Canada’s Business Risk Management (BRM) Program for Agriculture
Paul-Florent Montfort, Analyst, momagri
One of the world’s great agricultural nations, Canada has since April 2008 carried out a policy of agricultural risk management based on income stabilization. In February 2009, momagri’s mission to Quebec gave us the opportunity to examine the policy, which deserves the credit for innovation in an increasingly unstable price environment.
In many ways, Canada presents an agricultural position similar to that of the European Union––as net exporter of agricultural products for Can$32 billion (€20 billion)1––the country is also a global agricultural powerhouse. Primary agriculture amounts to nearly four percent of total GNP and posts currency returns of close to Can$40 billion (over €25 billion). If we add agro-food activities, the industry accounts for close to eight percent of GNP and for one out of eight jobs.
Whereas the trend in the European Union is to deregulate the CAP, Canada seems to have assumed a more aggressive approach with the adoption of a new initiative called “Growing Forward” that lays the foundations of a new agricultural and agro-food policy for the next five years (2008 to 2012). Made up of three linchpins––general guidelines, financing and programs––the initiative outlines policies and programs to meet three basic and strategic goals: be competitive and innovative, contribute to society’s main concerns and proactively manage risks.
To comply with this third objective, Canada developed a new program for agricultural Business Risk Management (BRM) to assist producers in reducing income losses generated by price volatility on international agricultural exchanges or by lowered production following natural hazards2.
Momagri’s February 20093, mission to Quebec gave us the opportunity to study this new program. We felt its interest deserves to be presented it here, as it shows an innovative approach in a context of high price volatility on international markets.
With its new agricultural and agro-food policy entitled “Growing Forward” adopted on April 1, 2008, Canada bets on an agricultural business risk management targeted on income stabilization. The programs in the BRM suite complement each other and allow farmers to benefit from maximum protection in various situations. The strategy is made up by four keystone concepts: AgriProtection, AgriInvest, AgriStability and AgriRecovery.
a) Agriprotection is a harvest-insurance against specified risks (bad weather, pests and diseases). Farmers finance forty percent of its cost and most of them take out the insurance, which covers production losses. Canada should earmark close to Can$8 billion over five years to this policy. (Currency returns for agriculture amount to Can$40 billion).
b) The AgriInvest fund protects farmers against lowered income. Supported half by farmers and half by the Government, it allows producers to self-administer the risks of declines production income up to 15 percent4. It is the equivalent of a savings account for producers.
c) When farmers experience larger income losses, AgriStability comes into play. In exchange of a given financial contribution, farmers obtain partial coverage that increasingly compensates lowered production income5. The Federal Government contributes 70 percent to make up for losses between 15 and 30 percent and 80 percent for losses over 30 percent. Should farmers’ income become negative, the Government underwrites 60 percent of the lost income.
d) Lastly, AgriRecovery has been set up in addition to the above-mentioned programs to allow federal, provincial and territorial (FPT) governments to provide additional response when major disasters strike, filling gaps not covered by existing programs. It is therefore a relief program that covers non-cyclical risks. Consequently, cyclic events, such as price variations or long-term occurrences of price declines, are not covered in the AgriRecovery program. Financing is shared 60/40 between the Federal Government and affected Provinces. This program has the advantage to organize a type of participation, which was previously handled on a case-by-case basis and generated a situation of uncertainty that was difficult to manage for farmers.
Graph – Canada’s new programs for Business Risk Management (Source: Center for Strategic Analysis, Note n°122, February 2009
The BRM program, however attractive and ambitious as it is, may not be the panacea to the structural instability affecting agricultural producers and markets. While it unquestionably represents the key mechanism of the 2008 policy-framework “Growing Forward”, which leaves all leeway to federal, provincial and territorial governments to provide additional regulation tools to specifically limit price volatility, and not only its consequences. Thus, supply management systems are recognized in the “Growing Forward” agreement and some Provinces, such as Quebec, are centering their agricultural regulation policy on it (as indicated in an interview with Marcel Groleau, President of the Fédération des Producteurs de Lait du Québec (Quebec Dairy Farmers Federation).
At the same time, the BRM program gets the credit to present a dynamic policy aiming to a posteriori soften price volatility for businesses and decrease the influences that threaten the long-term survival of Canadian agriculture. The issue of its cost is undoubtedly a concern, but it should not be unconnected from another equally crucial matter: what price must we pay for food security?