Steve Funk
There is increased negativity these days towards the AgriStability and AgriInvest programs resulting from the recently announced changes that will affect the 2013 program year applications to be filed in 2014.
The program budgets were cut; however, there have also been government cuts to areas other than agriculture.
The changes have caused producers to question whether they should continue to be involved in these programs.
To make a decision that is right for them, it is crucial producers understand the program changes and be able to interpret how their farm will be affected before the 2013 AgriStability signup deadline of April 30, 2013.
Unfortunately, interpreting the program changes can be accomplished only in light of a good understanding of the existing programs. Without that understanding, the current round of changes will simply add another layer of confusion.
The worst thing that can happen is if “I don’t fully understand the programs” leads a producer to conclude “I don’t need the programs.”
Producers who have a strong understanding of the programs will, almost always, want to incorporate them into the risk management strategy for their farm – even after the recent round of changes.
So then, step number one in interpreting the program changes is to understand the existing programs – some producers may need to do some reading and consult with their professional advisor to get a better understanding.
With that in mind, here is a quick summary of key program changes, their interpretation and some recommendations for producers.
AgriInvest
Key change:
- The government matching contribution is being reduced by one-third.
Interpretation:
- The program continues to guarantee producers government benefits each year and the accounting fees are minor in relation to those benefits.
Recommendation:
- Continue to participate.
AgriStability
Key changes:
- Increase in the self-insured portion to 30% of the reference margin from 15%.
- Equalization of government funding percentages to a straight 70%.
- Potential limiting of reference margins (this will not be finalized until January-February of 2013).
Interpretation:
- The first two changes result in less government support; however, there is still substantial support available.
- Unlike traditional insurance products, these programs are government subsidized. This means that over time, most producers will reap benefits that substantially outweigh the costs.
- Now, instead of getting a significant payment every five years, maybe it becomes every five to 10 years. It was a great program before; now it is only a good program.
The third change will not affect all producers, only those who consistently achieve high gross margins. This may include high-end grain and oilseed, potato, tobacco and dairy producers.
Even after the program changes are considered, AgriStability is still the cheapest form of whole farm insurance in the Canadian marketplace and, for some types of farms, the only form of whole farm insurance available.
Consider that for straight grain and oilseed producers, the costs of the program will vary between 50¢ and $2 per acre for potential government payments that could amount to well over $100 per acre every five to 10 years in many cases.
With less support being paid out through AgriStability (and AgriInvest), the government has created an environment where ad-hoc programming will be in bigger demand.
Recommendations:
- Go back five to seven years and add up your AgriStability benefits compared to program fees and accounting costs.
- Consider that the program covers a total of four variables: price and quantity of production and price and quantity of inputs. Never make an opt-out decision based solely on the fact that one of those variables (e.g. commodity selling prices) is doing well.
- Consider that AgriStability has been the basis of calculation for ad-hoc programs in the past before opting out. You may end up having to file your applications in any case or, worse yet, may be out of luck if you didn’t file the original applications. Applications are generally more expensive to file when filing has not been maintained on an annual basis.
- Consider your equity position and whether your balance sheet can withstand a disaster scenario without government subsidized insurance.
- Consult with your bankers prior to making any opt-out decisions, to determine how they feel about your ability to repay loans if you drop out of cheap, government subsidized insurance.
- Consult your professional advisor who may be able to conduct further cost-benefit analysis to assist in the program participation decision.
Producers who have a good understanding of the risks in their farming operation and how AgriStability and AgriInvest tie in to their risk management will likely stay in these programs and continue to reap the benefits and security they offer.