Risk Management and Growing Forward 2

April 2, 2013

 

The launch of Growing Forward 2 on April 1, 2013 will bring significant changes to the agriculture industry’s suite of Business Risk Management programs. Here’s a look at what’s coming and how that may affect your business.

 

Over the years, Alberta’s agricultural producers have participated in a succession of Business Risk Management programs delivered by the federal and provincial governments.

 

Those programs took on a new look in 2008 with the launch of the Growing Forward initiative. Since then, the AgriInvest, AgriInsurance, AgriStability and AgriRecovery programs have helped producers manage significant and unpredictable risks to their operations.

 

Now, with Growing Forward set to transition into Growing Forward 2, some of these programs are changing. Vicki Chapman, Manager of Customer Service with AFSC, which delivers BRM programs in Alberta, explains that these changes are taking place for several reasons.

 

"At the end of a five-year policy period, it's appropriate to examine the programs in terms of how well they are meeting the needs of producers and the governments that are funding them," says Chapman.

 

In terms of future funding for BRM programs, the federal budget of March 29, 2012 has had a major impact. The budget calls for savings of $253 million per year by Agriculture and Agri-Food Canada by 2014-15. Another key financial driver for Growing Forward 2 has been the strong business results posted by many producers in recent years.

 

"With the prices we've seen for grains and oilseeds over the last few years, many producers’ reference margins have gone up dramatically," says Chapman. "This has created a future liability issue under the Business Risk Management programs that the federal government wants to address."

 

Consensus on policy drivers and financial priorities

 

Since 2010, and particularly since the 2012 federal budget, producer associations have been asked for their views on how best to improve the value of BRM programs, while meeting the federal government’s need to manage their cost.

 

As producer groups have discussed the issue and made representations to Growing Forward in Alberta, the outline of a new policy approach has taken shape.

 

"Producer groups have told us they are strongly supportive of the AgriInsurance program as it's now set up," says Chapman. "Producers felt that savings should not be taken solely out of the AgriStability program. If we're looking to reduce the cost of these programs, producers also pointed in the direction of AgriInvest."

 

As Chapman explains, the common ground between producer views and government priorities has allowed a fresh set of policy themes to emerge around Business Risk Management.

 

At its heart is the idea that producers are responsible for a ‘normal’ level of business risk, but that governments should play an active role in providing disaster level assistance. Thus, when the issue is a moderately reduced farm profit from one year to the next, this falls under the producer's responsibility. However, if the scale of the decline can be considered a disaster, governments' response should be robust.

 

Changes to AgriStability and AgriInvest under Growing Forward 2

 

AgriStability. This is a whole-farm, margin-based program that allows producers to protect their farm operations against large declines in farm income. A program payment is triggered when a producer's margin (allowable revenue less allowable expenses) in the program year drops below their average margin from previous years (known as reference margin). Governments will continue to provide a share of the lost income.

Previously, a payment was triggered when the producer’s margin fell below 85% of the average margin. Now, under Growing Forward 2, the trigger will be 70%. “In other words, if margin drops more than 30% below their reference margin, a payment can be triggered,” says Chapman.

 

Also for 2013, a producer's payment will be based on a single level of government support of 70% on any program margin decline greater than 30%, including negative margins. Previously, a tiered system was used.

 

The reference margin will be the lower of the Olympic Average Reference Margin, or the average allowable expenses in the same three years. “This is consistent with the policy theme that the proper role for BRM programs is for true disasters, not to compensate for a reduced profit,” says Chapman.

 

As a result of these changes, producers will pay a lower annual AgriStability fee starting in 2013.

 

AgriInvest. This is a self-managed producer-government savings account that allows producers to set money aside to help deal with small income shortfalls, or to make investments to reduce on-farm risks. AgriInvest accounts are held at a participating financial institution of the producer's choice.

 

Under Growing Forward 2, producers can deposit up to 1% of their Allowable Net Sales (ANS) each year into an AgriInvest account and receive a matching government contribution. Previously, producers could deposit up to 1.5% of ANS.

 

For 2013, the limit on matching government contributions will be $15,000 per year, down from the current $22,500. However, producers will be able to contribute up to 100% of their ANS annually and up to 400% of ANS in total. This means that producers can use AgriInvest more effectively as a risk management tool. Significantly, producers will continue to have the flexibility to withdraw funds at any time throughout the year.

 

No major changes to other BRM programs

The two other Business Risk Management programs under Growing Forward 2 are AgriInsurance and AgriRecovery.

 

AgriInsurance offers protection for production losses related to specific crops or commodities caused by hail, drought, flooding, disease and other factors. Premiums for AgriInsurance coverage are cost-shared between the producer, the province and the federal government. Producers receive a payment when their production is below their guaranteed insured level of protection.

 

“During our consultations with producers, through their producer associations, there was a strong feeling that AgriInsurance is working well as it’s currently designed,” says Chapman. “There will be no significant changes to AgriInsurance as part of Growing Forward 2.”

 

AgriRecovery is a framework that allows federal, provincial and territorial governments to work together on a case-by-case basis to assess natural disasters (such as extreme weather, disease or pests) affecting Canadian farmers and respond with targeted, disaster-specific programming. Where existing BRM Programs assist producers in production and income losses, AgriRecovery can provide assistance for extraordinary costs associated with the resumption of operations and/or to contain the impacts of the disaster. Growing Forward 2 will continue with the same approach to AgriRecovery as before.

 

BRM programs to be reviewed in 2015

The Business Risk Management programs available under Growing Forward 2 are the result of extensive producer consultations, a comprehensive policy and program review and new federal government budgetary requirements. Built into Growing Forward 2 is the provision of a mid-point BRM policy review during the next five years.

 

“What we learned in the previous framework is that circumstances can change considerably in a five-year period,” says Chapman. “Rather than saying these new BRM rules are set in stone until 2018, we expect to review their effectiveness in 2015 with a view to continuously improving the programs.”

 

As Chapman has spoken with producers in recent months, she’s heard a level of concern that governments’ financial commitment to BRM programs is reduced under Growing Forward 2. Fair enough, she notes, but having been involved in the development of the new BRM programs, Chapman still sees tremendous value for growers.

 

“The AgriStability program is still a very cost-effective way to protect your farm,” she says. “It’s very significant that this covers all perils, whereas the perils covered by crop insurance are much narrower. The change in margin can be caused by lower prices, by higher expenses, by planting problems, by business interruption, it doesn’t matter. In that sense, anything that protects your margin is still a very worthwhile resource to have.”

 

For more information on the Business Risk Management programs available under Growing Forward 2, please contact your local AFSC office, call 1-877-899-2372 or visit www.afsc.ca.

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