Business risk managements programs

CHALLENGING ECONOMIC TIMES OFTEN RAISE THE QUESTION OF RISK MITIGATION. Nowhere is this truer than grain farming in Ontario. Despite being one of North America’s most productive group of growers, Ontario’s grain farmers remain exposed to declining commodity prices and input prices that remain stubbornly high relative to the selling price. In fact, economists predict that 2024 is shaping up to be the worst financial year in farming since 2007. In such times, farmers often turn to government-supported business risk management (BRM) programming for relief and questions turn to their effectiveness, especially relative to neighbouring regions.

In Canada’s case, this region is, of course, the United States. Grain farmers south of the border enjoy the luxury of choosing from a wide variety of federal crop insurance

products and can rely on funding available through the Farm Bill’s Title I programming, specifically the Area Risk Coverage (ARC) and Price Loss Coverage (PLC) programs. Both programs are set to pay out over the next two years, given the low commodity price environment farmers currently find themselves in.

COMPARING PROGRAMS

Recent work by Grain Farmers of Ontario compared programming available to Ontario’s grain farmers with those in the U.S. The analysis revealed that U.S. farmers have more comprehensive risk coverage available, and the payments from these programs are also higher on a per-acre basis. In a simulated scenario, it was discovered that in 2024, if BRM programming is called upon due to a bad production event for a representative farmer (1,000 acres) in both Ontario and the U.S. (specifically a farmer in Nebraska), a U.S. farmer’s payment would be nearly C$91/acre higher. However, it must be noted that the U.S. farmer does have a combined per-farmer payment limit for the PLC/ARC programs of US$125,000. This may be extended to US$250,000 if the farmer and their spouse jointly operate the farm.

The difference in payments is primarily why the U.S. number is higher, which can be explained by the fact that U.S. farmers can cover their acres using the Revenue Protection program, which is by far the most utilized crop insurance product in the U.S., and the PLC/ARC payments, which are set to pay out this year and the next at least. In comparison, Ontario’s grain farmers use the Production Insurance program, which only offers coverage for a decline in yield. In addition, Ontario’s farmers also have the Risk Management Program (RMP) payments, which provide coverage for price loss or high input prices but have historically experienced high proration. Even this year, the RMP payments will be heavily prorated, paying only 35 cents on the dollar. Federal programs such as AgriStability rarely trigger even in times of need since they only cover catastrophic income loss.

AD HOC PROGRAMS

U.S. farmers have also benefitted from ad hoc direct payments in the recent past, which were not budgeted for in the Farm Bill. These were driven by U.S.-China tariff wars in 2018/19 and the Covid-19 pandemic in 2020. In fact, more ad hoc payments might be on the way with the recent introduction of a bill titled the FARM (Farm Revenue Mitigation) Act, which, if passed, will provide another $20 billion in funding to U.S. farmers. These latest ad hoc payments are to support farmers who face declining margins driven by lower commodity prices of primary crops.

Furthermore, the new U.S. Farm Bill, pending passage, is aiming to considerably increase funding for Title I commodity and crop insurance programs. The Congressional Budget Office estimates an additional US$47 billion more will be spent on the two programs over the next 10 years (until 2033), which will be a 77 per cent increase over the current funding level for those programs. The funding increase will support an increase in crop insurance premium subsidies and an increase in the reference prices of the PLC/ARC programs, which are set to increase between 11-15 per cent. The higher reference prices will enable the programs to trigger more often.

It is important to highlight the differences in risk coverage between the U.S. and Canada as they affect the respective global competitiveness of the two groups of farmers. Whenever U.S. farmers have suffered, the American government has acted quickly to compensate them. In fact, research suggests that payments from the Market Facilitation Program—an ad hoc payment initiative created by the U.S. government to compensate corn and soybean farmers during the U.S.-China trade wars—may have exceeded the losses those farmers incurred.

Improving business risk management programming is the number one priority for Grain Farmers of Ontario. This includes increasing the funds available to pay out claims for Ontario’s Risk Management program and improving the AgriStability program so that it is more responsive to grain farmers in Ontario.

Sankalp Sharma, PhD, is Grain Farmers of Ontario’s senior economist. •