BUSINESS RISK MANAGEMENT

Working with industry, governments are developing a new, forward-looking approach to risk management. This new approach will aim to protect farmers' incomes from the vagaries of weather, pests, and global markets, while at the same time encouraging risk mitigation strategies for emerging risk areas, and supporting growth, diversification and increased value-added activity in Canadian agriculture. Two integrated program elements make up the proposed approach - insurance and stabilization-investment. These proposed changes reflect a strong desire expressed by stakeholders to address the shortcomings of the existing safety nets while building on their foundation. The proposal is described in more detail below.

PROGRAM PRINCIPLES

There are a number of principles proposed to guide program design. These principles reflect program objectives, as well as trade and economic considerations. Proposed program principles include: minimizing countervail risk; minimizing distortion of farmers' production and marketing decisions, including moral hazard; focus on the management of risks related to the stability of the entire farm entity; encourage the use of risk management practices and contributing to the use and development of private sector risk management tools; be relatively simple to administer and transparent for participants; minimize the capitalization of program benefits into farm asset values; contribute to profitability through encouraging innovation and improved environmental stewardship and food safety; focus on stabilizing the incomes of farmers, while renewal programming would focus on enhancing the income of those with inadequate income levels; and facilitate long-term planning by farmers.

PROPOSED COMMON GOALS

The following goals are being considered:

• to increase the capacity of the farm sector to manage business risk;
• to work towards increased profitability, growth, diversification, and value-added activity;
• to develop a common approach to programming across Canada whereby program eligibility and payment calculation provisions for business risk management programming are jointly agreed to by governments, cost-shared with producers on a federal-provincial-territorial basis, and implemented nationally.

PROPOSED TARGETS AND INDICATORS

It is proposed that targets and indicators be established relating to the risk management program principles in order to allow governments to report to producers and citizens on the effectiveness of risk management programs.

The following are proposed targets and indicators:

• comparing farmers' aggregate sector margin to the five-year average, to determine the extent to which farm incomes have been stabilized by risk management programs;
• analyzing commodity mixes, to determine the extent to which diversification has strengthened profitability and competitiveness;
• tracking the use of private and public risk management tools and strategic planning practices by farmers, to determine the extent to which whole-farm risks are being covered; and
• analyzing administrative procedures, to monitor improvements in the administrative efficiency of risk management programs.

PROPOSED IMPLEMENTATION MEASURES

The proposed approach to business risk management is based on two ways in which governments can work with producers to strengthen farm viability and profitability.

First, governments will continue to work with producers to help protect them against catastrophic risks to income to enable their businesses to continue operating after setbacks.

Second, governments could work with producers to help support future profitability in their farm business. This can be done in a number of ways, including: promoting good production management practices to increase productivity and reduce costs; by encouraging investments in food safety and environmentally responsible production to reduce income risks and improve marketability; and by supporting the development of new value added opportunities and product markets.

In some cases, where producers are experiencing particular difficulties in managing their businesses, governments could work with producers through specialized renewal type programs, including skill development and access to capital (discussed below) to better address the individual needs of the producer.

To simplify adjustment from both a producer and an administrative perspective, it is proposed that the new business risk management framework be built on existing programs, namely Crop Insurance and the Net Income Stabilization Account (NISA) program.

Insurance

It is proposed that crop insurance be expanded to cover a wider range of production perils and agricultural products to ensure that farmers have broadest possible protection against catastrophic risks to income. Crop insurance agencies across the country could review potential gaps in coverage (e.g., forage and horticulture) and plan ahead to address those gaps where demand exists. Similarly, to widen coverage and strengthen program efficiency, governments will examine opportunities to utilize, where appropriate, technologies such as satellite imaging and instruments such as weather derivatives. Special efforts could be undertaken, to provide risk coverage for new business ventures where adequate information is not always available.

How would this proposal address gaps in insurance coverage?

To help increase coverage and maintain attractive premium rates, while maintaining flexibility for individual producers, a whole farm crop insurance option could be developed which provides insurance protection for the impact of production perils across specific crops for the whole farm entity. This option would be offered in addition to crop specific insurance. In addition, governments will examine methods to provide benefits to farmers that invest in good management practices relating to food safety and environmentally responsible production.

What would producers find attractive in a "whole farm" crop insurance option?

To increase choices available for farmers to help manage insurable risks, it is proposed that governments work with the private sector to develop new risk management instruments and protocols, especially in the area of business interruption insurance, where producers may wish to seek protection against income losses related to the losses of productive assets for specified perils (e.g., the destruction of chickens due to salmonella disease).

How could coverage be expanded to include business interruption insurance?

Stabilization and Investment

It is proposed that NISA be reformed into a more dynamic stabilization and investment program for risk management.

To broaden and deepen NISA as a stabilization tool, it is proposed that the current contribution methods and limits be reviewed to ensure producers have sufficient flexibility and opportunity to build accounts capable of stabilizing significant negative fluctuations from time to time. This could also include kick-starting low accounts for producers who did not, or could not, participate in the last few years.

If NISA matching contribution limits were significantly increased, do you think that NISA could become a much more effective stabilization tool?

To promote equity and accessibility for the NISA program, it is proposed: that the contribution formula be reviewed to address potential biases across commodities to deal with farms (like potato farms for example) where the gross revenue of even modest sized operations is usually well above the current cap; and that the situation of beginning farmers be examined to ensure they have adequate capacity to utilize the program.

Could adjusting the current contribution formula based on 3% of ENS to include as well a percent of the whole farm margin, adjust the program to today's farm business realities?

To ensure the program is used effectively as a stabilization vehicle, it is proposed that the withdrawal triggers and related incentives be reviewed.

How could NISA be strengthened for use as a stabilization tool?

To encourage and support investments in the capacity of the sector to manage risk and innovate, it is proposed that farmers be given the opportunity to utilize government matching funds through a new investment trigger. Investments made by farmers which support policy goals set out in the new Agricultural Policy Framework, within specified limits and other conditions, could be made permissible and possibly at a higher than a $1 for $1 producer - government matching rate. Given the importance of investing in the future, governments could consider providing limited access to the supply managed sector for government matching on qualified investments.

For a farm business facing a potentially major business risk, how would you assess giving a producer the flexibility of using NISA not only for stabilization (should the business begin to decline), but also for investment now, to improve the future viability of the operation?

Other

It is proposed that governments continue to help farmers through advance payment programs to help manage cash flow over the course of a year.

It is proposed that governments consider the termination of the Canadian Farm Income Program (CFIP) and the array of federal-provincial-territorial companion programs dedicated to risk management in the context of proposed reforms to broaden and strengthen risk management coverage through production insurance and NISA. A review of potential gaps in coverage in differing scenarios could be examined with the perspective of recommending further adjustments to the two major risk management programs.

Administration

To provide efficient and effective service to farmers through continuous improvement, governments could share knowledge and information and work together on the development and delivery of products and services.

Governments could collaborate, coordinate and share information to design and deliver risk management programs through an integrated, client-focused approach.

Governments could develop a business risk management database to promote the sharing of data among governments or agents for the implementation and delivery of business risk management programming and the integration with related programming under this agreement.

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• Overview: Building a More Profitable Agriculture and Agri-food Sector for Canada
  
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