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A new era for business risk management

Farm leaders expected the drop in AgriStability reference margins announced at last week’s federal-provincial agriculture ministers’ meeting, but the fine print was another matter.

Not only is the AgriStability trigger being increased from a 15 per cent to a 30 per cent drop in the farmer’s reference margin, there is a sleeper clause that apparently no one saw coming.

Payouts will now be based on 70 per cent of whichever is lesser, the reference margin or eligible expenses. In other words, the payments triggered will be significantly — and we mean significantly — lower than farmers might have expected in the past.

It completely changes the nature of the AgriStability program.

The remarkable speed at which the federal, provincial and territorial ministers agreed to this during their one-day meeting last week suggests the deal was done before they even got there.

It’s equally remarkable that while farm leaders had been briefed and prepared for the first part, they didn’t see this one coming. This is in addition to a reduction in the government’s contribution to the AgriInvest savings program from 1.5 per cent to one per cent.

OK, so farmers, and for that matter, the public, should have been consulted. As we’ve raised before, the federal government’s notion of consultations — closed-door meetings for a few invited guests and no reporters — is a joke. A major change such as this should have been given a fulsome airing so people could fully appreciate the implications.

There is one possible explanation for why that didn’t happen, and we’re being generous here. But farmers should consider this carefully before firing out their press releases. In the broader context, such a public debate might have proven embarrassing.

Consider this analysis from a series of papers assessing farm income prepared for the Canadian Agricultural Policy Institute (CAPI) in 2009-10. The analysis by economists with the George Morris Centre pointed out that net farm income, which is often reported in the media, isn’t a good measure of actual farm family wealth.

For starters, the analysis noted, “business and family expenses are easily intertwined so that, like all small business incomes, net farm incomes may be understated.” Anyone who has experienced both life as a farmer and life as a Joe Canadian worker knows this well.

Not only do farmers receive their family income from diverse sources, as do most families, farmers accumulate significant wealth through asset appreciation.

For example, despite stable net farm operating income between 1996 and 2007 the total value of farmers’ land and buildings rose 31 per cent for grain and oilseed farmers, and 46 per cent for dairy farmers.

Average net worth over that period grew 20 per cent for grains and oilseeds and 35 per cent for dairy farmers.

Farmers’ average net worth is about triple that of the average Canadian family. This analysis suggested that is despite farmers having a slightly lower annual income, but more recent data released earlier this year, puts farm family incomes well above average family incomes in Canada.

“Since farm families have a higher net worth, a wealth basis does not exist to argue the sector requires farm income support programs,” the George Morris analysis states.

We don’t begrudge farmers wealth. They work hard for it.

But it’s a dilemma for government. High commodity prices and high yields mean a surge in reference margins. Based on the former trigger, prices could drop to still-profitable levels, but governments would be (and be seen to be) making unnecessary payments to a group who are already better off than most other Canadians.

There’s also the “moral hazard.” It’s widely acknowledged that farm supports are quickly capitalized into land prices, and with governments acting as a revenue backstop, farmers have proven willing to take on more debt.

Canadian farms carry almost twice the debt of their American counterparts, and their debt is growing faster. Paying up to $6,000 an acre for farmland might have something to do with it.

Farmers here have higher debt-to-earning ratios, which means they carry more risk.

What happens when disaster strikes, as it invariably will?

The federal government changed the rules earlier this year making it harder for people to overextend themselves buying homes. It can hardly justify propping up a similar spree in farmland.

The farm lobby had best be reserved in its response to this one. In the long run, these changes might be doing the farm community a favour, especially if they take some of the heat out of the land market.

It should focus instead on making sure every dollar saved from program payments goes into research and innovation.

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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