Reduced Benefits in AgriStability and AgriInvest: Is it still worth it?

In the November 2012 issue of Farm Alert, we outlined the major changes that will be made to the AgriStability and AgriInvest programs starting in 2013. These changes will reduce substantially the amount of government support available for both programs.

Because of these reduced benefits, producers may wonder whether it is still worthwhile to be enrolled in these programs. For AgriStability, this decision must be made soon because the deadline to opt out of the 2013 program or to sign up as a new participant is April 30, 2013.

This article highlights the costs of participating in each program and how the changes will affect eligibility.

AgriStability

The most significant change to the AgriStability program is that the payment trigger in 2013 will be reduced from 85% to 70%. Thus, if a producer’s reference margin was $100,000, the current year’s margin would need to decline to under $70,000 before triggering a payment, rather than the former $85,000 trigger point.

Further, the amount of support has been reduced, even with the reduced margin. For example, if a producer’s margin dropped to $65,000 with a reference margin of $100,000, the payment would be only $3,500. This is calculated as 70% of the $5,000 drop below the $70,000 threshold ($70,000 less $65,000). Formerly, the payment would have been 80% of the $5,000 drop ($4,000), plus another $10,500 (70% of $15,000) for the drop in margin between $85,000 and $70,000, for a total payment of $14,500.

To make matters worse, the calculation of the reference margin has also changed. In the past, the program calculated reference margins by dropping the highest margin and the lowest margin of the past five years and averaging the rest. Now, the margin cannot exceed the average of allowable expenses in the years included in the reference margin calculation.

If a producer’s reference margin for AgriStability is generally around 50% or more of historical farm revenue, this new calculation could reduce the support level significantly. Consider this example of the possible results:

• If the average reference margin for the three years chosen happened to be $100,000, but the average of expenses in those years was only $80,000, the program will use the lower $80,000 as the reference margin.
• If the current year’s margin was $65,000 and the reference margin was reduced from $100,000 (as originally calculated) to $80,000 because of the average of expenses being lower, the drop would now be only 18.75% (going down to 81.25%) rather than 35% (going down to 65%). Consequently, the producer would no longer qualify for the program.

In addition, the government has further reduced the available benefits by eliminating the Production Insurance Premium adjustment. This was a payment the government issued to AgriStability participants that were also enrolled in production (crop) insurance. Essentially, the program refunded to the producer a portion of the crop insurance premiums as part of the AgriStability payment, as an incentive for producers to remain enrolled in crop insurance.

To offset the reduced benefits, the government has reduced the premiums for enrollment, from 0.3825% of the reference margin (plus $55) to 0.3150% of the reference margin (plus $55). Therefore, again using the above example of a $100,000 reference margin, the producer’s premiums would drop from $437.50 to $370.

The premiums, however, may be only a small portion of the cost to participate in the AgriStability program. Participants must also complete annual AgriStability applications detailing their production history, accounts receivable, accounts payable, and detailed reconciliations of their opening and ending inventory, among other things. Compiling this information often requires a significant amount of work for the 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 enquiries 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.

In summary, the program changes are not expected to reduce the costs of preparing and following up on AgriStability applications and the small reduction in premiums may not significantly offset the costs to participate in the program. Consequently, some producers may be tempted to opt out of the program. But caution is required in making this decision.

Most notably, the profitable producer should consider what would happen if his or her margin dropped by 50% or more. A drop of this magnitude is not unrealistic (unless most of the income was from supply-managed commodities). If a producer is efficient and has little debt, he or she may have adequate resources to cover such a loss and decide not to participate in AgriStability. However, if the producer is highly leveraged and is in highly cyclical commodities, it may not be worth the risk.

The cash crop sector in particular has recently had some very profitable years due to high commodity prices. However, it is possible (some would say inevitable) that prices will drop in the future. Crop insurance is available to cover losses due to yield. However, in many provinces only AgriStability can cover losses due to price. Ontario does have a Risk Management Program that will cover such losses directly, but participation in this program requires enrollment in AgriStability anyway.

Some other producers, particularly in the hog sector, have recently experienced some less profitable years that have driven down their reference margins. Given the requirement now to have at least a 70% drop compared to this lower reference margin, it will be increasingly difficult for these producers to qualify for AgriStability under the new rules. However, some federal and provincial government programs, such as the Ontario Risk Management Program noted above and the Self-Directed Risk Management Program (discussed below), require participation in AgriStability. Although some producers may never have a margin decline significant enough to qualify for an AgriStability payment, they may very well qualify for one of these other programs.

The supply-managed sector rarely experiences margin declines under 70%. It is possible, however, that a disaster could cause this to happen. The avian influenza outbreak that affected certain western Canadian chicken producers a few years ago is a good example. These types of producers would need to 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.

It should also be noted that many ad-hoc government disaster recovery programs in the past have been based on information filed through the AgriStability program and its predecessors, and thus may not be available to non-participants.

Keep in mind that if a producer does opt out of the AgriStability program they not only cannot participate in the current year but also the two years following.

AgriInvest

In the past, the government would match 1.5% of Allowable Net Sales contributed to an AgriInvest account, up to a maximum of $22,500. In 2013, this matching will be reduced to 1% with a maximum payment of $15,000.

AgriInvest also will continue to reduce payments for those producers who have supply-managed commodities. Thus, if only 20% of a producer’s income came from non-supply managed commodities, and the Allowable Net Sales were $100,000, the matching contribution from AgriInvest would be reduced from $1,000 (1% of $100,000) to $200 (1% of $20,000).

Although there is less funding available, in the majority cases, including farms with a significant supply-managed component, it probably still makes sense to be enrolled in AgriInvest because the costs to participate are small.

For sole proprietors and partnerships, the incremental cost to enrol in AgriInvest is negligible. All that is required to participate is to show farming income and expenses on a T1163 schedule rather than a T2042 on the personal tax return. The T1163 may require only a slightly more detailed breakdown of income and expenses than is required on the T2042. Thus, for sole proprietorships and partnerships, it is generally worthwhile to apply to AgriInvest even if the benefit is small.

Corporations, on the other hand, are not required to provide breakdowns of farm income and expenses on their corporate tax returns. Some additional work will thus be required to translate financial statements for use with the equivalent of a corporate T1163. This may require very little to moderate effort, depending on the complexity of the operation. If most of the corporate income derives from supply-managed commodities, the corporation may qualify for only a very small AgriInvest payment, which may not justify even the little to moderate effort required.

In Ontario, edible horticulture producers can also participate in the Self-Directed Risk Management Program, which provides additional matching deposits. In 2012, the rates were 2% for the first $2.5 million of Allowable Net Sales, 1.5% between $2.5 million and $5 million, and 1% above $5 million.

However, as noted above, participation in the SDRM program also requires enrollment in AgriStability, which is not the case for the basic AgriInvest program.

The decision whether to remain enrolled in the AgriStability and AgriInvest programs can be complicated. Every case is different. Contact your Collins Barrow advisor before making any decisions; we can help you to understand your options.

Thomas Blonde, CA, is a partner in the Elora, Ontario, office of Collins Barrow.