in price. The resultant instability in the manufacturing sector has created huge problems as companies struggle to remain competitive in the face of significant price fluctuations in some of these basic materials. Bioproducts also offer important opportunities for environmental improvement.

Especially appealing is the opportunity to link auto-parts manufacturing with farming through the use of agricultural feedstocks to manufacture parts that can replace plastic and certain metal auto parts. Auto and agri-food are two of Ontario's leading economic drivers, and both often exist in the same communities. An integration of the two could mean important new markets for farm products, environmental benefits for society, and superior products for auto manufacturers.

This report is submitted to the Ontario Minister of Agriculture and Food by the Business Risk Management Advisory Committee on June 20, 2005. The Committee members are:

Terry Daynard
Hector Delanghe
Graeme Hedley
Jack Wilkinson

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