Risk Planning for the Crop Season
Throughout this year, Olds College Centre for Innovation (OCCI) is collaborating with industry partner Algo-Rythmn Corp. to enhance market and financial risk management innovations in agriculture. One goal of this partnership is to enhance public knowledge and awareness of risk management strategies, and offer farmers sufficient resources and information to protect their livelihood.
Crop Farming Risk Profile
Crop production plays a major role in Canada’s economy contributing to employment, food security and national income. In 2021, crop production employed approximately 115,000 people and contributed $26.3 billion to Canada’s GDP. Compared with other industries and products, the seasonality of crops results in inherent price volatility due to unpredictable factors such as weather, pests, geopolitical uncertainties, supply and demand. The failure to take necessary risk precautions has direct repercussions on farmers income, market stability and food security.
In order to support both farmers and the agriculture industry to address and protect against volatility and the associated business risks, the Canadian government offers a series of Business Risk Management (BRM) programs meant to provide financial support and income stabilization. The three major BRM programs are AgriInsurance, AgriStability and AgriInvest. The proper utilization of these BRM programs, combined with complimentary risk management tools and practices, can help mitigate the inherent uncertainty in the agriculture industry.
Business Risk Management (BRM) Programs
AgriInsurance
AgriInsurance is a crop insurance program designed to reduce the impact of production or yield losses arising from perils such as drought, flood, wind, frost, hail, disease, insect infestations and wildlife. Insurance is offered for both annual and perennial crops, and is available to most producers in Canada. In Alberta, AgriInsurance is developed and administered by the Agriculture Financial Services Corporation (AFSC). Producers using AgriInsurance pay an insurance premium at the beginning of the growing season, and receive a production guarantee based on average historical yields and the coverage option they select. This production guarantee hedges the farmer against any yield losses below the guarantee. At the end of the growing season if the farmer's yield is below their production guarantee, the farmer will receive an insurance payout mitigating the impact on farm revenue. Federal and provincial governments support AgriInsurance by paying all administrative expenses and up to 60% of the premium costs.
AgriStability
AgriStability is a margin-based protection program intended to help producers stabilize their farm income. While AgriInsurance is based on production losses, AgriStability covers declines in a producer’s farm income relative to previous years. In Alberta, AgriStability is developed and administered by AFSC. Producers using AgriStability pay an upfront premium, and receive a margin guarantee based on their average reference margin calculated using five years of prior data. At the end of the growing season if the farmer's revenue margin is below their margin guarantee, an AgriStability payment is triggered mitigating the impact on farm profitability.
AgriInvest
AgriInvest is a producer-government savings account intended to provide income protection against small financial losses. Each year, producers can deposit up to 100% of their allowable net sales (gross sales - purchase of allowable commodities) and receive a matching government contribution of 1% of allowable net sales. Producers can withdraw these funds at any time, and have discretion over the use of these funds. Producers can earn interest on their deposited money; however, must pay taxes on both interest and the government's contribution when money is withdrawn from the account. In Alberta, AgriInvest accounts are offered by various financial institutions.
Complimentary Risk Management Tools
Market Risk Management
In addition to the government-managed Business Risk Management programs, producers can utilize market risk management tools such as futures contracts and option contracts. Futures contracts are a standardized contract in which the buyer and seller agree to exchange a fixed quantity and quality of a commodity, at an agreed upon price, on a specified future date. Option contracts are a standardized agreement where the buyer pays an upfront premium to the seller in exchange for the right, but not the obligation, to buy or sell a fixed quantity and quality of a commodity at a predetermined price on a specified future date. Both futures and options contracts allow a producer to lock in a commodity price in order to hedge against unfavorable price changes at harvest. For additional information, refer to our article Farm Risk Management using Futures Contracts.
Additional Risk Management
There are other risk management decisions that can be made at the farm level and have historically been used by crop farmers to hedge their overall risk. Diversification of on and off-farm activities contributes to reducing risk. For instance, choosing a combination of crops whose returns are not perfectly correlated reduces the variability of total revenue. The same is true for having an additional job or revenue stream dissociated from primary production. The level of the farmers integration in the food supply chain also affects the degree to which the farmer is impacted by price volatility. One example is vertical integration where the farmer controls more than one stage of production which grants the farmer a role in price setting. If there are storage capabilities, the farmer may also take advantage of spreading the sales over the year to reduce the impact of lower prices at harvest. Additionally, holding financial reserves or liquid assets can help mitigate large losses caused by volatile prices or production.
Farming requires the ability to withstand unpredictable events. It’s important farmers have access to a diverse range of risk management tools and practices to help them make informed, risk-reducing decisions!
This article was written by Algo-Rythmn for publication in Olds College Smart Farm Newsletter. To read the published version see HERE.
