Federal election 2019: business risk management

 

The next Canadian federal election will take place on Monday, October 21, 2019. For producers, the next election is an opportunity for the interests of agriculture to reinforced by voting for your local candidate with the strongest background and most favourable policy positions in this area.

 

Approaching the upcoming election, Alberta Pork has previously covered the need for federal government support for international market access. Another issue of note is support for improved business risk management (BRM) programs for producers.

 

Under the Canadian Agricultural Partnership (CAP), there are three main BRM programs: AgriInsurance, AgriInvest and AgriStability. Pork producers across Canada have known for some time that these existing programs have been inadequate for the pork sector.

 

When Canada’s provincial agriculture ministers met with Minister of Agriculture and Agri-Food Canada, Marie-Claude Bibeau in July 2019, BRM issues were addressed, and a panel is set to provide findings to the federal government by year-end. While Alberta Pork eagerly awaits the panel’s findings, the multi-year issues are no secret to many who have experienced them first-hand.

 

In August 2019, Minister Bibeau announced a new call for applications under the AgriRisk Initiatives Program, which was renewed under CAP to support the development of new BRM tools for the agriculture industry.

 

Under AgriInsurance, almost half of all funds are spent on crop insurance, while a corresponding mortality insurance program for livestock is unavailable. While “acts of God,” such as hail, do not often destroy livestock as they do crops, extreme heat and other factors leave producers perpetually vulnerable in the absence of insurance coverage, including drought and disease.

 

In Alberta, porcine epidemic diarrhea (PED) was discovered for the first time ever in January 2019 at four farms. Luckily, the outbreak appears to have been contained since March, but if the disease had continued to spread, animal deaths may have resulted in severe asset losses. This could financially ruin producers with little hope of ever recuperating.

 

Under AgriInvest, payment caps do not reflect the scale of commercial hog farms. For example, the $10,000 cap represents fewer than three days of feed costs for a 600-sow, farrow-to-finish operation. For grain and oilseed producers, the difference between three weeks and three months to receive compensation is relatively inconsequential, since input costs are comparatively low between seeding and harvest.

 

For livestock producers, three weeks versus three months is nearly half the length of a pig herd cycle—how long it takes for pigs to be farrowed (born) and finished (ready to be sent to slaughter). Delayed payments make it considerably more difficult to purchase feed and other supplies for producers with already tight margins related to cost of production.

 

Many producers believe the 70 per cent reference margin under the AgriStability program is too low and delivered too slowly. The Canadian Pork Council (CPC), working as part of the AgGrowth Coalition, has suggested increasing loss coverage to be 85 per cent of reference margins. The group has also requested a move to make BRM program based on effectiveness rather than funding levels, along with the creation of a new working group to allow producer organizations to provide input on programs.

 

Forward contracting is another aspect associated with BRM. Producers may take advantage of forward contracting through a marketing agency. These contracts are most favourable to producers when prices are perceived to be high. For the producer, forward contracting means a guaranteed, regularly paid source of income but potentially missing out on greater profits if prices continue to trend upward during the term of the contract. For the marketer, forward contracting becomes a hedging strategy to earn profit at auction, at the risk of falling market prices.

 

Popularity of forward contracting naturally varies, but when popularity peaks, the marketer must have a substantial asset base to in the event of a margin call. The problem is that sufficient cash is often unavailable under these circumstances, which limits the marketer’s ability to offer forward contracts. A potential solution to the problem is for a lender to make this cash available via a loan guarantee, which carries no actual risk to the lender but improves the marketer’s ability to offer more attractive contracts.

 

The lack of assets to back forward contracts has been an ongoing problem that has existed for producers and marketers alike for many years across several federal governments. If the Government of Canada were to support loan guarantees to back forward contracts, it would open up the possibility for better private business and increased public revenue generated by taxes and exports.

 

Alberta Pork hopes the next federal government considers the pork sector’s issues with BRM to be important, and that action is taken.