Is Ontario's Risk Management Program a good deal?

Monday, October 3, 2011

Farmers are divided, some saying that the potential claw-back by the federal AgriStability program negates its value

by DON STONEMAN

Western Ontario cash crop farmers Steve Thompson and Steve Twynstra both signed on to the province's new Risk Management Program for grains and oilseeds before the mid-September deadline. There's no downside, they agree, since the province is paying the tab on premiums for the first year of the program, announced on April 1.

Neither farmer expects a payout this year when crop prices are buoyant. But that's where the two diverge.

Clinton-area farmer Thompson, a former banker and a past- president of the Huron County Federation of Agriculture, says he "definitely won't sign up in 2012 unless the claw-back provision and the non-refundability of RMP premiums are both removed from the present policy."

Twynstra, operator of 3,000-acre Twilight Acres Farms in Ailsa Craig, acknowledges RMP's shortcomings and deplores the federal government's refusal to sign on. On the other hand, he says RMP is the best program that Ontario producers have going for them now, at a time of increasingly volatile grain markets. He plans to renew in 2012.

Ontario's new Risk Management Program has been touted by every involved producer group and farm organization since it was launched. Carol Mitchell, the provincial minister of agriculture, describes RMP as "the first made-in-Ontario program in 25 years." The minister's mantra, repeated at one speaking engagement after another, is that RMP is "designed by farmers, for farmers." At the grass roots level, though, the benefits are sharply debated.

RMP isn't new to grain and oilseeds producers. The pilot RMP program was introduced by then agriculture minister Leona Dombrowsky in 2007. At that time, as in 2011, the province waived the premiums.

The first year "was a win-win because all of us got money and we didn't have to pay premiums," Thompson says. In 2009, Thompson was eligible for a payout from the federal AgriStability money, a federal program for which he also paid a premium. The monies he received under RMP were deducted from his AgriStability payout. (Agriculture and Agri-Food Canada describes AgriStability as part of its suite of business risk management programs. AgriStability covers larger margin declines caused by circumstances such as low prices, production losses and rising input costs.)

"When I had my RMP program money clawed back by AgriStability, that's when I realized this is not a win-win program," says Thompson. "It is a lose-lose, and I started to do the numbers." Thompson says that, on a 500-600 acre grain farm, the typical premium for AgriStability was about $500 while the annual RMP premium was $6,000, more than 10 times higher.

By Thompson's calculations, a farmer can expect to lose his RMP premium completely in two years out of four;  in the other two years, he might recoup his $24,000 in premiums, "but only if he is really lucky."

The risk benefit ratio is out of whack, he says. Life insurance and fire insurance all involve paying small premiums in exchange for mitigating the small but hugely expensive risk of a near-catastrophe. RMP is the opposite, Thompson argues; the premiums are "huge" and the payout is "relatively little."

Thompson describes AgriStability as "a good investment" and crop insurance as "a wonderful investment." And so is forward contracting prices for delivery of crops. He doubts that lenders will support spending their money on RMP premiums.

Twynstra argues the contrary. If AgriStability met the needs of crop and livestock farmers, special disaster relief measures wouldn't be needed in the West, Twynstra says.

"RMP is not for everybody," he allows. "It is a draw to AgriStability. That is the reality of the world today."

But Twynstra argues that because volatile commodities such as corn prices frequently go up the 40-cent daily limit on Chicago futures, producers have to mitigate volatility in the marketplace.  Failure to do so means "gambling $200-300 an acre on your marketing." A year ago, farmers were looking at $3.25 corn, he points out. Inputs can cost "$700-800 an acre before a crop is even pollinated."

He says that "the (RMP) premium is pretty darn cheap" compared to carrying a hedge account to cover margin calls. "It's a big premium, but that is what insurance is and it is relative to the risk involved."

Enrolment down
Thompson runs a farm business advisor business. He is advising his younger clients with big cash flow demands that they will be ahead if they make payments on a house or a tractor rather than RMP. Agricorp, the Ontario crown corporation that administers crop insurance and RMP in Ontario, says 5,900 farmers enrolled in the RMP pilot in 2010, about 50 per cent of the 2007 number. If the program was wonderful, Thompson argues, enrolment would be up, not down.

Twynstra says he and Thompson have agreed to disagree.

As for Farm Credit Canada, it won't be telling farmers if the program is, or isn't, bankable any time soon. "We will let (customers) make their decisions," says Perry Wilson, director for the London District.

Provincial agriculture minister Carol Mitchell is familiar with the arguments Thompson and Twynstra raise, says her press secretary, Sarah Petrevan. According to program rules, farmers can sign up for 2011 and opt out in 2012. Petrevan says the commodity groups asked for this option in a "transition year," Once they sign on for 2012, however, they are locked in.

"Once farmers pay a premium for a commodity (or commodity category), they need to continue to enrol that commodity in subsequent years, providing they have production of that commodity. If, they do not have production in a year, they simply have to notify Agricorp that the production is zero for that year – this maintains their eligibility. If they have production and do not enrol, they are deemed ineligible for that current year plus the next two years."

Petrevan adds that a program is in the works to rebate RMP fees to farmers who have had their payments clawed back by AgriStability. In that case, the arguments that Twynstra and Thompson make for and against RMP, will be academic.

There is a catch, though. "We need to run the 2012 year with premiums to see how the AgriStability and the RMP numbers work against each other. Once we've got that figured out, (we will) rebate producers."

Mark Wales, a garlic and pepper grower in Aylmer, expects that growers who get a Self-Directed Risk Management program payment won't be eligible for the federal AgriStability program. (SDRM is the horticultural sector's version of RMP.)

"You will only be clawed back on AgriStability if you have a sizeable payment," says Wales, the chair of the safety nets committee for the Ontario Fruit and Vegetable Growers' Association.

With a diversified farming operation, such as grains and vegetables, "you could get a risk management or an SDRM payment under one or even under both and not have enough of a crop loss to trigger AgriStability," Wales says.

Horticulture different
The SDRM program for the horticulture industry mimics the grain and oilseeds program. That "fundamental design feature" was "part of the deal," says Wales. "We tried to mirror the original grain and oilseeds pilot. If they got it wrong originally we will all get it wrong."

Also part of the agreement on the program's design was that everyone would have to subscribe to AgriStability, although you don't have to have it in the first year of the program, Wales says. He thinks that this is "unfortunate," arguing that "horticulture is fundamentally different" from grains and oilseeds because it lacks a solid crop insurance program to back it.

There are about 100 fresh vegetable crops in Ontario "and there is not a lot of veg crop insurance available." He thinks it may take 15 years to develop yield histories for these crops and a buy-in from producers.

Wales doesn't see these risk management programs as more favourable to either small or large growers.

An earlier SDRM program ended in 2007 after the federal government pulled out. "It was a well understood program by the horticulture sector." But gathering data was difficult. "It didn't work for everybody," Wales says.

Wales says that Gerry Ritz, the federal minister of agriculture, likes SDRM.  "It is just AgriInvest spelled differently, because they are so similar and they are very complimentary to each other."

Better Farming asked for a comment from Ritz on RMP, but the minister is adamant that the federal government will not take part. "Provinces are free to develop and fund their own programs outside the national framework to meet their own priorities, but they will not be federally cost-shared," the minister told Better Farming via an email sent by his press secretary.

"All national programming will continue to treat producers equitably, regardless of where they farm or the commodities they produce, do not mask market signals, respect our international trade obligations and reduce the risk of countervail."

Meetings for beef and pork producers were just starting in the fall to unveil their programs, says LeaAnne Hodgins, communications manager with the Ontario Cattlemen's Association. The booklets explaining the program were not available at the first beef producer meeting in August, she says. BF

Premises identification linked to RMP in 2012
The RMP program contains an element of cross-compliance. In 2012, producers must obtain a PID (premises identification) number from OnTrace, the Ontario agri-food traceability agency. For some farmers, that is a sore point.

Premises identification has a value for livestock farmers, admits cashcropper Steve Twynstra. "But for grain and oilseeds, I think it is a bloody joke," he says. Twynstra says he already signed up his main premises for OnTrace. "Two years later, they (OnTrace) still think we are growing soybeans on that piece of ground. There has been no follow-up."

Twynstra says he has been a pedigreed seed grower for 20 years and takes part in a number of product-specific programs for different food companies. "If the marketplace demands that for grains and oilseeds, the marketplace will administer it and look after it. To have a bureaucracy in Guelph to look after it, I think, is a joke."

Holland Centre dairy farmer Bruce Saunders, who is chair of OnTrace, says it's "not a very big bureaucracy. It's three people in an office in Guelph." The danger in having the marketplace require food identification systems is that you may end up with 20 different systems, he says. As for keeping a premise's crops up to date, that isn't OnTrace's job, he says.

OnTrace CEO Brian Sterling adds that "it is important to note that it is an industry-led organization," and not a branch of government.

On Sept. 1, OnTrace started up a 24-hour, seven-day-a-week call centre where farmers can register their premises. The number to call is 1-888-38TRACE (87223)
Premises identification is mandatory in Quebec, Saunders says. Producers are required to report the movement of livestock from one location to another within seven days.

However, there is no indication that the province of Ontario is going that route, he added.

Making premises identification mandatory for the RMP "is a step. In what direction I don't know."

Sarah Petrevan, press secretary to agriculture minister Carol Mitchell, says pork and beef producer organizations wanted premises identification to be part of their risk management programs. Beyond that, there is a strong desire to treat all of the commodities the same, she says. Premises identification isn't necessary in 2011, the "transition year," because farmers must sign up for the programs on short notice. BF