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Substitutes versus Complements among Canadian Business Risk Management Programs
Nicoleta Uzeaa*, Kenneth Poonb*, David Sparlingc, Alfons Weersinkd
aPost-Doctoral Research Associate, Ivey Business School, Western University, [email protected] bResearch Associate, Department of Food, Agricultural and Resource Economics, University of Guelph,
[email protected] cProfessor and Chair of Agri-Food Innovation, Ivey Business School, Western University,
[email protected] dProfessor, Department of Food, Agricultural and Resource Economics, University of Guelph,
*Senior authorship is shared by the first two authors.
Selected Paper prepared for presentation at the Agricultural and Applied Economics Association’s
2014 Annual Meeting, Minneapolis, MN, July 27-29, 2014.
Copyright 2014 by [Nicoleta Uzea, Kenneth Poon, David Sparling and Alfons Weersink]. All rights
reserved. Readers may make verbatim copies of this document for non-commercial purposes by any
means, provided that this copyright notice appears on all such copies.
1
INTRODUCTION
Governments worldwide spend considerable amounts of money developing programs and policies that
are meant to help their agri-food sector survive and grow in the increasingly competitive and volatile
marketplace. In Canada, federal and provincial governments spent more than $33.6 billion1 in total over
the last agricultural policy framework, Growing Forward I (2008-2012) – that is 29.1% of the GDP
generated in agriculture over the five-year period or 13.2% of the agri-food GDP (see Figure 1 for the
annual statistics). As Figure 1 shows, the amounts spent under Growing Forward II (2013-2017) are not
likely to change substantially, at least based on preliminary figures for 2013 and budget estimates for
2014.
Figure 1. Federal and Provincial Government Expenditures in Support of the Agri-Food Sector, 2008-2014
Source: Agriculture and Agri-Food Canada, Farm Income, Financial Conditions and Government Assistance Data Book, 2011-2014. Notes: p = preliminary figures based on actuals and budget estimates when actuals are not available; e=estimated figures based on budget estimates.
Given the significant amounts of public money that governments spend on programs, a number of
questions bear consideration. For instance, do programs perform as intended? What can be done to
improve their effectiveness? Are there better ways of allocating resources (across programs) so that the
greatest possible benefits are obtained? This paper aims to answer the first two questions by examining
the business risk management (BRM) programs – the cornerstone of Canadian agricultural policy – and
to open up discussion on the third question.
1 52% of these expenses were incurred at the federal level, with the remaining 48% at the provincial level.
0%
10%
20%
30%
40%
2008 2009 2010 2011 2012 2013p 2014e
Government Expenditures in Support of the Agri-Food Sector, 2008-2014
Government Expendituresas % of Agriculture GDP
Government Expendituresas % of Agri-Food GDP
$7.5B $6.7B $6.4B $6.4B $6.6B $6.6Bp $6.2Be Total Federal and Provincial Expenditures
Growing Forward IIGrowing Forward I
2
Business risk management (BRM) continues to be the central objective of Canadian agricultural policy
even with the changes introduced under the Growing Forward II policy framework. As Figure 2 shows,
farm support payments2 make up for the largest portion of government expenditures in support of the
agri-food sector – over the period 2008-2013, the share of program payments varied between 48% in
2009 and 41% in 2013. By comparison, R&D programs attracted only between 1.8% of government
expenditures in 2009 and 3.3% in 2013, while the share of marketing and trade programs varied
between 1.1% in 2009 and 1.6% in 2011.
Figure 2. Government Expenditures in Support of the Agri-Food Sector, by Major Category, 2008-2014
Source: Agriculture and Agri-Food Canada, Farm Income, Financial Conditions and Government Assistance Data Book, 2011-2014. Notes: p = preliminary figures based on actuals and budget estimates when actuals are not available; e=estimated figures based on budget estimates.
BRM programs are meant to provide protection against market volatility and disasters, while not
impeding the flow of market signals and adaptation of the sector within the dynamic marketplace.
Appendix 1 briefly describes the suites of Canadian BRM programs under the three most recent policy
frameworks. While there have been changes in the way they operate, programs remained fairly
consistent across the three policy frameworks and include: 1) AgriInsurance (and its predecessor
Production Insurance); 2) AgriStability; 3) AgriInvest; 4) AgriRecovery, and 5) Advance Payments
Program.
The programs have been designed to work together in reducing business risk by providing protection
against different types of risks and by allowing payments to be made at different times (Table 1).
Specifically:
2 Include payments for Income Support and Stabilization programs, Ad Hoc and Cost Reduction programs,
Crop/Production Insurance programs, and Financing Assistance programs.
0%
10%
20%
30%
40%
50%
2008 2009 2010 2011 2012 2013p 2014e
Shar
e
Government Expenditures in Support of the Agri-Food Sector, by Major Category, 2008-2014
Operating and Capital
Program Payments
Research and Inspection
Development and TradeRelated Programs
Others
Growing Forward I Growing Forward II
3
- AgriInsurance provides coverage for production losses related to specific crops or commodities
caused by natural perils;
- AgriStability provides coverage for large declines in farm income caused by circumstances such
as low commodity prices, rising input costs, and production losses;
- AgriInvest helps cover small income shortfalls or make investments to reduce on-farm risks;
- AgriRecovery helps producers return their farm businesses to operation following disaster
situations by filling gaps not covered by the other BRM programs;
- Advance Payments Program improves cash flow and provides producers with flexibility in
marketing their commodities, thus allowing them to benefit from best market conditions.
In terms of timing:
- AgriInsurance payments are made soon after a loss, providing the needed cash flow during the
production year;
- AgriStability final payments are made after the production year is completed (interim payments
are available to provide early access to partial benefit);
- AgriInvest withdrawals can be made anytime throughout the year.
Table 1. Business Risk Management Programs – Risks Covered and Timing of Payments
Program Risks covered Timing of payments
AgriInsurance Production losses During production year, soon after a loss
AgriStability Large income declines (due to low commodity prices, rising input costs & production losses)
After production year is completed (interim payments available within 30 days)
AgriInvest Small income shortfalls & investments to reduce on-farm risks
Anytime throughout the year
AgriRecovery Disaster situations
Advance Payments Program Cash flow shortages Spring and fall
In addition, a number of incentives have been built into the programs to encourage producers to use the
programs together rather than substitute for one another.3 For example, because production losses
covered under AgriInsurance can also be covered under AgriStability and/or AgriInvest (provided they
translate into a whole farm loss4), some farmers may choose to participate in AgriStability and/or
AgriInvest only. The following incentives are provided to encourage producers to also participate in
AgriInsurance:
3 Note that AgriRecovery is not a program for which producers can choose to apply in advance – once
Governments decide that an initiative will be developed under AgriRecovery, the details of that initiative are made available to producers, including the process required to access the program. 4 It may be that increased prices cancel production losses; hence, AgriStability payments cannot be triggered, while
the farm could benefit from AgriInsurance proceeds. This effect is going to get even stronger with the drop in AgriStability coverage to 70% under Growing Forward II.
4
a) AgriStability payments are reduced by the amount of losses that could have been covered
under AgriInsurance;
b) AgriInsurance payments are included as allowable income in a producer’s Reference Margin
under AgriStability and Allowable Net Sales under AgriInvest. Maintaining a higher Reference
Margin means a higher level of income is protected under AgriStability. Also, the larger the
Allowable Net Sales, the larger the amount a producer can deposit in the AgriInvest account and
the larger the matching government contribution. However, AgriStability payments or
government contributions under AgriInvest are not included as allowable income in the
Reference Margin under AgriStability or the Allowable Net Sales under AgriInvest.
c) AgriInsurance payments can help fully cover negative margins. AgriStability provides negative
margin protection at 60% under Growing Forward I and 70% under Growing Forward II, and
d) AgriInsurance provides coverage for spot losses. AgriInsurance losses are determined on a crop
specific basis. If a farmer does not have a whole farm AgriStability loss, he/she may still be
protected through AgriInsurance for one or more crops.
Also, because producers may choose not to participate in AgriInsurance and/or AgriStability hoping that,
if a disaster strikes, they would receive assistance under AgriRecovery, AgriRecovery is only offered
when AgriInsurance and AgriStability cannot respond to the disaster. If it is determined that AgriStability
and AgriInsurance coverage provides assistance to respond to the disaster, then additional coverage
under AgriRecovery is not offered to those producers who chose not to participate in these programs.
Finally, in order to qualify for a cash advance under the Advanced Payments Program, a farmer must
participate in another business risk management program such as AgriInsurance.
Despite such efforts to encourage producers to participate in the programs, anecdotal evidence and a
few recent studies suggest that programs may ‘crowd out’ each other. For instance, Kimura and Anton
(2011) provide evidence based on simulation analysis that CAIS/AgriStability reduces farmers’ incentives
to participate in Crop Insurance/AgriInsurance. Also, commodity prices may have implications for how
AgriInvest and AgriStability are used. Specifically, an increase in prices increases the contribution room
for AgriInvest (contribution is based on sales), hence, increasing the incentive to participate in
AgriInvest; however, it decreases the likelihood that a farm can trigger AgriStability payments, hence,
decreasing the incentive to participate in AgriStability. Similarly, a drop in prices will encourage
participation in AgriStability and potentially discourage participation in AgriInvest (though the high rate
of return on AgriInvest contributions is expected to mitigate this effect).
Moreover, producer participation tends to drop in most programs, which raises questions about the
relevance and performance of these programs. Available data at the Ontario level (Figure 3) shows that
AgriStability and AgriInvest cover an increasingly smaller share of farms and market revenues. The
exception is Crop Insurance, but increased participation in this program is likely due mostly to the cross
compliance requirement for the Risk Management Program (RMP) imposed in 2008.
5
Figure 3. Participation Pattern in Ontario Sample – Percentage of Farms vs. Percentage of Market
Revenue, 2003-2011
The objective of this paper is four-fold:
1) understand the factors that influence producers’ decision to participate in the main BRM programs –
Crop Insurance, AgriStability, and AgriInvest;
2) understand the interlinkages between participation in these programs;
3) examine if and how those factors and relationships differ across farm sectors and sizes, and
4) assess the impact of program participation on the business risk experienced by producers.
The answers to these questions are central for policy makers in order to achieve the desired objectives.
If indeed there is substitutability between any of the programs, the current BRM suite of programs will
need to be re-designed. Moreover, if programs are not effective at reducing business risk, the whole
BRM policy will need to be re-evaluated.
EMPIRICAL MODEL
The analysis in this paper is conducted in two stages. In the first stage, we estimate dynamic multivariate
and multinomial probit models with unobserved heterogeneity to study: 1) the interrelated dynamics of
participation in Crop Insurance (CI), AgriStability (AS), and AgriInvest (AI) (participation in the programs
is assumed to be endogenously determined), and 2) the factors that affect participation in each of the
programs. In the second stage, we use the predicted probabilities for different participation states from
the first stage to examine the impact of program participation on business risk. We estimate a business
risk function using quantile regression and tobit models.
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006 2007 2008 2009 2010 2011
Program Participation as % of Farms vs. % of Market Revenue, 2003-2011
CAIS/AS part (% of farms)
CAIS/AS part (% of market rev)
CI part (% of farms)
CI part (% of market rev)
AI part (% of farms)
AI part (% of market rev)
Ag Policy Framework Growing Forward I
6
Program Participation Decisions
To study the interrelated dynamics of participation in the programs, we first estimate a dynamic
multivariate probit model such as the one specified in equations (1)-(6):
+ +
+ +
+ +
For an individual i (subscript not shown for simplicity), the probability of participation in CI at time t is
expressed in terms of a latent variable as specified in equation (1), the probability of participation in
AS at t is expressed by the latent variable , specified in equation (2), and the probability of
participation in AI at t is expressed by the latent variable , specified in equation (3). The dependent
variables are the dummy indicators , , and specified in equations (4)-(6) – they are equal to 1
if the individual participates in the program at time t and 0 otherwise. Explanatory variables are the
lagged participation states ( , , and ) and exogenous regressors ( ), including:
enterprise diversification, crop diversification, profitability, operating efficiency, debt coverage, past
business risk, and reliance on government payments. , , and represent the time-invariant
error terms (unobserved heterogeneity) and and represent the time-specific
idiosyncratic shocks.
The consistent estimation of this model requires a solution to the ‘initial conditions problem’ (Heckman,
1981). The problem arises due to our lack of knowledge of the data generating process that governs the
start-of-period status for participation in CI, AS and AI. We use the approach suggested by Wooldridge
(2005) to correct for the initial condition.
As an alternative to the multivariate model presented above, we also estimate a dynamic multinomial
probit model with unobserved heterogeneity in which the choice set is made up of all possible
combinations of the three BRM programs instead of just the programs by themselves. Specifically, there
are eight possible combinations that a producer can chose to adopt: 1) participate in all three programs
(CI, AS, and AI) simultaneously; 2) participate in CI and AS; 3) participate in CI and AI; 4) participate in AS
and AI; 5) participate in AS only; 6) participate in AI only; 7) participate in CI only, and 8) participate in
none of the programs. Given this choice set, the dynamic multinomial probit model can be specified as
follows:
+ +
= Ι if ˃ 0 and 0 else (4)
= Ι if
˃ 0 and 0 else (5) = Ι if
˃ 0 and 0 else (6)
7
where represents the program combination j (j = 1, …, 8) that the ith producer chooses to
participate in at time t and is the lagged participation state. The variable BPM is coded from 1
to 8, so that equation (7) is only one equation to be estimated. Combination 8 (i.e., no participation) is
chosen as the ‘base’ category and excluded from the estimation for identification purposes.
The multinomial model allows us to examine how different variables affect the probability of choosing a
certain combination of BRM programs, rather than how explanatory variables affect participation in one
particular program, conditional on participation in the other programs.
Impact of Program Participation on Farm Business Risk
To assess the impact of participation in BRM programs on a farm’s business risk, we estimate the
following business risk function using both tobit and quantile regression:
DR = + … +
+ γz + ε (8)
The dependent variable, downside risk, is measured as the percentage change in gross margin from
previous year. The independent variables include, among others, a set of 8 state dummies for all
possible combinations of program participation. Since these participation states are latent and
endogenous, they are replaced by predicted probabilities from the first stage. For instance, (1,1,1) is
replaced by the probability that a farm participated in all three programs. Given that these propensities
add up to one, it is necessary to use one combination as a reference category to avoid perfect
collinearity; the (0,0,0) combination (i.e., no participation) is the reference category. The coefficients on
these participation state dummy variables provide preliminary evidence on the complementarity/
substitutability of these programs in reducing business risk. That is, two programs are complementary if
they mitigate downside risk more when used jointly than when either program is used in isolation. z is a
vector of control variables including enterprise diversification, crop diversification, and size dummies.
DATA
Data Source
The dataset used in the analysis resulted from merging three datasets: 1) the Ontario Farm Income
Database (OFID); 2) AgriCorp’s Crop Insurance Data, and 3) Agriculture and Agri-Food Canada (AAFC)’s
AgriInvest Data. Data merge was possible through a common identifier (Personal Identification
Number). OFID is a longitudinal farm-level dataset including all Ontario tax-filing operations from 2003
to 2011. The dataset contains detailed financial, production and program payment (except for Crop
Insurance) data. Additional operator-level Crop Insurance and AgriInvest payment data was linked to
8
farm-level OFID records to complement the program payment data. The panel sample size after
cleaning5 is 8,721 farms, distributed across sectors6 as follows:
Sector # of farms % of total sample
Field Crops 5,910 67.8% Beef 694 8.0% Supply Managed (Dairy, Poultry) 555 6.4% Swine 360 4.1% Others 1,202 13.8%
TOTAL 8,721
The analysis is conducted on the aggregate sample, as well as for field crops versus beef – the two
largest sectors in the sample.
Variable Definition
Variable Name Description
Dependent Variables
Crop Insurance =1 if the producer participates in Crop Insurance at time t, 0 otherwise AgriStability =1 if the producer participates in AgriStability at time t, 0 otherwise AgriInvest =1 if the producer participates in AgriInvest at time t, 0 otherwise Downside Risk Measured as the percentage change in gross margin from previous year
Independent Variables
Sector diversification Calculated as a Herfindahl index of revenue allocations among various operations (e.g., crops, beef, dairy): lower values=greater diversification
Crop diversification Calculated as Herfindahl index of revenue allocations among various crops: lower values=greater diversification
Operating Profit Margin Measure of profitability. Calculated as net operating income (before interest and taxes)/ total operating revenue
Operating Expense Ratio Measure of operating efficiency. Calculated as total operating expense/ total operating revenue
Debt Coverage Ratio Calculated as net operating income (before interest and taxes)/ interest expense
Payment Reliance Calculated as the share of program payments in total revenue Business Risk Calculated as the coefficient of variation of revenue/expense of
previous five years Farm Size Dummies $10,000-$100,000 (omitted) $100,000-$250,000 $250,000-$500,000 >$500,000
=1 if a farm has average total revenue between $10,000-$100,000 over the panel period, 0 otherwise =1 if a farm has average total revenue between $100,000-$250,000 over the panel period, 0 otherwise =1 if a farm has average total revenue between $250,000-$500,000 over the panel period, 0 otherwise =1 if a farm has average total revenue > $500,000 over the panel period, 0 otherwise
5 Farms with average annual revenue less than $10,000 were dropped.
6 Sectors are defined based on share of revenues in six out of the nine years.
9
RESULTS
A key result is that there is positive and statistically significant state dependence in program
participation. As the transition probability matrix in Table 2 shows, producers who participate in a
program or program combination in the current year tend to do so next year, and those who do not
participate in any of the programs in the current year tend to not participate next year. The positive and
significant coefficient of the lagged participation variables in the multivariate model (Table 3) supports
this result, even after controlling for other factors and unobserved heterogeneity.
Table 2. Transition Probabilities of Participation States in AgriStability (AS), AgriInvest (AI), and Crop
Insurance (CI), 2008-2011
Also, we find that programs tend to be used together rather than independently – the pairwise
correlations between the residuals in the multivariate model (see rho in Table 3) are positive and
significant, with the correlation between participation in Crop Insurance and AgriStability the strongest,
followed by that between AgriStability and AgriInvest. Significance of these error correlations means we
Participation State in Period t+1
Participation State in Period t
AS=1 AS=1 AS=0 AS=1 AS=1 AS=0 AS=0 AS=0
AI=1 AI=0 AI=1 AI=1 AI=0 AI=1 AI=0 AI=0 CI=1 CI=1 CI=1 CI=0 CI=0 CI=0 CI=1 CI=0
AS=1
AI=1 83.9 6.0 5.7 2.7 0.3 0.5 0.7 0.1
CI=1 AS=1
AI=0 46.5 33.4 5.4 2.9 3.2 0.5 6.9 1.3 CI=1 AS=0
AI=1 15.2 2.4 66.4 0.4 0.3 6.0 8.5 0.8 CI=1 AS=1
AI=1 2.9 0.3 0.2 79.3 10.1 5.8 0.0 1.5
CI=0 AS=1
AI=0 1.2 1.4 0.3 36.2 44.1 4.6 0.4 11.8
CI=0 AS=0
AI=1 0.5 0.2 1.9 9.1 1.6 72.2 0.3 14.2 CI=0 AS=0
AI=0 5.0 3.9 22.1 0.2 0.4 2.9 57.2 8.4 CI=1 AS=0
AI=0 0.1 0.0 0.3 1.7 2.2 16.2 1.4 78.1
CI=0
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can reject the hypothesis of independence independence of the two participation decisions, confirming
the need for their joint estimation.
As regards the factors that affect participation, we find that operating efficiency increases the
propensity to participate in Crop Insurance and decreases the propensity to participate in AgriStability
and AgriInvest. A potential explanation for why efficient farms are more likely to participate in Crop
Insurance, but less likely to participate in AgriStability is that efficiency can compensate for any
production losses – hence, they may not be able to trigger AgriStability payments, but they can still
trigger Crop Insurance payments. Also, we find that larger farms are more likely to participate, one
reason for that being more availability of human resources to sign up in the program, and to prepare
and submit the claim. It may also be because these farms find it is worth the time given the larger
amount of money they receive.
A surprising result is that historic income volatility has little effect on participation, suggesting the
decision is a forward-looking one. Another surprising (and robust) result is that crop specialization is
inversely related to propensity to participate in AgriStability and Crop Insurance. One potential
explanation for the relationship between specialization and AgriStability is that farmers may use
marketing contracts to protect against price risks (though we lack information on the use of marketing
contracts).
Note that the results from the multinomial model (Table 4) generally support these findings.
11
Table 3. Parameter Estimates from the Multivariate Probit Model for Estimating the Factors Affecting Participation in Crop Insurance,
AgriStability, and AgriInvest
Independent Variables
All Farms Field Crops Beef
Crop Insurance AgriInvest AgriStability
Crop Insurance AgriInvest AgriStability
Crop Insurance AgriInvest AgriStability
Lagged Participation (t-1)
AgriStability 0.299*** 0.172*** 2.076*** 0.321*** 0.140*** 2.004*** 0.535** 0.612*** 2.177*** Crop Insurance 2.539*** 0.053 0.338*** 2.508*** 0.047 0.328*** 2.826*** -0.021 0.405** AgriInvest 0.147*** 1.177*** 0.234*** 0.151** 1.209*** 0.159*** -0.126 1.060*** 0.374***
Diversification Variables
Sector Diversification 0.394* 0.118 -0.179 0.305 -0.032 0.181 -0.551 0.402 -0.070 Crop Diversification -0.468*** -0.236*** -0.139 -0.645*** -0.348*** -0.136 -0.190 -0.232 -0.240
Financial Variables
Operating Profit Margin 0.000 0.033 -0.010 -0.001 0.082*** -0.008 0.105 -0.320** 0.012 Operating Expense Ratio 0.057** -0.634*** -0.071*** 0.104*** -0.560*** -0.070** 0.372 -1.858*** -0.168 Debt Coverage Ratio -0.449* -0.505 -0.234 -1.491*** 0.274 0.073 6.979 -0.202 0.010 Previuos Year’s Payment Reliance
-0.379 0.052 1.574*** -0.377 0.014 2.401*** 0.635 -1.064 -1.176
Previous Year’s Business Risk 0.000 0.003*** 0.000 0.000 0.003*** 0.000 -1.465** -0.596 -0.433
Size Dummies
Revenue $100-250K 0.045 0.132*** 0.169 0.104** 0.121*** 0.159*** -0.103 0.005 0.188 Revenue $250-500K 0.056 0.293*** 0.280 0.144** 0.263*** 0.208*** 0.091 0.357** 0.231 Revenue >$500K 0.116** 0.234*** -1.489*** 0.067 0.250*** 0.270*** 0.003 -0.073 0.171
Sector Dummies
Field Crops 0.222*** 0.034 -0.133** Others 0.031 -0.114** -0.131** Supply Managed 0.031 -0.326*** -0.474*** Swine 0.326*** -0.214*** 0.187*
Constant -2.002*** 0.000 0.000 -2.215*** -0.022 -1.600*** -1.666*** -0.153 -2.234***
Rho
Crop Insurance-AgriInvest 0.052*** 0.070*** 0.014 Crop Insurance-AgriStability 0.153*** 0.135*** 0.199*** AgriInvest-AgriStability 0.089*** 0.097*** 0.115*
Log-pseudolikelihood -19,327.2 -12,951.2 -1,459.1
No. of observations 26,138 17,705 2,082
12
Table 4. Parameter Estimates from the Multinomial Probit
Combination/Independent Variables All Farms Field Crops Beef
Combination 1 : Crop Insurance, AgriStability, and AgriInvest
Lagged Participation 1.297*** 1.254*** 1.179***
Sector Diversification 0.207 0.683*** -0.089
Crop Diversification -1.732*** -1.862*** -0.969**
Operating Profit Margin 0.017 0.012 -0.175
Operating Expense Ratio 0.026 0.037 -0.696*
Debt Coverage Ratio -2.901*** -0.265 -8.239**
Previous Year’s Business Risk -0.002 -0.001 -1.764***
Previous Year’s Drop in Income -0.052** -0.059 -0.136**
Revenue $100-250K 0.751*** 0.798*** 0.477*
Revenue $250-500K 1.151*** 1.371*** 1.432***
Revenue >$500K 1.778*** 1.391*** 1.086**
Constant 1.131*** 1.045*** 1.870***
Combination 2 : Crop Insurance and AgriStability
Lagged Participation -0.785*** -0.742*** -1.077***
Sector Diversification 0.219 0.564** 0.687
Crop Diversification -1.143*** -1.237*** -0.562
Operating Profit Margin 0.002 -0.001 -0.285
Operating Expense Ratio 0.018 0.028 -1.100**
Debt Coverage Ratio -5.655*** -6.163** -8.951**
Previous Year’s Business Risk -0.046 -0.035 -0.616
Previous Year’s Drop in Income -0.131*** -0.217*** -0.083
Revenue $100-250K 0.542*** 0.591*** 0.789***
Revenue $250-500K 0.679*** 0.913*** 1.063**
Revenue >$500K 1.335*** 0.826*** 1.622***
Constant 0.743*** 0.781*** 0.880***
Combination 3 : Crop Insurance and AgriInvest
Lagged Participation -0.389*** -0.453*** -0.623***
Sector Diversification 0.053 0.357 -1.487
Crop Diversification -1.326*** -1.368*** -0.323
Operating Profit Margin 0.000 -0.024 -0.388*
Operating Expense Ratio -0.241*** -0.247** -1.152**
Debt Coverage Ratio -0.761 2.044 -0.323
Previous Year’s Business Risk -0.296*** -0.375*** -2.453***
Previous Year’s Drop in Income -0.028 -0.022 -0.501***
Revenue $100-250K 0.476*** 0.529*** 0.561*
Revenue $250-500K 0.750*** 0.947*** 1.369***
Revenue >$500K 1.247*** 0.819*** 1.037**
Constant 0.719*** 1.253*** 2.256***
Combination 4 : AgriStability and AgriInvest
Lagged Participation 0.485*** 0.384*** 0.795***
Sector Diversification -0.004 0.134 0.988*
Crop Diversification -0.716*** -1.162*** 0.252
Operating Profit Margin 0.012 0.013 -0.248**
Operating Expense Ratio -0.076 -0.037 -0.845**
Debt Coverage Ratio -0.551 2.142 0.094
Previous Year’s Business Risk -0.167** -0.050 -1.954***
13
Previous Year’s Drop in Income -0.016 -0.031 -0.007
Revenue $100-250K 0.391*** 0.396*** 0.272
Revenue $250-500K 0.747*** 0.950*** 0.626**
Revenue >$500K 1.249*** 0.863*** 0.495
Constant 1.286*** 0.869*** 0.843*
Combination 5 : AgriStability Only
Lagged Participation -0.545*** -0.477*** -0.769***
Sector Diversification -0.128 0.101 -0.149
Crop Diversification -0.479*** -0.836*** 0.658
Operating Profit Margin 0.027 0.008 -0.308**
Operating Expense Ratio 0.005 0.019 -1.003**
Debt Coverage Ratio -1.472 0.573 -0.716
Previous Year’s Business Risk -0.002 -0.056 -0.273
Previous Year’s Drop in Income 0.002 -0.031 0.023
Revenue $100-250K 0.128 0.119 0.376
Revenue $250-500K 0.313** 0.726*** 0.332
Revenue >$500K 0.678*** 0.416 0.441
Constant 0.812*** 0.385 0.811
Combination 6 : AgriInvest Only
Lagged Participation -0.089* -0.081 -0.803***
Sector Diversification -0.255 -0.097 -0.124
Crop Diversification -0.653*** -0.738*** 0.114
Operating Profit Margin -0.004 -0.028 -0.064
Operating Expense Ratio -0.413*** -0.439*** -0.886**
Debt Coverage Ratio -0.260 3.502** -8.193
Previous Year’s Business Risk -0.001*** -0.001*** -1.193**
Previous Year’s Drop in Income 0.000 0.007 -0.009
Revenue $100-250K 0.068 0.066 0.082
Revenue $250-500K 0.407*** 0.504** 0.357
Revenue >$500K 0.670*** 0.369* 0.197
Constant 0.874*** 1.053*** 0.956*
Combination 7 : Crop Insurance Only
Lagged Participation -0.284*** -0.276*** -0.445**
Sector Diversification 0.394* 0.550* 0.845
Crop Diversification -0.906*** -0.957*** -1.137**
Operating Profit Margin 0.020 0.015 -0.056
Operating Expense Ratio -0.109 -0.110 -0.634
Debt Coverage Ratio -2.603 -2.447 -1.032
Previous Year’s Business Risk -0.003* -0.003** -1.706*
Previous Year’s Drop in Income -0.019 -0.037 0.022
Revenue $100-250K 0.207** 0.197* 0.414
Revenue $250-500K 0.440*** 0.629** 0.291
Revenue >$500K 0.685*** 0.213 0.349
Constant 0.107*** 0.247 0.604
Combination 8 : No Participation (base outcome)
Log-pseudolikelihood -34,066.9 -23,003.0 -2,619.1
No. of observations 26,138 17,705 2,082
14
As Table 5 shows, BRM programs are effective at reducing downside risk (results shown for the beef
sector) – the coefficients for most program participation states are negative and significant, suggesting
that producers who participate in one or more of the programs experience smaller drops in gross margin
than producers who do participate. One exception is Crop Insurance, which seems to not be able to
mitigate downside risk when used independently. Also note that specialization is associated with larger
drops in gross margin.
Table 5. Parameter Estimates for the Tobit and Quantile Regression Models of the Impact on Program
Participation States on Downside Risk
Independent Variables
Beef
Tobit Quantile Regression
Q25 Q50 Q75
Participation States
Crop Insurance, AgriStability, and AgriInvest -26.127* -2.482*** -3.054*** -8.049*** Crop Insurance and AgriStability -25.561* -2.712*** -2.464** -7.359*** Crop Insurance and AgriInvest -26.058** -2.743*** -4.065*** -9.376*** AgriStability and AgriInvest -24.725* -2.732*** -3.368*** -8.287*** AgriStability Only -28.963* -2.608*** -3.711*** -9.528*** AgriInvest Only -26.866** -2.600*** -2.514** -7.486*** Crop Insurance Only -19.357 -2.212 -2.490 -5.790
Diversification Variables
Sector Diversification -0.498 0.276*** 0.204** 0.155 Crop Diversification 0.220 0.087 0.192*** 0.234**
Size Dummies
Revenue $100-250K 0.530 -0.005 0.028 0.151** Revenue $250-500K 1.212** 0.055 0.121 0.380*** Revenue >$500K 1.139* 0.057 0.039 0.137
Constant 25.098* 2.495*** 3.232*** 8.216***
CONCLUDING DISCUSSION
Despite the fact that BRM programs are effective at reducing downside risk, producers exit the
programs. Two findings are particularly important in this context: 1) positive and significant state
dependence – once a producer exits a program, he/she is unlikely to return; and 2) dynamic spillover
effects among the programs – exit from one program will likely trigger exit from other programs. There
are at least two policy implications that can be drawn: 1) it is possible to reduce the risk of low program
participation in the future by incentivizing farms to participate in the present – short-term policies may
have long lasting effects, because they help break the vicious cycle leading to low participation; and 2)
policies aimed at incentivizing farmers to participate in one type of program may also contribute in
breaking the cycle leading to low participation in the other programs. The question is what are the
appropriate incentives to be used? The finding that larger farms more likely to participate across the
board suggests that we need to understand what drives participation decisions for the small farms and
what can be done to make them sign up.
15
REFERENCES
Agriculture and Agri-Food Canada (2011-2014), Farm Income, Financial Conditions and Government
Assistance Data Book, 2010-2013.
Heckman, J.J. (1981), The Incidental Parameters Problem and the Problem of Initial Conditions in
Estimating a Discrete Time-Discrete Data Stochastic Process, in Structural Analysis of Discrete
Data with Econometric Applications, C.F. Manski and D. McFadden (eds.), MIT Press: Cambridge,
MA, pp. 179-195.
Kimura, S. and J. Antón (2011), Farm income stabilization and risk management: Some lessons from
AgriStability program in Canada, Paper presented at the EAAE 2011 Congress “Change and
Uncertainty: Challenges for Agriculture, Food and Natural Resources,” Zurich, Aug 30-Sept 2.
Wooldridge, J.M. (2005), Simple Solutions to the Initial Condition Problem in Dynamic, Nonlinear Panel
Data Models with Unobserved Heterogeneity, Journal of Applied Econometrics, 20: 39-54.
16
Appendix 1. Canadian Business Risk Management Programs, 2003-2017
Table 1. Review of Canadian Business Risk Management Programs
Agricultural Policy Framework (2003-2007)
Growing Forward I (2008-2012)
Growing Forward II (2013-2017)
Crop/Production Insurance AgriInsurance AgriInsurance
Canadian Agricultural Income Stabilization (CAIS)
AgriStability AgriStability
AgriInvest AgriInvest
AgriRecovery AgriRecovery
Spring Credit Advance Program Advance Payments Program
Advance Payments Program Advance Payments Program
Agricultural Policy Framework (2003-2007)
Canadian Agricultural Income Stabilization (CAIS) – meant to help producers protect their farm
income from both small and large declines (CAIS integrated income stabilization and disaster
protection). Under CAIS, payments were triggered when the program year margin (eligible revenue
minus eligible expenses) fell below the historical reference margin (average program margin in three of
the past five years, with the highest and the lowest margins dropped). The farmer was not compensated
for the entire margin loss; rather, the actual level of payment was based on a series of percentages
related to the severity of the margin loss, with deeper losses reimbursed at higher rates, i.e.:
- Tier 1: The minimum coverage was 50% if the margin fell in the range from 85% to 100%;
- Tier 2: For the next 15% of the margin decline, the government covered 70%, and
- Tier 3: The maximum coverage rate was 80% for the disaster portion – i.e., margin decline in the
range from 70% to 0%.
- Also, producers were protected for an amount up to 60% of their negative margin.
The producer chose a level of coverage and paid a fee related to coverage level selected (i.e.,
$4.50 for every $1,000 of reference margin for maximum protection, $3.825 for medium protection, and
$3.15 for minimum protection) plus an additional $45 in administration fees.
In order to respect World Trade Organization rules, the overall assistance provided by
Governments did not exceed 70% of the margin decline at maximum protection (program payout was
capped at 66.5% for medium protection and 56% for minimum protection).
Production (Crop) Insurance provided crop producers with financial protection against the
effects of production losses caused by natural hazards like drought, flood, hail, frost, excessive moisture
and diseases.
17
Advanced Payment Programs (Spring Credit Advance Program and Advanced Payments
Program) provided up to $250,000 in loan guarantees and interest-free loans on up to the first $50,000
advanced to assist in financing the spring seeding and the fall harvest and storage.
Growing Forward I (2008-2012)
AgriStability replaced the CAIS program, except that tier 1 payments (triggered by the first 15%
fall in reference margin) were eliminated and replaced by AgriInvest. Medium and minimum levels of
protection were also eliminated (more than 90 percent of producers who had signed up for CAIS chose
the maximum coverage level) and program fees were set at $4.50 for every $1,000 of reference margin
protected.
Producers who experienced negative margins could be compensated for up to 60% of the
portion of their margin decline that was below zero. Producers with a negative reference margin were
eligible for AgriStability if they had positive margins in two of the three years used to calculate their
reference margin. There was no limit on the number of negative margin payments a producer could
receive.
The maximum payment under AgriStability was capped at either $3 million or 70% of margin
decline, whichever was lower. Any amount over this limit would be deducted from the negative margin
payment.
AgriStability included a number of improvements over CAIS which are summarized in Table 2.
Table 2. AgriStability vs. CAIS
Program Change
2003 CAIS AgriStability Benefit to producers
Inventory valuation
End of year price used to value inventory.
Both opening and end of year prices used to value inventory.
More accurate assessment of losses.
Negative margin coverage expanded
Producers with negative reference margins not eligible. Limit on number of negative margin payments a producer could receive.
Producers with negative reference margins eligible. No limit on number of negative margin payments.
Better protection for those faced with back to back disasters.
Easier participation requirements
Producers had to make a deposit equal to 22% of their reference margin.
Producers pay $4.50 per $1,000 of reference margin protected.
Cash is not tied up in a deposit.
Targeted Targeted advances not Targeted Advance Payment Faster payments in times of
18
Program Change
2003 CAIS AgriStability Benefit to producers
advances available
available. in place to provide assistance in times of serious income declines.
serious income declines.
Interim payments available
Interim payments not widely available.
Interim payments available in most provinces within 30 days.
Early access to an estimated portion of payment.
AgriInvest is a self-managed producer-government savings account that allows producers to set
money aside which can then be used to recover from small income shortfalls (AgriInvest replaces
coverage for margin declines of 15% or less, previously covered under CAIS) or finance investments that
help mitigate risks or improve market income. Producers can deposit up to 1.5% of their Allowable Net
Sales (=Sales of Allowable Commodities (most primary agricultural commodities except those covered
under supply management) – Purchases of Allowable Commodities) each year into an AgriInvest account
and receive a matching government contribution. Producers of supply managed commodities, who also
produce allowable commodities, may be eligible for AgriInvest based on the non-supply managed
portion of their farming operation. Producers have the flexibility to withdraw funds at any time
throughout the year.
ANS are limited to a maximum of $1.5 million per eligible participant. The limit on matching
government contributions is $22,500 a year.
AgriInsurance offers protection for production losses related to specific crops or commodities
caused by natural hazards. Premiums for AgriInsurance coverage are cost-shared between the producer,
the province and the federal government. Producers receive a payment when their production is below
their guaranteed insured level of protection.
Compared to Production Insurance, coverage under AgriInsurance includes livestock and
additional horticultural crops. However, there is still a need to improve coverage for forage and livestock
production.
AgriRecovery is a disaster relief framework which allows governments to determine whether or
not assistance beyond what is provided through existing programs (AgriStability, AgriInvest,
AgriInsurance, etc.) is warranted in response to a disaster. The aim is to help affected producers with the
cost of taking actions to mitigate the impacts of the disaster and/or resume business operations as
quickly as possible.
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Advance Payments Program provides producers with a cash advance (of max. $400,000 per
producer) on the value of their agricultural products during a production period. The federal
government pays the interest on the first $100,000 of a cash advance issued to a producer per
production period and producers have up until the end of the production period to repay their advance.
By improving their cash flow throughout the year, the program provides producers with flexibility for
marketing of their commodities (producers can meet their financial obligations and sell when prices are
most favourable).
The Advance Payments Program combines two previous programs (Spring Credit Advance
Program and Advance Payments Program) and includes a number of improvements over those
programs:
-coverage was expanded to allow loans on additional commodities, including livestock. The APP
is delivered under the authority of the Agricultural Marketing Program Act, which was amended in 2007
to make the program available to the livestock sector.
-loan and interest free limits were increased to ensure that they reflect existing farm sizes.
Growing Forward II (2013-2017)
The BRM programs under Growing Forward I have been maintained. However, a number of
changes have been made to some of these programs in an attempt to better target them, while placing
a higher degree of responsibility on producers to manage and mitigate risk.
AgriStability
70% Margin Coverage: Governments will provide assistance once a producer’s margin falls
below 70% of their historical reference margin (under Growing Forward, the program payout trigger was
85% below the reference margin). This change is meant to target assistance to farm operations facing
the most severe income losses. The annual AgriStability fee to protect a farming operation is lowered to
reflect this coverage level, at $3.15 for every $1,000 of reference margin.
Harmonized Positive and Negative Margin Coverage Levels: A producer’s payment will be based
on a single level of government support (i.e., 70%) for both positive and negative margin declines.
Harmonizing assistance at 70% simplifies the payment calculation and increases assistance in cases of
negative margins to those who are eligible.
Reference Margin Limit: Payment calculations will be based on the lower of the historical
Reference Margin or the average allowable expenses in the years used to calculate the Reference
20
Margin. This limit has been introduced to better target AgriStability assistance to more severe income
losses, rather than profit fluctuations.
AgriInvest
Producers can deposit up to 1.0% (instead of 1.5% under Growing Forward ) of their Allowable
Net Sales.
The limit on matching government contributions will decrease to $15,000 (from $22,500 under
Growing Forward) a year.