March 2006

Index

• Food Freedom Day and Farm Income Forecasts
• Confirmation of Escalating Costs
• CAIS Update
• Update on Risk Management Program Lobbying
• Ontario Grain & Oilseed "Federal Ask"
• U.S. Environmental Protection Agency Terminates Oxygenate Requirement
• U.S. Awaiting WTO Ruling on Mexican Tax on High Fructose Corn Syrup
• April Key Month for WTO Doha Round Negotiations
  

Food Freedom Day and Farm Income Forecasts

In a very telling conjunction, Food Freedom Day arrived February 8, the same day as Agriculture & Agri-Food Canada and Statistics Canada released their farm income forecast for 2005 and 2006. Food Freedom Day marks the calendar date when the average Canadian consumer has earned enough income to pay their individual grocery bill for the entire year. That would be the 120 Canadians the average Canadian farm feeds; but the farmer who produced the food on that farm can't support himself on the income from that same farm. That's the message from the AAFC/StatsCan income forecasts.

Total Net Farm Income for all of Canadian agriculture for 2005 is projected to fall to $2.8 billion, down 26% from 2004. Total NFI for all of Canada is projected to collapse to only $729 million in 2006, a drop of 74% from 2005 and 72% below the average for 2000-04! I wonder what the average Canadian consumer would have to say to their MPs and MPPs if their net income in 2006 was only ¼ of what it averaged for 2000-04 even though they were working harder and producing more at the same job?

Government press releases made much of large program payments ($4.88 billion in 2004, a record $4.9 billion in 2005, falling to a projected $4.15 billion in 2006) included in those NFI projections. But, those releases failed to mention that a large proportion of those payments were NISA accounts being flushed out with the termination of that program. Also not mentioned was the fact that these same NISA contributions were touted by both levels of government as investments in agriculture in those years in the past when deposited into NISA accounts to match grower contributions. Smells like double-counting to me; count as a government expenditure on the way in, count as a government expenditure on the way out.

Excluding program payments, total Canadian Net Farm Income from the marketplace was negative $1.05 billion in 2004, negative $2.07 billion in 2005, and a projected negative $3.42 billion in 2006!! Shameful.

New Federal Agriculture Minister Chuck Strahl is quoted as saying the projections are "startling and troubling". He said they "should provoke an examination of what can be done because it appears to be the result of a long-term restructuring of global agriculture rather than a temporary blip". We have been telling both levels of government and both major parties that for a long time.

For Ontario, much the same pattern. Total Ontario NFI fell 18% in 2005 to $348.4 million, and is projected to drop an astonishing further 118% to negative $62.5 million in 2006! That includes government program payments! Interesting that program payments in 2006 in Ontario are projected by AAFC/StatsCan to decline by 25%. Excluding program payments, total Ontario NFI from the marketplace was negative $250.7 million in 2004, negative $490 million in 2005, and projected to be a whopping negative $690 million in 2006!! Shameful.

Confirmation of Escalating Costs

What is even more worrisome in the AAFC/StatsCan data is confirmation of increasing operating expenses. For Ontario, net operating expenses are escalating at an increasing rate from $7.44 billion in 2004, to $7.5 billion in 2005, to $7.79 billion in 2006, up 4% from 2005 and up fully 10% from the average 2000-04. Costs for all of Canada exhibit a similar pattern, up 9% from the 2000-04 average. Statistics Canada commented "this is of particular importance for 2006 due to the rapid rise in and historically high machinery fuel prices faced by farmers in 2005," and "the unusually rapid rise in the value of the Canadian dollar that has been observed over the past three years …." "Fuel prices in Canada have reached record highs due to international political uncertainty and slow growth of crude oil supplies relative to the strong growth in fuel demand. This has been further exacerbated by the loss of refinery capacity in the U.S. Gulf Coast caused by Hurricanes Katrina and Rita. Fertilizer prices have also increased strongly during 2005 due to tight supply/demand fundamentals, as well as higher energy prices." Statistics Canada adds the comment for 2006 that "interest costs are expected to increase due to a combination of higher farm credit outstanding and higher interest rates driven by a stronger Canadian economy in 2006." Bottom line is that any recovery in net farm income is going to be extremely hard to generate with operating costs rising at a sharp rate and little or no prospect for reductions in the near term. Meanwhile, the main element depressing revenue, U.S. subsidies, continue to increase unabated and unopposed.


CAIS Update

As of the end of January, $176.8 million in CAIS 2003 program year payments had been triggered by 39.8% of 28,105 Ontario applicants with payments averaging $15,786. By comparison, 11,023 Ontario field crop participants triggered 3,671 payments totaling $22.0 million and averaging just $5.999. The $176.8 million in 2003 CAIS payments includes $17.6 million in payments triggered through participant amendments (the term used to describe appeals).

As of the end of January, $120.3 million in CAIS 2004 program year payments had been triggered by 43.4% of 18,301 applications processed to date averaging $15,124. By comparison, 7,814 Ontario field crop participants processed to date had triggered 2,943 payments averaging just $6,432 totaling $18.9 million. OMAFRA is projecting CAIS 2004 program payments totaling about $250 million.

Interesting that provincial government projections indicate that savings to CAIS (generated because RMP payments would count as CAIS payments) should our Risk Management Program be introduced would not exceed $50 million per year. That implies that CAIS at maximum would provide only $50 million in support to all farmers in Ontario who grow field crops. Consider the information on plummeting Ontario Net Farm Income projections highlighted above and then consider whether $50 million provided through CAIS is sufficient.


Update on Risk Management Program Lobbying

The seven Ontario grain & oilseed commodity (G&O) groups continue to work closely together, with the Unified Voice (which includes SM5, OFA, CFFO, UFO, and most other commodity groups), and with many individual concerned producers in Ontario and other provinces to get our Risk Management Program fully funded and implement in Ontario. We remain committed to getting RMP implemented.

However, to be honest, we are meeting with less than enthusiastic uptake on the part of both levels of government. Push-back appears to centre on three areas:

Cost: For 2005/06 in Ontario, our RMP would require about $300 million from the Federal government plus about $200 million from the province. However, deducting the savings to CAIS generated by our RMP payments, "new funding" required for 2005/06 is only $450-$470 million (which would mean $180-$188 m from the province). Finance Minister Dwight Duncan stated (during pre-budget discussions in Woodstock on January 13 and as quoted in the Woodstock Sentinel newspaper) that the province has set-aside $500 million for agriculture over the next 3 years or about $170 million per year. The province needs only to increase its contribution by an additional $18 million for 2005/06 in order to implement our Risk Management Program. Out of a budget of $88 billion, that doesn't even register as a percentage. Such leadership would then put the Federal government squarely on the spot to step up to the plate (see Federal Ask below). The total cost for 2005/06 including all other "asks" from all of Ontario agriculture requires $220 million, which is only $50 million more than Minister Duncan has stated has been set aside. Moreover, after 2005/06, and using the average cost of the previous 5 years, RMP would cost about $342 million per year or about $88 million from the province after allowing for CAIS savings. Since we are so close on cost, surely this can't be the real problem preventing full implementation.

Contractual Obligation: Our RMP has been designed as price insurance in which a participant pays a premium to insure the selected price option coverage. If triggered, the full amount of coverage is due. Governments appear to be saying they do not want to enter into such a contractual obligation where they are required to provide all necessary funding to meet that obligation regardless of the amount. They seem to prefer the old system where a fixed amount of funding (of course less than what has been documented as the amount needed) could be spent. The fixed amount would necessarily be divided among all sectors regardless of triggered need with payments pro-rated so that only the pre-established budgeted funding was spent, nothing more. This may be closer to the real objection.

Trade Implications: Our RMP is also suggested as a possible source of trade irritant with the U.S., especially by some livestock producers and both levels of government. Essentially pork and cattle groups are concerned that RMP payments received by a hog or cattle producer could provide grounds for the US to launch countervail suits against hog or pork or cattle or beef imports from Canada into the US. We have met with various groups to discuss how to massage RMP to make it "blue" and therefore less exposed to WTO-based retaliation. We have agreement with our assessment of proposed changes (see below). The livestock sector also has some concerns about what is called "flow-through benefit" meaning that RMP payments to crop producers could be argued to have kept more producers in business thus Canadian feed prices are lower which provides a benefit to livestock feeders. That is a far more speculative connection legally because the CBOT determines Canadian feed prices anyway, and lawyers are divided on the thought (ours don't think it would hold water).

We think we can make RMP "blue" under WTO rules by changing the acreage base used to trigger payments from current planted acreage (the way MRI worked) to average historic acreage planted to the specific crop (the same way the US Direct and Counter-cyclical payments work). RMP already uses historic average yield. That would legally de-couple RMP from current production which is the chief criteria for "blue" box spending which is exempt from WTO-required expenditure reductions.

There is a question about payments covering more than 85% of the gap between the support price and the market price. There is divided opinion on that issue.

However, making RMP "blue" and as WTO friendly as possible is not a guarantee against US countervail actions which are launched under US trade law. Nothing is a guarantee against that. However, keep in mind that RMP is a replacement program for MRI which existed from 1991 through 2004 in Ontario. So we are not adding a new "irritant". Also, there is not a single Canadian agricultural or agri-food export to the US that is a large enough percentage of the US market to cause legal injury under US trade law. That didn't stop the US from bringing countervail suits against Canadian hogs, durum wheat, red wheat, etc., but the US could not prove injury on any. Canada won them all. The US will likely continue to bring nuisance suits in any event (regardless of whether RMP is introduced or not), but cannot prove injury. We would continue to win. Of course, that won't stop the US; they have now brought 9 suites (and counting) against the CWB even though the CWB has won every case.

In short, the G&O groups will continue to push for a fully-funded Risk Management Program because the push-backs are not sufficiently valid nor insurmountable and the RMP is the solution to the problem of artificially depressed prices in the grain and oilseed sector until trade-distorting domestic subsidies in the U.S. are eliminated.

Ontario Grain & Oilseed "Federal Ask"

The Ontario Grain & Oilseed Group circulated the following "Federal Ask" to Ontario candidates during the recent Federal election, and to successful Ontario MPs, selected federal bureaucrats, provincial MPPs and provincial bureaucrats.

Ontario Grain & Oilseed Safety Net Committee
Requests from our FEDERAL government

Ontario's 29,000 grain & oilseed farmers are asking for "companion programming" in addition to the CAIS and Production Insurance programs. The companion program would be re-introduced as a "patch on CAIS" to correct CAIS' inherent inability to deal with artificially depressed production and reference margins plaguing Canada's grain and oilseed sector.

All parties in the recent Federal election recognized that CAIS does not meet the needs of the grain and oilseed sector. All parties promised to introduce additional programming to fill the gap.

We are asking that this funding, plus the promised additional $500 million contained in the Conservative Party's election platform, be combined and used to re-introduce companion programming for Canada's grain and oilseed sector.

U.S. Environmental Protection Agency Terminates Oxygenate Requirement

As expected, in mid February, the U.S. Environmental Protection Agency issued a rule change eliminating the 1990 Clean Air Act mandate requiring 2% oxygenates in reformulated gasoline in designated metropolitan pollution areas. 30 States that fall under the 2% oxygenate requirement will no longer have to add ethanol or methyl tertiary butyl ether (MTBE) to gasoline. Many others do voluntarily anyway. The elimination of the oxygenate requirement is part of the U.S. 2005 Energy Act which established in its place the Renewable Fuel Standard requiring 7.5 billion gallons of renewable fuel be sold as part of the transportation fuel pool (including diesel) by 2012. To comply, states cannot degrade air quality and must meet air quality standards. Revoking the oxygenate requirement is meant to give states flexibility in how to meet those air quality and renewable fuel sales volume standards. Demand for ethanol is not expected to be affected because ethanol is now in demand not only as an oxygenate but also as a gasoline volume extender (given limited and stretched refinery capacity), a tailpipe emission reducing agent, and as the premier renewable fuel.

U.S. Awaiting WTO Ruling on Mexican Tax on High Fructose Corn Syrup

The WTO is expected to rule March 6 on the U.S. government complaint against the Mexican government's 20% tax on soft drinks that do not use sugar as a sweetener. The complaint, backed by the U.S.-based Corn Refiners Association, alleges that the Mexican tax is illegal under WTO rules as a barrier to trade. Prior to the imposition of the tax, U.S. HFCS exports to Mexico were 300,000 tones per year in the late 1990s, mostly into the soft drink sweetener market. U.S. HFCS exports dropped to 75,000 tons by 2002 and zero since. As a result, HFCS production capacity has been surplus to domestic U.S. usage. U.S. HFCS exports to Canada have increased as the U.S. has been awash with HFCS. Should the WTO rule in favour of the U.S. complaint (which is expected), the Mexican legislature would have to vote to remove the tax, but that could take some time. Regardless, any move that opens up the Mexican sweetener market to U.S. HFCS would relieve pressure on Canadian HFCS markets.

April Key Month for WTO Doha Round Negotiations

Even after lowering expectations prior to the Hong Kong Ministerial meetings in December, WTO Doha Round negotiations appear to be at an impasse. In Hong Kong, negotiators agreed to try and reach agreement on a formula for cutting tariffs and subsidies by the end of April. With the July 2007 expiration of U.S. Presidential "fast-track" trade negotiating authority (and no prospect for extension since 2008 is an election year), realistically a WTO deal must be finalized by December 2006. To achieve that, meaningful and detailed formula for reducing domestic subsidies, opening international markets, and eliminating export subsidies in agriculture must be agreed by the end of April. Most observers think that is now impossible since there is not enough time left. The E.U., the U.S., and other developed nations are demanding greater concessions on greater access for industrial goods and services from developing countries, especially Brazil, India, and China before making greater concessions themselves on agriculture. The E.U. refuses to increase access for agricultural goods and the U.S. refuses to make meaningful reductions in domestic subsidies despite "smoke and mirrors" proposals. Developing countries refuse to open up their industrial and services markets seeing these as their ticket for future long-term sustainability and growth and the means away from dependence on bulk agricultural commodity exports. Oxfam (UK-based third world development agency) says "it is highly unlikely that the sort of detail that is needed will be agreed by April - not just because there is a lot of it and it's technical - but because the major players are still holding back, waiting for the other ones to move first."

Observers point to a sharp increase in bi-lateral and regional trade agreements over the last few months as an obvious indication that most players see only limited results emerging from the Doha Round. The trend is well underway and many see the pace accelerating as Doha negotiations flounder.