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Cover Story CAIS uses 'Enron accounting,' critics say
CAIS – the farm safety net that satisfies no oneEven a modified CAIS isn’t meeting the needs of producers, say critics. And another margin-based program, as proposed by the federal government, is not going to work any better by DON STONEMAN Even for producers of other commodities, CAIS has been a problem since its inception, starting with the 2003 tax year. The CAIS program is part of the business risk management “pillar” of the federal-provincial Agricultural Policy Framework and is designed to stabilize farm income. Both farm critics and governments stress that the word “stabilize” is key. While countries like the United States have an agricultural support program, Canada has a stabilization program and there is a difference, observes Shauf. CAIS replaces the old Net Income Stabilization Account (NISA) program. Under that program, the federal and provincial governments matched farmer’s contributions and the monies went into individual farm accounts. Canadian farmers had $4 billion in their NISA accounts by the time that the program ended, and some NISA critics in government felt those balances were too high, the OFA’s Jason Bent says. They wondered why government payments were being directed to farmers who apparently didn’t need them. Even in low-income years, many farmers tended to leave the money in their “rainy day” account, he notes. On the flip side, producers who did take out their NISA money didn’t have enough left to trigger a payout when a financial disaster did strike. BPUs for Ontario 1998-2003
NISA accounts are currently being wound down and producers must withdraw all of the money by March 31, 2009. Bent says recent reports indicate that $900 million was still in those accounts. When NISA was ended in late winter of 2003 -- a controversial decision that “does not sit well with farmers at all,” according to Bent – it and the Canadian Farm Income Program (CFIP), an income disaster protection program, were rolled into one package under CAIS. Eligibility for a payment is based on the difference between income and eligible expenses in the “program year,” usually the last tax year, as compared to the “reference margin,” which CAIS defines as the average of the last five years of farming history, with the high and low years removed. The criticisms of CAIS are wide-ranging. The biggest complaint, heard across Canada, is that “farmers do not know what money is there for them and when they are going to get it,” says Green. Farmers who expected a payout out complain that they didn’t get one, or that the payout was much less than expected. In particular, the government’s reaction to calls for relief from the closing of borders because of the 2003 BSE crisis outraged affected producers. There was a “claw-back” of BSE payments under CAIS. The Farm Income Payment Program and the Transitional Industry Support Program, both put in place to help farmers hurt by the BSE crisis, were counted as income in the program year but not in the reference year. If your reference margin goes down, it is harder to “trigger” a payment, Bent says. The upshot was that some farmers expecting a substantial payment from CAIS got either a small cheque or even a bill. Predictability a problem While the provincial and federal governments develop policy on CAIS, Agricorp, the provincial agency delivering both government and “non-government” risk management programs, delivers the program in Ontario. In Ontario, producers complain that it takes too long to process their applications. Director of operations division Mike McMorris defends efforts at Agricorp. He says that “we are making progress in turning around files” and that “we did ramp up staff about a year ago.” A staff of about 85 verifies files from about 28,000 producer clients. Encouraging producers to apply earlier, even if they don’t like to do it, has speeded up payments. Dealing with “structural adjustments,” the expansion or reduction of an operation compared to its previous history remains an issue. “We know there is a desire to make it more predictable, but there is no easy answer,” he says. McMorris can’t speak to the predictability of payouts. It’s a national policy issue, he says. Predictability and “bank ability” go hand in hand. Better Farming spoke to a lender who did not want his name used. He defines “bank ability” as the ability to generate a bill that can be included on the accounts receivable side of the farm’s ledger. We received the same definition after calling Minister Strahl’s office. The newest changes to CAIS have made it easier for the lender’s clients to get CAIS to pay out, but it still doesn’t fit the “bank ability” definition. “Bank ability” is something that Chuck Strahl has promised. He has also promised to replace CAIS with a new “margin-based” program. Admittedly, recent changes to CAIS have benefited farmers. A change in calculating inventories goes some way to addressing the issue of declining margins, but Bent doesn’t think producers will be satisfied with that. Allowing for “deeper” coverage for margin declines and “changing the methodology for calculating inventories “are not likely to be seen as significant changes in the eyes of our producers,” he says. The future of CAIS will be on the agenda when agriculture ministers meet this month. The current agricultural policy framework expires in March of 2008 and public consultations will begin following the ministers’ meeting. In April, the provinces called for the federal government to “move forward with plans to transform CAIS.” The CFA is pushing the government to look beyond a few changes to the CAIS program. A NISA-like program would be a good replacement; it is allowable under trade rules, Bent says. He also notes that the United States was unsuccessful in countervailing NISA for the beef industry. “There was no reason to end the program because of trade,” he claims. When governments argue against it, “it comes down to spending.” He points out that CAIS is still referred to as NISA under the Farm Income Protection Act of 1991, which governs the CAIS program. “That has benefits and drawbacks, too,” Bent says. While a NISA-like program is an option under a law still on the books, that law requires that producers pay some type of a fee in order to enrol in the program. And producers must keep a special bank account in order to be part of the program. Would agriculture be in the problem it is now if NISA had continued? It would be worth knowing the answer to that question, Bent says. He says that the OFA has asked the province to do that analysis and to date it hasn’t been done. The fallout from closing the border to BSE would likely have required ad hoc assistance to wither under CAIS or NISA. “It’s not realistic to expect current funding” to cover those losses.
A revived and improved NISA CAIS uses “Enron accounting,” critics sayCAIS is working to its design, says Canadian Federation of Agriculture vice-president Marvin Shauf.“The program design said that we will keep the expenses directly related to production” such as seed and chemicals and fuel, but capital costs, and “anything exchangeable for capital costs” will be excluded from calculations of reference margins that farmers can use to make claims against the federal-provincial stabilization program. Nowhere is this design aspect more apparent than when farmers make use of Benchmarks Per Unit (BPU) calculations to determine whether they are eligible for a payment under the controversial CAIS program. For farmers with five years of farming history under their belts, their reference margin is calculated using an average of the three middle-income years, leaving off the lowest and highest income years. Beginning farmers don’t have that history to determine their reference margins, and neither do operators who are either expanding or contracting -- a challenge that CAIS’ policy makers refer to as “structural change.” In both instances, the sometimes controversial Benchmarks Per Unit come into play. BPUs are average costs and incomes for a commodity. According to CAIS policy documents, BPUs are calculated based on “weighted average information” for the entire province. The “weight” takes into account the importance of a major producing area in terms of provincial prices, yields and costs. The BPUs are calculated in two ways, according to the CAIS documents. One way is for commodity specialists to develop a budget of revenues and costs involved in producing a commodity. The budget is adjusted to reflect market prices, yields and costs that are specific to CAIS. If there are a small number of growers of a product, a sample approach is used. An example is grapes, where a BPU is developed by evaluating a number of farms that generate 95 per cent or greater of their income from that crop. The information behind the calculations used to create BPUs is not readily accessible to the public. Better Farming received information on BPUs after making a request under Freedom of Information legislation. The Ontario Federation of Agriculture says it had requested the information on which BPU calculations from the Ontario agriculture ministry and was unable to obtain it. Jason Bent, policy analyst, says that concerns about trade were cited. Steve Duff, senior policy advisor for Ontario agriculture ministry’s business risk management program, confirms that Agriculture and Agri-Food Canada’s trade experts advised CAIS administrators to avoid putting BPU calculation tables, for example, onto websites. Duff says keeping BPUs under wraps has caused “no end of grief” from producers who think that “the big bad government” is trying to hide something. Administrators have talked about “ways to get around it and improve transparency. To date the trade issue has been a trump card,” Duff says. Production margins for corn growers in 2003 were $163 per acre, based on total revenues of $438, and total direct costs of $275. Inside, the documents used to create the BPUs refer to a “profit” of $162.73 per acre. Some CAIS critics find that the way that these figures are presented as disturbing. “It’s Enron accounting,” charges Gormley farmer and elevator operator John Doner, a leader of a group called Food Chain, which has been critical of government support for agriculture, for a number of years. Ailsa Craig cash cropper Steve Twynstra agrees. BPU calculations “are excluding very real costs,” he says. “There is nothing in there for depreciation and, on top of that, there is nothing for reinvesting in the industry. And they’ve got nothing in there for machinery repairs and maintenance. We are eating up our equity.” His budget for the 2007 soybean crop shows a total cost of $218 an acre. Using a yield of 45 bushels an acre, “I’m showing a break even of $4.84 a bushel.” That’s a long way away from the costs for growing soybeans in the BPU calculations, he says. Duff says only direct costs were used in the production margin calculations in order to meet WTO requirements and to meet agreed upon “principles.” Under WTO rules “you are not supposed to include capital asset values” in calculating benefits, Duff says. The principles of the program included avoiding distortion of production and also capital asset values. “There is no end of research,” to show that “if you include land rent you quickly see the value of the program bid back into land rent,” Duff says. With the notable exception of a drastic expenditure such as replacing a blown combine engine, building and machinery repairs are mostly discretionary, Duff asserts. Farmers tend to delay those expenses when cash flow is tight. If you spend money on repairs when times are good and not when times are tough “you make the good year look worse than it really is and the bad year look better than it really is,” Duff says, and it is harder to trigger a CAIS payment. Grain and oilseeds farmers’ problem is one of income adequacy, not income stability,” he asserted. “CAIS could be tweaked to make up for that, but some of the (founding) principles would have to change.” BF
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