The new "Growing Forward 2" agricultural policy business risk management programs
Growing Forward 2 (GF2) is a five year program for Canada's agriculture industry running from 2013 to 2018. It is cost-shared between federal, provincial and territorial governments to offer a suite of complementary business risk management programs: AgriStability, AgriInvest, AgriInsurance and AgriRecovery. These programs are designed to mitigate the risks associated with farming and to adhere to Canada's international trading restraints, by acting as supplements to normal production and marketing decisions, and support the financial stability of an entire farm entity.
AgriStability
The AgriStability program compares the farm operation's current year program margin to the reference margin for the prior five years. When the current year falls below 70% of the calculated average, a payment is triggered.
Production margin
The margin for current and prior years is determined by calculating the difference between allowable income and allowable expenses. Allowable items include only those that fluctuate directly with the production of commodities. Supply-managed commodities are eligible for coverage of a portion of production margin declines.
| Allowable income |
Non-allowable income |
| Agricultural commodity sales (crops, livestock, by-products) |
Custom work and contract feeding |
| Crop/production insurance proceeds |
Disaster assistance payments |
| Insurance proceeds for allowable income or expense items |
Gravel sales |
| Rebates for allowable expenses |
Wood sales
Trucking
Rental
Resale of purchased commodities |
| Allowable expenses |
Non-allowable expenses |
| Commodity purchases (crops, livestock, by-products) |
Machinery repairs |
| Containers & twine |
Building repairs |
| Fertilizer & lime |
Custom work |
| Sprays & chemicals |
Professional fees |
| Crop/production insurance premiums |
Office membership fees and dues |
| Feed |
Motor vehicle expense |
| Vet & breeding |
Small tools, hardware & supplies |
| Freight & trucking |
Telephone |
| Fuel |
Rental or lease expense |
| Heating |
Land clearing, tilling or drainage |
| Storage, drying & elevation |
Interest |
| Electricity |
Municipal taxes |
| Wages (arm's length wages) |
Property & equipment insurance |
| Commissions & levies |
Capital cost allowance (amortization)
Allowance on eligible capital property
Purchase of commodities for resale
Wages (non-arm's length wages) |
Claim year margin
The production margin for the current year is determined by calculating the difference between allowable income and expenses for the fiscal year on an accrual basis.
Reference margin
The reference margin is calculated by determining the operation's production margin for the prior five years using an Olympic average. The highest and lowest margins in the five-year period are eliminated and the remaining three are averaged to determine the reference margin. The reference margin will be limited to the lower of this calculation or the average allowable expenses in the years used to calculate the reference margin. Adjustments will be made for producers who did not farm in all five of the prior years, or who have undergone a change in the scale or type of farm operation during the period.
AgriStability fees
The AgriStability program works much like an insurance plan. A premium is paid in advance to cover the upcoming period and the AgriStability fee is provided annually through an enrolment notice sent to producers. It is calculated as 70% of the contribution reference margin x .45%, plus an administrative fee of $55.
Calculations
The following example illustrates the operation of the program:
| Production margin — prior year |
$150,000 |
| Production margin — second prior year |
$120,000 |
| Production margin — third prior year |
$85,000 |
| Production margin — fourth prior year |
$65,000 |
| Production margin — fifth prior year |
$95,000 |
| Allowable expenses — prior year |
$90,000 |
| Allowable expenses — second prior year |
$105,000 |
| Allowable expenses — third prior year |
$95,000 |
| Allowable expenses — fourth prior year |
$120,000 |
| Allowable expenses — fifth prior year |
$115,000 |
Under the Olympic average calculation, the prior year margin of $150,000 and the fourth prior year margin of $65,000 are eliminated, leaving an average for the remaining three years of $100,000. The average allowable expenses for the same three years is $105,000. Therefore, the reference margins will be the lower of $100,000 and $105,000.
The first 30% ($30,000) of decline in margin is not covered under the program. The rest of the decline including negative margins, is compensated at 70% by the government.
Reference Margin $100,000
Claim Year Margin $50,000
| |
Margin |
Decline |
Government Coverage |
Payment |
| 100% |
$100,000 |
|
|
|
| |
|
$30,000 |
Not covered |
0 |
| 70% |
$70,000 |
|
|
|
| |
|
$20,000 |
70% |
$14,000 |
| Claim year |
$50,000 |
|
|
|
| Total payment |
|
|
|
$14,000 |
Other issues
Negative margins are now also covered at 70%. There are specific rules about beginning farmers, supply managed commodities, interim payments, and structural change adjustment for operations changing in size and commodity, and other rules that are specific to individual provinces. This is a complex program with many specific policies and interpretations. For assistance with your operation, please contact your BDO advisors.
AgriInvest
AgriInvest is reminiscent of the former Net Income Stabilization Account (NISA) program. Producers make an annual deposit — 1% of their operations' allowable net sales for the program year — into a special account and receive a matching government contribution. Producers may deposit up to 100% of the allowable net sales but only the first 1% will be matched. There is a maximum account balance limit of 400% or the most recent three years' allowable net sales.
Allowable net sales
The allowable net sales are determined by calculating the difference between the sales and purchases of allowable commodities for the fiscal year, based on that year's income tax filing. Only commodity sales (livestock, crops and by-products) and commodity purchases (livestock, crops, seed, portion of feed and commodity by-products) are considered in the calculation.
While supply-managed commodities are not eligible for coverage, operations with both supply-managed and other commodity sales will be able to participate under special rules designed to capture the non-supply-managed activity.
Annual deposit
Each year, producers receive a notice indicating the amount eligible for deposit. Once the deposit is made (which is not tax deductible at the time) in the AgriInvest account, it will be matched by government contributions.
Withdrawals
The producer deposit will be segregated from the government funds. Fund 1 will represent the producer deposit and Fund 2 will represent the government funds, plus earnings on the investment. When withdrawn, Fund 2 will be taxable and Fund 1 will not. Withdrawals from Fund 1 are only made once Fund 2 has been depleted. There are no triggers to determine when producers can withdraw funds from their accounts.
Other issues
There are other considerations to be made, such as maximum allowable net sales limits and maximum account balances. Producers do not have to participate in other business risk management programs in order to participate in AgriInvest.
AgriInsurance
AgriInsurance is developed and administered differently in each province. Producers pay a premium in advance and payments are triggered when there is a decline in production for the year. Commodities covered vary by province.
There is also a link to AgriStability: a premium adjustment is made on an AgriStability payment to ensure that the producer did not receive a lower payment due to his/her participation in AgriInsurance. Furthermore, in the event that a producer suffers a negative margin for the claim year, payments may be reduced for losses that could have been mitigated using AgriInsurance.
AgriRecovery
AgriRecovery is intended to fill the gaps when the other programs cannot respond quickly to a weather or disease disaster that may impact only a small geographic area of the country. There are intentionally no established calculations so that each situation can be assessed individually. This allows the available funds to flow quickly through a targeted program, to the producer, through a predetermined framework.
Examples of coverage that could be provided under AgriRecovery include assistance for areas impacted by drought or flooding, catastrophic crop disease, or an outbreak of livestock disease. However, this program is neither intended to cover price fluctuations nor a long-term declining trend in an industry.
Conclusion
The suite of business risk management programs — AgriStability, AgriInvest, AgriInsurance and AgriRecovery — are designed to be complementary: operations do not need to participate in all or any of them. Each farm operation will also have different needs and rules.
For assistance with your own operation, please feel free to contact your nearest BDO office, visit www.bdo.ca,call toll free at 1 800 805 9544, or e-mail at agri@bdo.ca.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.