Ex-ante analysis of structural change adjustments under the canadian agricultural income stabilization program

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Nakagawa, Ken

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University of Guelph

Abstract

The Canadian Agricultural Income Stabilization (CAIS) program was the new farm income support program introduced by the Canadian government in 2004. CAIS was designed to stabilize farm income by covering large and small declines in a reference margin. The reference margin is based on a five-year (Olympic) average of the production margin (defined as revenue minus expenses). Payouts are made if the production margin for the current year is less than for the reference margin. Given the nature of how reference margins are calculated, scope exists for producers to alter aspects of their production in order to become eligible for a payout. Such structural change is problematic as it suggests scope for misuse of the program (i.e., moral hazard). To deter potential moral hazard, CAIS includes a structural adjustment mechanism (SAM) to prevent such misuse. This study determines which factors within and outside the control of producers affects the reference margin, and the degree and direction of effect. An econometric model was used to estimate the impact of producer and market factors associated with structural adjustment on producers' reference margins. These results were used to differentiate between actual structural adjustment and variation based on fluctuations in different factors.

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Canadian Agricultural Income Stabilization program, farm income, ex-ante analysis, structural change adjustments, reference margin

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