Ottawa urged to act before agricultural safety net fails

Failing to add major big-money elements to farm support programs ignores dramatic events like sudden market access losses and threatens to make AgriStability irrelevant

Farmers face financial ruin if Canada’s farm safety net isn’t radically expanded, says an analysis by economic outfit Agri-Food Economic Systems.

Tweaks and improvements won’t save farmers from being crushed by subsidies being offered to American farmers and an increasingly protectionist world trading system.

“The elements are lining up to present much greater risks to farm incomes than have existed in the past, the past that framed the design characteristics of current (business risk management) programming,” says the report, written by Al Mussell and Douglas Hedley.

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“A structural decrease in farm prices and earnings will generate reduced earnings and over time these will erode reference production margins and eligibility for stabilization under AgriStability. In the face of sustained reductions in production margins, the eligibility for payments… will wither.”

That structural decrease will come from the impact of production subsidies in the United States, in the range of US$13-$14 billion per year, and from growing protectionism around the planet.

Those subsidies and trade barriers enrich farmers in countries where Canadian commodities are exported and they hammer down world and North American prices because they promote overproduction and surpluses.

“The distortionary market effects of this additional U.S. support will logically undermine the basis and effectiveness of AgriStability, quite apart from the current dialogue on payment triggers and coverage levels,” says the report, entitled Business Risk Management Under Siege: Alternatives for Canada, published last month.

“This stands to be exacerbated by the prospect of increased support payments by others, such as the (European Union). The ability of Canada and others to enforce disciplines on domestic support through the (World Trade Organization) has been dismantled.”

Mussell and Hedley worry that farmers, provincial governments and the federal government are looking only at renovating the present farm safety net, not adding major, big-money elements. That not only fails to address dramatic events like sudden market access losses, but also threatens to make AgriStability irrelevant.

This is due to AgriStability’s design, which averages farm production income in a way that provides a relatively accurate picture of the previous five years’ returns.

That works fine in times of generally free trade, when supply and demand principles apply, but not when foreign subsidies and market access impediments distort supply and demand factors and eventually drive down Canadian farmers’ averaged returns.

For example, with U.S. farmers receiving billions of dollars in subsidies, they can continue to produce crops and livestock at loss-making prices that would normally see production shrink and producers leave the industry.

That extra production is dumped on the market, which pushes down prices and presents Canadian farmers with losses greater than U.S. producers will endure.

The result will be Canadian farmers failing and backing away from investing in their farms, and Canada’s agriculture industry losing the value of its investments and the incentive to invest more.

“The risks are such that they should be viewed as both the risks to farmers of much lower or insufficient incomes in farming, and the risks that existing capacity cannot be maintained in agrifood,” says the report.

Canada must expand and rebuild its safety net now, the authors argue.

“Canada must plan for adversity. This changes the BRM problem from one of elegant design to protect farm incomes and cash flow… to the periodic need for cash injections to protect the economic viability of Canada’s agri-food sector and the investments made in its capacity.”

The options Mussell and Hedley see include “greatly increased use of contingent lending by governments or their intermediaries to provide ready cash and cash flow for farms and commodity segments facing a much harsher operating environment.”

Those loans would be at “low or no cost, and with highly enabling security and repayment terms.”

The improvements made in recent years to advance payments “may provide something of a template or starting point for the strategic discussion that needs to take place.”

Mussell and Hedley think it would be a grave error for Canadian governments to chalk up the recent U.S. subsidy binge to election year politics and to assume the country returns to its previous levels of support for its farmers.

“There is no burning platform to motivate a change in direction on these payments,” says the report.

“With the WTO appeals process sidelined indefinitely, the U.S. can operate with little fear of successful trade challenge from other countries, regardless of whether the U.S. has exceeded its WTO caps on most distorting support.”

Canada has about one year in which to get a new safety net in place, they conclude. It could include the old structure, but it needs extra elements to deal with the new global reality.

Government resources beyond the agriculture department should be brought in, they say, and the geopolitical elements must be recognized.

“Without this broad effort, agriculture may be relegated to ad hoc payment arrangements on a continuing basis with a high risk of WTO challenges or retaliation from other countries, breaking down the regional and commodity equity objective embedded in Canadian agricultural policy over the last 20 years,” say Mussell and Hedley.

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