In a chaotic trade environment, Canada needs a longer-term BRM strategy for farmers
By Jackie Clark
With the immediate threat of COVID-19 and its impact on agriculture looming fresh in farmers’ minds, many producer groups are calling for changes to AgriStability to better protect their businesses. Ernie Hardeman, Ontario’s minister of agriculture, food and rural affairs, echoed these calls in a statement to the federal government released Oct. 14, ahead of the Federal-Provincial-Territorial Ministers of Agriculture meeting.
However, ongoing subsidies paid to U.S. farmers and unstable global trade rules indicate that AgriStability will not be enough to protect farmers long term, Al Mussell told Farms.com. He’s research lead at Agri-Food Economic Systems in Guelph, Ont.
Stemming from challenges such as the U.S.-China trade war and global pandemic, the U.S. government has paid large subsidies to farmers through multiple iterations of the Market Facilitation Program and the Coronavirus Food Assistance Program. Those ad hoc subsidies put downward pressure on commodity prices, Mussell explained.
“The basic mechanism kind of goes back to economics 101. One of the reasons that markets work is that they have a self-correcting mechanism built into them,” he said. If prices are low, profits go down, and producers therefore decrease supply, which in turn helps bring prices back up.
“We know that when you bring a subsidy in, that cushions that perception” of the price going down, Mussell explained. If the producer is being paid more than the market price, they may not decrease supply, or may even invest the subsidy into greater production. The impact on markets will be prolonged lower prices or even further increased downward pressure on prices.
Which, in turn, “creates more demand for even more subsidy,” Mussell added.
This cycle can be devastating for Canadian producers, who see the low prices but aren’t receiving the same level of subsidies.
“I feel like we’ve been here. I’m describing, essentially, the 1980s,” Mussell said. There were some differences in interest rates and export subsidies, however, the situation created the same dynamic.
“If other countries are subsidizing their farmers and causing these effects, especially when they’re much larger countries than Canada, well, we have to defend our producers,” he said. This leads to governments developing programs to try to help domestic producers.
“There are countless, almost a wreckage, of these programs that were attempting to offset the harm. … We have to defend (farmers) someway or another, but these don’t work and there were losers for Canada,” Mussell explained.
That chaos in the 80s contributed to the development of the Agreement on Agriculture through the World Trade Organization (WTO), to attempt to establish rules to make trade more fair.
“But, here we go again,” said Mussell.
Furthermore, the U.S. has sidelined the WTO appeal process. Some international players are looking to an arbitration committee to settle trade disputes, however, “it doesn’t have the rigour or the breadth of support that the WTO appeals process had. It’s a workaround,” Mussell said.
“One real worry here, as we get into the actual optics of appeals occurring, (is) knowing that the appeals purpose is pointless,” he added. Recently, Canada won a case against the U.S. for softwood lumber, however, the U.S. appealed, which basically acts as a veto “because they know that (the appeal) capacity isn’t there, because the U.S. has blocked it.”
Those actions make the rules of trade seem irrelevant, and world powers can act in their own best interests.
How does all of this impact Canada’s business risk management (BRM) programs for agriculture?
“We’re at least two or three years into a BRM review, and the industry has kind of coalesced around restoration of what was originally in AgriStability,” said Mussell.
Many producer groups and Hardeman are calling to remove the reference margin limit and lower the margin loss threshold required to trigger payments. The current trigger is 70 per cent. Industry organizations are asking for payments to be triggered if income falls below 85 per cent of recent income average.
Currently, the 70 per cent trigger “is going to reduce the number of claims, and the reference margin limiting function is going to reduce the level of payment when a claim is made,” Mussell explained. “In a lot of ways (those changes) make good sense from a number of perspectives … it suits a range of different commodities.”
Mussell thinks the ag industry should be asking for those changes, “but understand that that’s only a short-term strategy,” he said.
AgriStability and its BRM program predecessors “were all based on this idea of a reference, and then if your current year falls in some measure below your reference, then you get a payment for the difference,” he explains. “That only works if year in and year out you’ve got some bounded range in which farm incomes are going to land.”
However, an external force, such as ongoing subsidies in the U.S., changes the game.
“If you have some external force that comes in, like ongoing ad hoc payments … that lower the price, you have something that’s just pushing farm prices and, therefore, farm earnings … down,” he explained. “What’s going to happen is that, initially you’re going to get very large payments, but your reference is going to collapse.”
He estimates that collapse could start happening in as little as two years.
“Your reference margin outlines your eligibility for stabilization payments. And what will happen over time logically is that people’s eligibility for these payments will decline,” Mussell said. So, eligibility may decline at a time when trade is increasingly unstable.
A lot of farmers don’t want a loan-based program, Mussell said. However “when you really don’t know what the future is going to bring, you don’t have a basis of expectations for what others are going to do, I’m not sure what great alternatives we have.”
Canada “can’t have a sophisticated and mature program like AgriStability if competing countries turn on the subsidy switch … and some of your customer countries get into arbitrarily blocking some of your exports,” he explained.
“What we need, I think, more than anything else is the awareness that we’re in a mess,” he said. Canada can’t use tools from status quo “and try to apply them now as we’re getting into a more and more chaotic place.”