Business Risk Management

Overview

Business Risk Management Programs

At their July 2008 annual meeting in Quebec City, Canada's federal, provincial and territorial Ministers of Agriculture endorsed a five-year Growing Forward policy framework. This framework replaced the Agricultural Policy Framework (APF), which was launched in 2003.

The Growing Forward’s BRM programs were the first programs officially available under Growing Forward in 2007. The Agri-Invest, Agri-Stability, Agri-Recovery, and Agri-Insurance programs were designed by governments with the aim to respond to farmer demands for programs that are simple, responsive, predictable and bankable. The BRM suite of programs aims to provide producers with effective tools to manage business risks which are largely beyond their control. Governments believe these programs help producers reduce income losses stemming from low commodity prices, reduced production, or natural disasters.

Key policy outcomes stated in the Growing Forward framework are:

• BRM programs that are timely, responsive and predictable;
• increased producer capacity to manage business risk from unexpected events;
• reduction in the economic impact of disasters on producers and more rapid adjustment and business resumption after a disaster; and
• greater stability of producers' incomes.

Risk management programming principles to be considered by governments when designing or modifying risk management programs as stated in the Growing Forward framework are:

1. Programs shall be in conformity with Canada's international trading obligations and should minimize countervail risk.
2. Programs should minimize moral hazard and not influence farmers' production and marketing decisions.
3. Programs should be developed in conjunction with the agricultural sector, including consultation with other relevant partners and stakeholders.
4. Programs should have a clear purpose, and be comprehensive, comprehensible, predictable, and simple to administer.
5. Programs should not provide a disincentive to the use and development of private sector risk management tools.
6. Programs should contribute to market-oriented adjustments and adoption of technological innovations.
7. Programs should apply to the stability of the entire farm entity.
8. Payments for the purposes of stabilization, disaster mitigation or production loss should not be capitalized into assets.
9. There shall be limits on the levels of assistance to producers.
10. Programs should help mitigate a broad range of risks by allowing for increased or enhanced environmental stewardship and improved food safety and quality.
11. The financial resources of Canada should be allocated to provide, over time, the same level of protection for farmers in similar circumstances.
12. The allocation of federal and provincial funds should not distort regional or commodity-based comparative advantage within or among jurisdictions.

Additional principles when designing or modifying production insurance programs as stated in the Growing Forward framework are:

1. Producers should have access to effective insurance tools as appropriate.
2. Production insurance shall encompass production risk protection against uncontrollable natural perils with producers assuming the initial production losses.
3. The general approach shall consist of common program standards with provincial design and implementation flexibility.
4. Protection strives to reflect, but not exceed, individual productive capability and expected, actual or replacement value of commodity.
5. Programs strive to be cost-effective and efficient with an emphasis on protection against severe loss situations.
6. Programs shall be based on sound insurance principles, actuarial soundness and self-sustainability.
7. The use and development of private sector insurance products and delivery is encouraged, where appropriate, or the development of non-subsidized plans in cases where such products are inconsistent with government policy.
8. There shall be equity and fairness in that the same level of federal cost-sharing shall be provided for similar levels of coverage, programs and features.
9. Stakeholders are involved throughout the program design and implementation.
10. Governments shall strive for greater interprovincial and federal collaboration and data sharing in order to improve consistency and availability of programs, as well as to expand coverage of commodities.

There are notable differences between the BRM programs under the Growing Forward policy framework and the BRM programs that were available for the program years 2003 to 2006 under the APF. For example, a similar program to Agri-Recovery was not offered under the APF. In addition, starting with the 2007 program year, the Canadian Agricultural Income Stabilization (CAIS) Program was replaced with stabilization assistance through the Agri-Invest Program and disaster assistance through the Agri-Stability Program. This change reversed a significant change made under the APF when the CAIS program combined the stabilization assistance (formerly provided under the Net Income Stabilization Account (NISA) Program) and disaster assistance (formerly provided under the Ontario Farm Income Disaster Program in Ontario) into one program.

BRM programming similarities between the two frameworks also exist. Agri-Insurance appears to be only a new name for what was known as Production Insurance. Also, Agri-Stability is a whole-farm, margin-based program much like CAIS was - albeit Agri-Stability does not provide the stabilization tier assistance that CAIS did.

The OFA believes governments should offer Ontario farmers a suite of BRM programs rather than just one program. OFA policy calls for production insurance programs or alternatives for all commodities including livestock and horticultural crops. Long-standing OFA policies with respect to whole-farm, margin-based programming are noted under the Agri-Stability program description section below. The OFA advocated for a NISA-like, self-stabilization program, a program to deal with catastrophic events, and provincial specific program that are funded jointly by the federal and provincial governments.

Although not considered a BRM program by governments, this paper includes an Agri-Flexibility Program description section. The OFA, along with the Canadian Federation of Agriculture, strongly support the federal government contributing funds to the provinces to support regional programs. The federal government could allocate this funding to the provinces conditional on a few broad parameters to ensure inter-provincial competition is minimized. Where there are many common problems across Canada, the solutions may be different. Federal funding for companion programs equalizes the abilities of provinces to tailor safety-net programming to their own regional economies. The OFA has further proposed that the federal government should provide funding for cost of production type programs like the Grain and Oilseed Risk Management Program (RMP) from such an allocation.

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