How the program would work

The proposed new income stabilization and protection program would operate like this:

• The Canadian Agricultural Income Stabilization Program is based on a farm’s production margin, or farm revenue minus expenses. Only expenses directly related to a commodity’s production—such as fuel, fertilizer, pesticide and feed costs—will be deducted. This makes the program more responsive to rising input costs and makes the production margin larger than the “gross margin” calculation currently used in the NISA program. The result of this change is more support for farmers in a major downturn.
  
• Payments are to be triggered when the current year’s margin falls below the farmer’s reference margin, calculated by taking the margins of the previous five years, removing the best and worst years, and then determining the average of the remaining three.
  
• To get coverage, the farmer must make a deposit at a bank or other participating financial institution. The refundable deposit is not a premium. It belongs to the farmer. In the event of a margin decline, the farmer would make a withdrawal from the deposit, triggering a government payout to help boost his or her income toward the reference margin (see Graphs B and C). If no margin decline occurred, the deposit could be rolled over for coverage the following year, or adjusted if the farmer wanted a different level of coverage.
  
  Farmer selects minimum protection
  
  

  Graph B illustrates how the program would work for a farmer with a reference margin of $100,000 who selects the minimum protection by making a deposit equal to 14 percent of the historical margin ($14,000). If this farmer’s margin then drops by $40,000, that leaves $10,000 of the decline in the disaster range, where government provides $8,000 for $2,000 the farmer withdraws from deposit. In the middle tier, government provides $10,500 and the farmer $4,500. The rest of the income drop is shared equally, at $7,500 each. So the farmer draws down all $14,000 on deposit and receives a total of $26,000 from government, fully replacing the $40,000 loss.

  Graph C illustrates how payouts would be calculated to give the producer the greatest possible government contribution. Cost-sharing always begins at the deepest part of the loss, where the government share is largest. In this graph, the margin of the farmer in Graph B falls to zero. The producer’s minimum deposit is applied first to the portion of the loss below the 70 percent mark, where one farmer dollar attracts $4 from government. The producer therefore generates $56,000 from government by withdrawing the entire $14,000 deposit. This boosts the farmer’s margin to 70 percent of the $100,000 reference margin.

  
  
• Each year the farmer is able to choose how much protection to get by deciding on the size of the deposit.
  
• To ensure effectiveness of the program, a minimum level of risk protection has been established. Producers who participate would have to commit to a deposit equaling at least 14 percent of their reference margin. This would fully cover income drops of up to 40 percent of the reference margin, while returning 70 percent of the reference margin if the margin fell to zero in the claim year.
  
• Maximum protection, guaranteeing full coverage for margin declines of up to 65 percent and returning 92 percent of the reference margin if the claim-year margin falls to zero, could be obtained for a deposit of 22 percent of the reference margin.

Making coverage affordable

Farmers would secure effective coverage for income declines from the first day they make a deposit. To make protection even more affordable, particularly for beginning farmers, the proposed program includes an option allowing producers to put only one-third of their required cost-share on deposit for their first two years of immediately following a serious margin drop. The producer wouldn’t be expected to have the full deposit on account until the third year. These arrangements offer protection for back-to-back disasters and would allow a farmer with a $100,000 reference margin to deposit as little as $4,667 to gain entitlement to up to $56,000 from government.

Farmers will receive updates about the new program through the mail and in workshops and information sessions as agreements with the provinces and territories are finalized.