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A Change In Thinking

Acomprehensive new report released by the Canadian Agri- Food Policy Institute (CAPI) is bound to ruffle a few feathers in farm country.

It won’t be the section on increasing Canada’s production and exports, or the parts that say agriculture, food and health policies should be linked. Nor will it be the calls to buy more locally grown foods and to focus more effort on building farm production systems that reduce our reliance on non-renewable resources.

We suspect most will even agree with the suggestion that there isn’t enough research spending from both public and private sources.

It’s when we get to the section on business risk management that we see farmers starting to squirm.

At the very time that farm groups are lobbying for cost-of-production formulas in business risk management programs, here is a report suggesting it’s time to redivert government spending away from propping up the past.

Nearly 60 per cent of government spending or about $3.8 billion annually on agriculture goes into direct supports to producers.

That’s because in seven out of the past 10 years, producers have, on average, failed to achieve profitable returns from the marketplace.

“This perpetual support… does not seem to resolve aggregate farm income problems,” the CAPI report says. “With the bulk of the agri-food budget focused on BRMs, investments in R&D, innovation, market development and market access are limited (an average of 18 per cent of total spending over the past 10 years).”

The report also notes Canadian farms have also acquired higher debt levels than their U.S. counterparts, a source of financial risk. Any significant future increase in interest rates will have significant impact on sector earnings.

Due to AgriStability’s one-size-fits-all structure, program premiums don’t adequately reflect risks faced by different farm operations, the report says.

“The premium of the production margin that is at risk applies equally to a farm operation producing one specific commodity such as wheat and to a farm that is diversified across sectors,” the CAPI report says. “As well, the low AgriStability premium rate does not create any inducement for farmers to reduce their net income risk.”

In other words, these programs provide an incentive for farmers to “farm” the programs by having the most of their income in one commodity.

“Incomes and the reference margin will be high when prices are high. Then when prices fall, large payouts are triggered based on 85 per cent of the reference margin. In contrast, a diversified farm with a few crops and possibly a livestock enterprise may have high incomes in one commodity typically offset by lower incomes in another commodity as the farm’s reference margin is computed. The riskier monoculture operation receives more program dollars for the same premium payment.

“The program has a further unintended consequence: the very presence of this program encourages riskier behaviour. The result is off-loading farm level income risks on to government or taxpayers.”

CAPI suggests the taxpayers are getting a poor return on their investment relative to other places that money could be spent. At best, the benefit of direct farm payments equal program costs.

“Such a benefit-cost outcome suggests that this risk management approach requires review. The literature also reveals that agricultural R&D yields a much higher 10:1 benefit-cost ratio. Research and development, and supporting innovation, needs to be a priority,” the report concludes.

For example, a 10 per cent transfer of farm support funds increases research and innovation budgets by 50 per cent. A 50 per cent reduction by 2025 would boost research funding by 250 per cent.

In recent years, governments have tried to shift the cost of research over to the private sector. It hasn’t worked very well.

“Government’s total expenditure on R&D (including agriculture) has fallen from some 35 per cent to nine per cent since the 1970s, relative to all R&D funding in Canada. After years of growth, business R&D has declined steadily by some eight per cent since 2001,” the CAPI report states.

What’s more, if Canada is to move production towards natural systems that are less reliant on non-renewable resources, it can’t count on the private sector to take it there.

It’s also worth noting, farmers have typically been the biggest beneficiaries of publicly financed research.

Meanwhile, publicly financed business risk management isn’t working all that well either. There are multiple business risk strategies farmers can tap into outside of government, ranging from diversifying the farm business to joining a supply chain.

It’s time to change directions. [email protected]

About the author

Vice-President of Content

Laura Rance

Laura Rance is vice-president of content for Glacier FarmMedia. She can be reached at [email protected]

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