In March 2021, the Canadian federal and provincial governments announced changes to the AgriStability program to improve income support for farm producers. Given the influx of federal and provincial government support programs announced because of the COVID-19 pandemic, producers may have overlooked the changes to the AgriStability program and its potential impact on their operations. As we look forward to 2022, producers who have never participated or have been out of AgriStability for several years should re-evaluate whether the AgriStability program would benefit their operations.
AgriStability overview
AgriStability’s purpose is to buffer farm producers from production margin declines. The AgriStability program calculates the producer’s production margin as:
Allowable income - allowable expenses
= production margin
Allowable income includes sales of agricultural commodities. Allowable expenses include, but are not limited to, such expenses as seed purchases, pesticides, machinery fuel and feed.
A payment is triggered if the program year margin falls below 70% of a reference margin that is based on an “Olympic average” of the last five years meaning the highest and lower margin years are dropped and the remaining three years are averaged..
Changes to the AgriStability program
Removal of the reference margin limit
The most significant change to the AgriStability program announced in March 2021 was the removal of the reference margin limit tied to allowable expenses. This reference margin limit affected those with low ratios of allowable expenses to allowable income. The reference margin limit made it difficult for those producers to predict whether they could qualify for payments, as the payment triggers could range from 70% to 49% of the reference margins.
Field crop production, in particular, was significantly affected by this reference margin limit.
The result of the reference margin limit was that many producers needed the current year margins to fall 49% below their reference margins to trigger payments.
Many field crop producers and other producers with low allowable expenses relative to allowable income decided to exit the AgriStability program after the reference margin limit was introduced back in 2013.
With the reference margin limit no longer a factor, low allowable expense ratio producers, such as field crop producers, may wish to consider participating in the program again.
Should your operation enroll in AgriStability going forward?
Producers should consider several factors when deciding whether to participate in the AgriStability program.
Payment trigger unchanged at 70%
The most significant AgriStability program change that was enacted in 2013 by the federal and provincial governments was the lowering of the payment trigger from 85% to 70%. This payment trigger factor remains unchanged, so producers are still not as likely to trigger payments as those who enrolled when the payment trigger was 85%.
Understanding gross margins
The lower a farm’s gross margins, the more sensitive the operation will be to changes in factors such as market prices, production declines and rising expenses. With AgriStability, lower margin producers require a smaller percentage change in those factors to qualify for payments.
Producer administrative work and AgriStability fees
AgriStability fees are calculated as 0.3150% of the reference margin (plus $55).
However, the premiums may be only a small portion of the cost to participate in the AgriStability program. Participants must also complete annual applications detailing their production histories, accounts receivable and accounts payable, and must provide detailed reconciliations of their opening and ending inventories, among other requirements. Compiling this information often requires a significant amount of work for producers and their advisors, over and above preparing the basic annual financial statements and tax returns.
It is common for AgriStability administration to follow up with a producer with inquiries even after the application is submitted. And if the application is not processed as expected, the appeal process can add even further to the administrative burden.
To enroll in the AgriStability program, producers must provide historical financial and production information to calculate their reference margins. Provincial agencies do have a simplified enrollment process for those who are new to farming or have been out of the AgriStability program for more than four years.
Supply management sectors
Historically, the supply-managed sector rarely experiences margin declines under 70%. It is possible, however, that a disaster could cause a greater decline. The avian influenza outbreak that affected certain western-Canadian chicken producers more than 10 years ago is a good example. These types of producers should consider whether the costs to participate in AgriStability outweigh the insurance coverage provided. They may already have sufficient resources, including other insurance products, to deal with unforeseen disasters.
Get professional advice
The decision whether or not to participate in the AgriStability program can be complicated. Every case is different. The deadline to enroll in the 2022 AgriStability program is April 30, 2022. Contact your accountant and professional advisors before making any decisions. We can help you to understand your options.