Study criticizes broad farm support

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Published: November 30, 2006

The government tendency to use sectoral averages and one-size-fits-all farm safety net programming produces bad program design, says a new report from George Morris Centre in Guelph, Ont.

And the presumption that farm size matters does not take into account the key factors of management and individual circumstances, says the report written by economists Al Mussell and Terry-lin Moore.

Industry averages are used when setting supply management production costs and deficiency payment levels in Quebec and in some parts of the Canadian Agricultural Income Stabilization program.

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Mussell and Moore said the much-maligned individual farm margin system is a better approach to determine payments.

“The above observations are supportive of individually fragmented reference production margins used in determining eligibility for payment under the (CAIS) program,” the report said.

And when designing special programs to compensate farmers for income loss not picked up by existing programs, the report warned that officials should be careful.

“The design of certain ad hoc programs has relied on the notion of industry averages in distributing payments,” it said. “The results here suggest that industry averages are of more limited use than perhaps was previously thought.”

In a clear warning to government program designers, they wrote that looking at overall income numbers for sectors or national groupings as a reflection of individual farm situations is dangerous.

When Agriculture Canada reports annual farm income numbers that reflect low or negative income in some provinces or sectors, it usually results in increased farm lobby pressure for help targeted to those sectors. That was the genesis for the $755 million grain and oilseed payment announced late last year by the former Liberal government and implemented this year by the Conservatives.

Without making special reference to that program, Mussell and Moore said that type of sectoral response has its problems.

“Treating sectoral income as a benchmark for farm incomes creates the danger of erroneous conclusions and policy prescriptions that could actually exacerbate the problem,” said the study.

It said program money to an income-challenged large farm with little hope of becoming profitable could be a less useful use of taxpayer money than payments or management training to smaller farms that actually can be profitable.

The authors examined Canadian farm profitability factors from 1998-2004 and noted that while larger-than-average farms account for more than their numerical share of sales and profits, becoming larger is not necessarily the ticket to greater prosperity.

“Differences in management must explain a significant portion of observed farm profitability,” said the report. “Thus, there are some farms under $100,000 in sales which are, relative to their size, quite profitable and other very large farms that struggle. It is clear from the results that farm size is not a good proxy for operating profitability.”

Mussell and Moore reported that the number of farm families recording income below the low income cutoff line declined through the 1990s and the early years of this decade.

And they reported that in 2003, large business-focused farms with revenues above $100,000 represented 43 percent of Canadian farms, produced 85 percent of revenues and received 77 percent of government payments.

The largest group, with revenues above $500,000, accounted for eight percent of farms, 47 percent of revenues and 31 percent of government payments.

While this “business-focused” group was the single largest portion of Canadian farmers, the study noted that in the United States in the same period, almost 50 percent of American farms were represented by retired farmers still holding onto land and some production and lifestyle farmers with most of their income coming off-farm.

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