Gellner, Jack A.

Rattray, Brian

English

Research Papers in Economics

POLICY  DEVELOPMENTS  IN CANADIAN
AGRICULTURE  SINCE  1986
Jack Gellner  and Brian Rattray
INTRODUCTION
With the implementation  of the Uruguay  Round Agreement on Agri-
culture  in  1995,  Canadian  policy  shifted  toward reduced  levels of support to
agriculture and increased market orientation.  The policy shift was reflected  in
a number of important changes:
* a shift from commodity price support to whole farm income
stabilization;
* decreased  use of subsidies  for inputs;
* enhanced  support for farm investment and diversification;  and
* new emphasis  on cost-sharing measures.
At the same time, federal and provincial governments  were concerned
with deficit reduction.  The mandate to reduce deficits had major influences  on
agricultural  safety net policies in the mid-1990s. A federal-provincial  Memo-
randum of Understanding  (MOU) negotiated in  1995  provided  a management
framework  for the allocation of funds. In its 1995 budget,  the federal  govern-
ment dramatically reduced agricultural safety net funds from over $1 billion in
the early 1990s to $600 million in 1997/98.106  NAFTA  - Report Card on Agriculture
OVERVIEW  OF  CHANGES  TO  POLICY  ORIENTATION
The focus of government  spending is shifting  to non-trade-distorting
or "green" programs as defined by the World Trade Organization (WTO) Agree-
ment on Agriculture. In particular, there is greater relative emphasis on research
and development  and product safety,  and less  on commodity-specific  income
stabilization  initiatives.  Within  income  stabilization,  there  has been  a  major
shift from commodity price  support to whole farm income  stabilization,  con-
sistent with WTO principles.
The Organization for Economic Cooperation and Development (OECD)
uses the  Producer Support  Estimate (PSE) as  an indicator of the annual mon-
etary value of gross transfers from consumers and taxpayers to support agricul-
tural  producers.  These  gross transfers,  measured  at the farm-gate  level,  arise
from policy measures  which support agriculture.  Figures  1, 2 and 3 in the Ap-
pendix  highlight  the differences  in  support  in Canada,  the United  States and
Mexico,  and demonstrate  the changes in producer support  since  1986-88.
The PSE comprises  Market Price Support (MPS)  and direct payments
to producers. MPS  is an indicator of the annual monetary value of gross trans-
fers from consumers and taxpayers to agricultural producers arising from policy
measures  creating a gap between  domestic market prices and border prices for
a specific agricultural  commodity, measured  at the farm gate level. Direct pay-
ments  are  budgetary  payments  to producers  based on  factors  such  as  output,
area planted,  historical  entitlements,  input use and overall farming income.
Canada's  PSE  shows  a  declining  trend  since  1986-88  due  to lower
MPS and lower direct payments, from  a total of 51 percent of agricultural pro-
duction to 23 percent in 1998. More  specifically,  MPS fell  19 percent in  1986-
88. In  1998, MPS was just under half of all support and three quarters of that
support was for milk production.  Further, direct payments  fell from 21 percent
in 1986-88 to six percent in 1998 or in dollar terms from $3.8 billion in 1986-
88 to $1.7 billion in 1998.
General Services  Support Estimates (GSSE)  or general service  expen-
ditures  is  another  OECD indicator that reports  the  annual monetary  value  of
106 NAFTA - Report Card on AgricultureGeilner  and Rattray  107
gross transfers  to general services provided  to agriculture collectively.  These
expenditures  arise from policy measures  which support agriculture regardless
of their nature,  objectives  and  impacts  on farm production,  income  or con-
sumption  of farm products.  Canada's  GSSE  declined from ten percent  to six
percent of production value from 1986-88 to 1998,  with slight increases in the
"research and development" and "inspection" categories.  Also, general services
increased  as  a share  of total support  (as measured  by the Total  Support Esti-
mate).
MONITORING  AND  EVALUATING  AGRICULTURAL  POLICIES
Market  Price Support  (MPS)
As outlined above, MPS is  an indicator of the annual monetary value
of gross transfers  from consumers  and taxpayers  to agricultural  producers.  In
Canada, MPS is mainly represented by supply management. Canada has a sup-
ply management  system for dairy,  poultry and eggs with considerable powers
in three formst:
* import quotas;
* a domestic quota system on individual producers;  and
* a mechanism to set domestic producer prices.
These powers present significant intervention in marketing these commodities.
The supply management system results in almost no budgetary cost to govern-
ments but consumers  pay higher prices for some products.
There  have  been two important  program  changes concerning  market
price  support.  In  1995,  the  import control  system for supply  managed  com-
modities changed under certain  provisions of the WTO Agreement on Agricul-
ture. Quantitative import restrictions were replaced by tariff rate quotas as bor-
der protection. In addition, imports of certain supply managed products, above
historic levels,  became subject to high over-quota tariffs.
*  Editors note: "Supply management" as practised in Canada since the 1970s has meant
tailoring domestic  supply plus imports (less exports) to expected domestic demand  at
targeted producer prices.  "Cost of Production" is used to establish price  targets.
Gellner and Rattray 107NAFTA  -Report Card  on Agriculture
Direct  Payments
Input and Output  Subsidies.  Direct budgetary  payments to pro-
ducers  are  comprised  of both  output  and input  subsidies.  In  general,  output
subsidies are not used as  policy instruments in Canada. Safety net programs no
longer contain  deficiency  payment  schemes.  However,  dairy  policy  is  an ex-
ception  to this  generalization  on output  subsidies  since there  is  a direct  pay-
ment  on  industrial milk.  Producer  revenues  are  a  combination  of the market
return on dairy products and direct federal subsidy payment. Subsidy payments
moderate  the price of industrial milk products  sold to the consumer by reduc-
ing  the returns  required  by  producers  from the marketplace  to achieve  their
target  prices.  In addition to the federal  subsidy payment,  Quebec maintains  a
commodity-based  income stabilization program that provides direct payments
to producers.
Direct payments  in the  form of input subsidies  were  used quite com-
monly in Canadian  agricultural  policy. The  most important  input subsidy in-
volved  transporting  western  grain  to export  port in  which federal  legislation
fixed the freight rate. This subsidy was terminated in  1995.
Safety  Net  Programs.  In Canada,  there  is  a long  history  of farm
safety net programs  designed  to increase  income  stability and reduce  market
risks.  The Agricultural  Stabilization Act was implemented  in  1958 to provide
deficiency  payments  to producers.  More  recently,  the  concept  of whole  farm
income  stabilization  has  become  important  in safety net policy.  In late  1994,
federal and provincial ministers of agriculture agreed that the model for future
safety net policy would include  three programs:
* crop insurance
* whole farm income program based on the  Net Income  Stabilization
Account (NISA)
* province-based  companion  programs.
Today many Canadian producers have lower incomes,  largely due to low com-
modity prices. In response, the Agricultural Income Disaster Assistance (AIDA)
program  began  in February  1999.  Over the past  several  years,  seven  federal
programs  were  implemented  to provide  direct  payments  to  producers:  three
108Geliner and Rattray  109
have  been eliminated,  one will be phased out and three still exist.  These pro-
grams  are  described below.
Western  Grain  Transportation Act (WGTA).  The WGTA  was
passed at the end of the Crow Rate era (1983)  and continued some of the subsi-
dization of rail movement of prairie  grain to export.  By 1995, the federal gov-
ernment viewed the subsidy  as unsustainable  while the international  commu-
nity viewed it as an export subsidy. The WGTA was eliminated in 1995, as was
the smaller domestic  Feed Freight Assistance  program.
Gross Revenue  Insurance Program (GRIP).  In  1991,  a volun-
tary national program  available to grain,  oilseed and specialty crop  producers
was set up to provide income  support through market  and production  compo-
nents of revenue.  This program marked the transition  from income protection
at a sectoral or regional level to income support on an individual producer ba-
sis. Increasing dissatisfaction among producers,  combined with pressing fiscal
constraints  by  both levels  of government  led to  termination  of the  GRIP  in
1996.
National Tripartite Stabilization Program (NTSP).  NTSP was
set up  in  1986  as a  voluntary  revenue  insurance  program  to reduce losses  to
producers due to adverse changes  in market prices  or costs. It applied to live-
stock  production  outside  of supply  management  and  some  horticultural  and
tree crops. In  1993, NTSP for red meats  was terminated at the request of pro-
ducers because of concerns over countervail actions. The entire program termi-
nated in  1997.
Federal Dairy Subsidy.  A direct deficiency payment made to pro-
ducers  for industrial  milk produced  within  domestic requirements  has been
part of the national  dairy program  in Canada for several  decades.  It  is  to be
phased out by January 31,  2002. Supply management remains  in place.
Crop Insurance.  Crop insurance has been a key federal and provin-
cial program aimed at providing production risk coverage from drought, flood
and hail to farmers in all provinces.  Payments are triggered  when a producer's
yield falls below 70 to 80 percent of the farm's average historical yield. There
109 Gellner and Rattray110  NAFTA  -Report Card on Agriculture
have been no  substantive changes to crop  insurance  since the  implementation
of the North America  Free Trade Agreement  (NAFTA).
Net Income Stabilization Account (NISA).  The NISA fund, ini-
tiated  in  1991,  receives  producer  contributions  during favourable  years  and
provides  for withdrawals  during  years of low revenue.  The uniqueness  of the
program  is  its  whole  farm  approach,  as  opposed  to  the commodity-specific
approach  of previous  stabilization programs.  The program is funded  by fed-
eral, provincial and producer contributions.
Agricultural Income Disaster Assistance Program  (AIDA).
This program was implemented in February  1999 to help with the farm income
crisis  triggered by  low grain  and hog prices.  Initially, the  federal  government
provided  up  to $900 million over  the first two years,  matched  by up  to $600
million from the provinces.  In  November  1999,  the federal  government  pro-
vided a further $170 million.
IMPACT  OF  ELIMINATION  OF FEDERAL  SUPPORT  PROGRAM
The  phase-out  of the federal  dairy  subsidy  will  be  accompanied  by
administered  adjustments  to producer prices to offset the reduction  in federal
payments. The  net effect will be to reduce the level of payments  and increase
MPS, with  little overall change in total support (Appendix - Figure 4).
The elimination of the WGTA and changes to commodity  specific pro-
grams have resulted  in significant  reductions  in  support levels  to grains  and
oilseeds producers in Canada. Elimination of the WGTA ended MPS for these
commodities.  Also, reductions  in other program payments  and the reorienta-
tion of support programs resulted  in a major decline in overall support for the
grains  and oilseeds sector. These changes are evident in measures of support to
the  grain and oilseed sectors in Canada. (Appendix  - Figures 5 and 6).
Program changes  have also had  large impacts  on red meat producers
even though support levels were relatively low in the reference period. (Appen-
dix - Figures 7 and 8). Elimination of the WGTA, in fact, ended a negative MPS
for  red meat commodities.  This  change,  offset by payment  reductions  from
110 NAFTA - Report Card  on AgricultureGeliner  and Rattray  hi
NTSP termination, resulted in an overall reduction in support for hogs and beef
cattle producers.
General  Services  Support Estimate  (GSSE)
As  mentioned above,  the GSSE or general service expenditures  is an
OECD  indicator that reports  the  annual monetary  value of gross transfers  to
general  services provided  to  agriculture  collectively.  Federal  agricultural  re-
search  and development  initiatives and government  regulations  are  examples
of general service  expenditures.
Research and development to increase farm productivity is a Canadian
policy objective.  Recently, federal research funds have been allocated to avoid
duplication and to match private sector contributions for high priority research
and development  activities. Also,  regulatory reform has addressed food safety
and  quality concerns  to  improve  consumer  confidence.  The Canadian  Food
Inspection Agency  (1997) and Health Canada are responsible for health, safety
and inspection  services.  The Agency's  mandate includes recovering  a portion
of its costs from users of its services.
There are four federal government  programs  which comprise  the ma-
jority of Canada's  GSSE. They include:
Canadian Adaptation  and Rural Development (CARD)  Fund
The CARD Fund provides short-term funding for adaptation
initiatives to support diversification,  value-added processing,
market development,  innovation and job creation in the agriculture
and agri-food  sector. Adaptation programs  provide the agriculture
and agri-food sector and rural Canada with tools to acquire and use
knowledge,  skills and ideas to work together to create  opportuni-
ties for themselves  and their communities.  CARD funding  ($60
million annually),  initiated in  1995, became  a continuous  program
in  1999.
Gellner and Rattray 111112  NAFTA - Report Card  on Agriculture
* Canadian  Agri-Food Infrastructure  Program (CAIP).
It is a new  $140 million investment in Western Canada to adapt to
the  changes triggered by transportation  reform. Infrastructure
changes include improving roads to contend with  elevator consoli-
dation and railway  branch-line abandonment,  and upgrading
highway  links to new grain terminals.
* Agri-Food Trade  2000 Program (AFT 2000).
A cost-shared contribution program  to support market readiness,
market access  and market development.  Its objective  is to increase
sales of agriculture,  food and beverage  products  in domestic  and
foreign markets.  Program  spending reached $12.8  million for the
fiscal year  1999/00.
* Matching  Investment Initiative  Program (MII).
Collaborative research  activity between AAFC and the private
sector,  by matching dollar investments  in research  by industry. The
program was introduced  in 1995. Federal funding  is expected  to
reach  $35.8  million  by 2000.
SUMMARY
* Reduced budgets and more open trading rules have changed
agricultural  policies.  There has been a significant downward trend
in support to agriculture.
* Recent policy changes to Canada's safety net system helped
producers manage their own risks in trade-neutral  ways while
improving the stability of farm income. The aim is  to be compat-
ible with WTO Agreement  on Agriculture commitments  and to
avoid establishing  a system that distorts producers'  decisions.
* The broader policy framework has shifted  its focus from the farm-
gate to the entire agri-food  system and rural economy.
* New policy initiatives  focus on the enhancement  of the industry's
economic viability  while strengthening  rural community economic
development.  They are  aimed at increased competitiveness  and
industry-led business  plans developed at the regional level.Geliner and Rattray  113
* Agricultural policy works in collaboration with other federal  and
provincial jurisdictions  and industry to address  horizontal initia-
tives such as biotechnology,  climate change,  the environment,
endangered species, youth employment,  rural development  and
aboriginal  affairs.
* The Canadian agriculture  and agri-food  industry wants grassroots
organizations to undertake more decision  making and program
delivery.  This focus combined with the federal government's  focus
to reduce costs and enhance flexibility has allowed the government
to approach adaptation programming from a new perspective.
APPENDIX
LEVEL AND BREAKDOWN  OF  PSE  FOR NAFTA COUNTRIES  AND
SELECTED  COMMODITIES
Appendix Figure  1:  Canada--OECD  Support Estimates.
60.0
51.0
50.0
O  40.0
30.0
n>  2  0.020.0  21.0
- 20.0
11 .O  13.0
10.0  10.0 10.  60  6.0
0.0
1986-88  1998
*  MPS  GSSE
Payments  *  Total
Source:  OECD  Producer and Consumer Support Estimates, Database,  1999
113 Gellner and Rattray114  NAFTA  -Report Card on Agriculture
Appendix Figure  2:  United  States--OECD  Support Estimates.
60.0
55.0
50.0
40.0
Co
30.0~~~  20.0~~25.0
20.0  14 0  16.0  15.0
12.0  12.0
10.0
0.0
1986-88
*  MPS
Payments
Source:  OECD Producer and Consumer Support Estimates, Database, 1999
1998
GSSE
* Total
Appendix Figure 3:  Mexico--OECD  Support Estimates.
25.0
20.0
17.0
0.0
0~~~~~~~~~.0~~~~  ~2.0
0.0
1986-88  1998
*  MPS  GSSE
Payments  I  Total
Source:  OECD  Producer and Consumer Support  Estimates, Database,  1999
114 NAFTA  -Report Card on Agriculture
39.0
0'3 nGeilner  and Rattray  115
Appendix Figure 4:  Canada--OECD  Support Estimates,  Dairy.
70.0
62.0
60.0
49.0  53.0
50.0
2  40.0
30.0
20.0
10.0o  8  5.0
0.0
1986-88  1998
*  MPS
Payments
Total
Source:  OECD  Producer and Consumer Support Estimates, Database, 1999
Appendix Figure 5:  Canada--OECD  Support Estimates,  Wheat.
50.0
45.0
40.0
a)
.U  30.0 c-
a)
20.0 ~ 20.0  ~  16.0
0.0
0.0
1986-88  1998
*  MPS
Payments
Total
Source:  OECD  Producer and Consumer Support Estimates, Database,  1999
115 Gellner and Rattray116  NAFTA  -Report Card on Agriculture
Appendix  Figure 6:  Canada--OECD  Support Estimates, Oilseeds.
30.0
25.0  __________________________25.0
20.019
§  15.0
- 10.0
07.0  6.0  6.0
5.0
0.0  ~~~~~~~~~~~~~0.0
1986-88  1998
MPS
Payments
Total
Source:  OECD  Producer and Consumer Support Estimates, Database,  1999
Appendix Figure 7:  Canada--OECD  Support Estimates,  Hogs.
10.09.
6.0  6.0
(5.0)
1986-88  1998
*  MPS
Payments
Total
Source:  OECD  Producer and Consumer Support  Estimates, Database,  1999
116 NAFTA  -Report Card on AgricultureGeilner and Rattray  117
Appendix Figure 8:  Canada--OECD  Support Estimates,  Beef Cattle.
15.0
11.0
10.0
coXj?~~~~  6.0  6.0
5.0
L'a.-~~  At^~~~~~~ _  ^  ^  ^  ________oD0.0
0.0
(2.0)
(5.0)
1986-88  1998
*  MPS
Payments
Total
Source:  OECD  Producer and Consumer Support Estimates,  Database, 1999
Gellner and Rattray 117

POLICY DEVELOPMENTS IN CANADIAN AGRICULTURE SINCE 1986

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics