Good afternoon.
My name is Humphrey Banack. I'm a grains and oilseeds producer in central Alberta, with 4,500 acres of grains and oilseeds and a 50-head cow-calf operation. We're very proud of our century-old farm out there. It's a wonderful part of our lives. I'm also very proud to be vice-president of the Canadian Federation of Agriculture and president of Wild Rose Agricultural Producers, Alberta's general farm organization.
It is my pleasure today to have the opportunity to present on Growing Forward 2 and business risk management.
As many of you know, the Canadian Federation of Agriculture is Canada’s largest general farm organization, representing 200,000 farm families in every commodity and region of this country. The mandate of the CFA is to promote the interests of Canadian agriculture and agrifood producers and to ensure the continued development of a viable and vibrant agriculture and agrifood industry in Canada. Understandably, managing risk is a key issue for our members and the CFA.
At CFA we firmly believe that agriculture policy must be a three-way partnership among the federal and provincial governments and the industry. As such, we firmly believe that we cannot simply offer criticism; rather, we promote concrete ideas and solutions on how to improve existing programs, as well as ideas on additional tools. As such, I would like to touch briefly today on some of the preliminary work and discussions we have been having around the CFA table in conjunction with other industry groups and government on additional business risk management tools that may assist producers in better hedging their risk.
Let's touch on the existing programs first. Despite significant increases in technology, farming remains an unpredictable and risky business. Producers face many uncontrollable production and economic risks every year. These risks can result in large fluctuations in producer incomes, which threaten the stability of our agricultural sector.
For many families, government business risk management programs and non-BRM programs help reduce the impact of these risks and provide some predictability to our farm incomes. To achieve sustainable growth, we need programs that are for the long term, and that are simple, equitable to all commodities, predictable, and are delivered consistently across Canada. As such, the Canadian Federation of Agriculture strongly recommends that BRM and non-BRM programs remain fully funded in the 2012 budget for the next generation of Growing Forward.
Payments from AgriStability and AgriInvest have fallen significantly over the past number of years. This can be explained by two significant events. First, returns from the grains and oilseeds sector, by far the largest group of participants in AgriStability, have increased dramatically. This has resulted in a much lower demand on the program. Second, the returns in the livestock sector remain historically low in comparison to their long-term average. Since reference margins for AgriStability are derived from historical farm revenue, this means that our livestock producers are no longer triggering payments from AgriStability.
Combined, these two factors have led to a drop in total federal and provincial AgriStability payments of 50%, a drop of $834 million from 2008 due to reduced program demand. As such, we believe that if AgriStability is to remain the base support program for all Canadian producers, it should include changes to the program that would permit it to effectively deal with these declining reference margins, diversified farms, and other chronic program issues. Removing the negative margin viability test could be beneficial to many farm operations.
Currently, a producer that has negative margins in two or more of the three years that end up in the reference margin calculation will not be eligible for coverage. We recognize that in many of these instances the farm had been viable in the past and, given the opportunity, will become viable once more when market conditions improve.
The CFA urges the government to allow farmers to choose either the top 15% of AgriStability's reference margin or to participate in AgriInvest; to use the larger of the Olympic average or the average of the previous three years when determining reference margins; and to increase the coverage of negative reference margins from 60% to 70%.
AgriInsurance is another important part of our coverage. The CFA maintains that crop pricing should consider moving toward a market price-discovery mechanism, instead of being derived from government projections. Decisions made by government need to ensure there is increased protection for our producers in times of need. As well, the CFA continues to call for the current slate of insurance programming to be expanded to include coverage options for the livestock sectors, such as cattle and hogs. Until this goal is reached, the provision of alternative methods of coverage should be considered.
Our next point is about exploring public-private risk management tools that could help farmers minimize farm income volatility and reduce the overall burden on BRM programs. Here the CFA has been exploring the potential for public-private, insurance-based products that farmers could voluntarily use to mitigate farm operation price and production risks.
A number of private companies and marketing boards provide farmers with various risk management tools that help minimize price risk and other financial uncertainties. These include fixed price forward contracts, purchasing agreements, and tools for various perils such as hail and weather. However, during time periods with extreme market volatility, or in areas where there are significant linked risks, the private sector is unable to continue offering such products, or can’t offer them at a price that makes them attractive to farmers.
Products that used to be offered, such as fertilizer forward contracts, disappeared when markets became volatile, reducing the number of tools available to producers just when they needed them most. CFA envisions two separate government activities to help develop and administer public-private risk management tools.
First, the CFA suggests that government could create a risk management administrative support structure that would help co-operatives, marketing boards, and private businesses provide useful and reasonably-priced private risk-management tools. This support could include credit guarantees to ensure that liquidity is not pulled back when markets become volatile, favourable currency-swap agreements to help reduce basis risk, reinsurance capabilities, and technical support to help negotiate contracts with counterparties.
Second, CFA suggests that government could help identify and design tools that would be impossible for the private sector to create independently. These could include hedging against risks that have no tradable derivative market, such as fertilizer and many horticultural crops, or providing basis insurance tools that are currently not independently available.
One of the reasons these products are not often available is that because farmers do not have big enough operations to warrant the effort of designing a custom agreement with a willing third-party insurer, such as an investment bank. However, if a sizable group of farmers formed behind a single government banner, it could become worthwhile, and enough to entice a large financial institution to assume that risk in return for a reasonable premium.
By helping marketing boards provide new and useful tools, and helping industry design tools that are impossible to implement on their own, the industry could become more competitive and burdens on current BRM tools could possibly be reduced.
In conclusion, we believe that if the current BRM suite is maintained, there should be changes made to let it deal with declining reference margins, diversified farms, and other chronic program issues. We face production risk and economic risks, and it is crucial that programs, existing or new, be designed, developed, and reviewed in consultation with established farm organizations. These programs must be adequately funded by both levels of government, while keeping in mind the goal of fostering an agricultural policy that focuses on the profitability and stability of primary producers.
Thank you for your time.