For years, farm groups have sought a better way to ensure grain producers are paid when they sell their crop.
But it’s not easy finding a replacement to the existing model, which requires grain companies to post security with the Canadian Grain Commission, says Robert Hyde, president of Scott Wolfe Management, a farm business planning and management consulting company in Headingly, Man.
“The answer hasn’t evolved over the last 10 to 15 years,” he said.
“The issues are complex. There’s a lot of different stakeholders, obviously, that have different magnitude of issues.”
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Despite the difficulty, Keystone Agricultural Producers and other provincial farm groups and grower associations asked Hyde to examine the current system and evaluate other mechanisms for producer payment security.
He presented his findings at KAP’s general council meeting in Brandon last week and told farmers two options to the status quo warrant further investigation:
n An insurance based model, where growers or grain buyers pay an insurance premium to cover risk.
n A fund-based model where producer contributions cover potential liabilities.
During his presentation in Brandon, Hyde frequently referred to a fund model from Ontario, the Agricorp Grain Financial Protection Program, which functions like a check-off program because producers make contributions in proportion to sales.
The fund, which would cover losses in case of a payment default, is now at $10.9 million and provides payment protection of 95 percent for corn and 90 percent for soybeans and canola.
Hyde said one question about this model is what to do with a growing fund over time if few claims are paid out.
He also considered a clearinghouse model.
“A lot of work has been done on this concept by barley growers.”
However, he said the report didn’t encourage further study of this option because “it’s complex and it’s intended to cover issues much broader than producer payment security.”
Hyde’s report also looked at the cost of the existing model and what it doesn’t cover.
He estimated that security, mostly in the form of bonds or letters of credit, costs grain companies $6.6 million annually. That figure is based on data from January 2009 when licensees had $440 million in security with the CGC. Licensed dealers and elevators pay an average of 1.5 percent on their security and to calculate his annual estimate, Hyde multiplied $440 million by 1.5 percent.
As well, rule compliance costs licensees $1 million a year and commission administration costs $1.4 million per year, increasing the total annual system cost to $9 million.
However, the report said that isn’t the entire story.
“There are considerable sales and deliveries of crops to buyers of grain who are exempt from the current security and licensing regime.”
For example, the Canada Grain Act doesn’t cover producer sales to distillers, feed mills, seed dealers and other farms. Hyde estimated that those transactions represent 16 to 19 percent of total crop receipts in Western Canada. As well, there is also a risk that licensed dealers will not post sufficient security.
Insufficient bond
Seventeen farmers lost more than $153,000 in total when West-Can Agra, a special crops dealer in Plum Coulee, Man., went out of business. The farmers were owed $453,688, but West-Can Agra’s security bond with CGC was for only $300,000.
KAP president Ian Wishart said getting a better handle on how much the security system costs and quantifying weaknesses in the model was an important aspect of Hyde’s report.
“We’ve informed the debate a whole lot and now we’ll try and flag some options that work better from a producer perspective.”
Les Felsch, a producer from Ridgeville, Man., who attended the KAP meeting, said the current grain commission system works well for some producers, but there is room for improvement.
“I think there are better ways of addressing the issue,” he said.
“For the grains industry, they could probably deal with it through a funding system like Ontario.”
Wishart said the next step in the process is to examine the details of potential options. He said the Agricultural Producers Association of Saskatchewan, Wild Rose Agricultural Producers and pulse, canola and barley grower associations are on board to move ahead with the next step.
“We’re looking towards later this year to try and get this moving. We see this as a high priority,” he said.
The report can be downloaded at www.kap.mb.ca.
I mentioned in my last column how the average tax-paying family in Canada pays more in taxes to all levels of government than it spends on shelter, food and clothing.
As a result, it is probably in all our best interests to find strategies to keep more money in our pocket.
One way to do that is to invest off the farm.
Although re-investing in your farm business might seem prudent, many financial experts suggest that putting all your eggs in one basket is risky.
By the time you retire, at least 40 percent of your investment portfolio should be in non-farm assets. This reduces risk by having investments that operate on economic cycles other than farming and agriculture and may save money at tax time.
For example, you can shelter your money from a higher tax rate by making contributions to your Registered Retirement Savings Plan in years that you enjoy high farm income.
If you supplement your income in years that your farm income is down by making withdrawals from your RRSP, those withdrawals will be taxed but quite possibly at a lower tax rate than would have been applied in your high income years.
Economic downturn possible
Depending on the sale of your farming business as the sole source of your retirement funding can be a risky investment strategy.
Changes in the economy, exchange rates, government programs and the weather could either delay your plans or severely undermine the value of your farm assets.
Off-farm investments can add to your retirement income while giving you flexibility to lower the farm transfer price to your children or delay some of their loan payments while they get established in the business.
Off-farm investments such as life, disability, critical illness and long-term care insurance can also provide tax-free cash for your spouse and children if you should die prematurely, suffer an injury or become ill.
Life insurance is frequently used to divide an estate after death in a way that is fair to all children or to pay down taxes that would otherwise deplete the estate.
Any way you look at it, however, off-farm investing requires a comprehensive approach that involves the specialty skills of tax and financial advisers.
There are benefits to having both registered and non-registered investment portfolios and a balanced investment strategy designed to provide income and capital appreciation while avoiding excessive risk.
As shown by the recent decline in the stock market, virtually any investment can go through a period of volatility. Having the right blend of farm and off-farm assets can provide you with a more comfortable and secure retirement income.
