The Dry Sell
As harvests roll in, so do insurance payouts to drought-stricken farmers. But will the payments actually mitigate the drought’s impact? Or are we leaving the most vulnerable farmers in the dust?
Alberta Venture, Sep 28, 2015
Drought is less a portent of imminent danger than it is one of attrition. Biblically, drought is a curse – don’t let your heart be deceived, it warns in Deuteronomy, or your fields will yield no harvest. Drought is not a particularly exciting subject to cover without that sense of far-off but impending doom. So it’s no surprise that reporters, scientists and ideologues couldn’t help but link this summer’s arid conditions to the attention-grabbing narrative of worldwide climate disaster.
Coverage of Alberta’s drought had a frightening analogue in California, with that state’s drought simulcast to the world in vivid imagery (lush lawns and sprawling suburban subdivisions bordering bone-dry desert) and the fraught, accusative language of “drought shaming.” Perhaps, therefore, it felt natural to place Alberta’s drought in a global context, as the media did.
Then the government-run Agricultural Financial Services Corporation (AFSC) announced it would pay out $1 billion in insurance claims. On Friday, August 21, Alberta declared a province-wide agricultural disaster after row upon row of parched municipalities – 26 at last count – declared their own. That $1-billion figure was splayed across every major news outlet in the province like a tidy wrap-up to the perilous summer.
But Albertans would be wise to remain skeptical. Not just because the grand narrative might not be true, but also because the rhetoric obscures the drought’s real impact on producers and, in doing so, does a disservice to the agriculture industry.
Declarations of disaster are purely symbolic. The municipalities can only hope to goad the province into making a declaration, and the province has no firm metric for its declaration. It merely allows the AFSC to access a reserve fund to pay out its clients faster.
Not that the province was wrong to call it a disaster. Sure, some producers have avoided calamity with the help of some late-summer rains, and in some parts of the province, a second growth on crops staved off calamity. But 60 per cent of agricultural land in the prairies has received very low or record-low precipitation, according to Agriculture and Agri-Food Canada, and that’s financially affected an estimated 80 per cent of Alberta’s 40,000 farms. The provincial agriculture ministry estimates that 2015 crop yields will be 25 to 30 per cent less than average yields since 2010. The impact is less severe than the drought of 2002, but worse than that of 2009. Some farmers, however, have reported a decrease in their yields of as much as 75 per cent.
The biggest concern to the cattle industry is that conditions could expedite a selloff of cattle as producers become unable to pay for the high cost of feed. As Bloomberg reported in June, Canada’s herd is already at its lowest point in 22 years, and meat processing plants are running at just 74 per cent of capacity – a seven-year low. The cost of hay, meanwhile, has ballooned. As of early August, a 1,200-pound bale could sell for $200, more than four times its usual price. It seems like the drought has corralled some producers into a thorny crossroads: do they pay exorbitant amounts of money for feed or sell their cattle? The latter would create an long-term drain on their herds and the industry.
Well, give farmers credit: they seem to have mostly kept their herds. There’s no evidence of an industry-shaking selloff. “We’ve been watching that pretty closely,” says Rich Smith, executive director of Alberta Beef Producers. “We were hoping this would be a year when people might expand their herds, and that’s not happening. But we’re not seeing a large widespread sale of breeding animals, so that’s positive. It suggests that people are believing they can find ways to get feed for their animals for the winter so they can keep their breeding herd.”
This could be in part because more feed has become available since July, as some producers opt to harvest their crops for feed rather than for market, which AFSC allows them to do. But a more likely reason is that 2015 has seen record-high beef prices, incentivizing producers to keep their cattle until they’re ready for the market rather than selling them off early. As data from cattle auctions show, although sales are down 8.5 per cent since last year, the price of a 500-pound calf can soar almost 40 per cent higher than last year’s.
There are exceptions, however. Walter Sarapuk, the deputy reeve of Mackenzie County, says he knows “quite a few” producers who’ve sold off their cattle. “There’s just nothing to feed them, and people down south want $220 a ton for hay,” he says. “Add another $40 for freight and the numbers just don’t make sense.”
He says less than two per cent of farmers in the area have had enough rain to sustain their crops, and he counts himself among the few lucky cattlemen who have crops they can salvage for feed. But even he says he’s been getting less than a quarter-bale per acre compared to three bales per acre with a normal crop. Some of his land has received less than half an inch of rain all summer, and that came in bursts of one-tenth of an inch. “We had good moisture and seeding done early, and it germinated really nice and I had a real good start to my crops,” he says. “Then we just sat there and watched it die.”
As Alberta Farm Express reported recently, a trucker named Bill Fehr said he’d usually haul two or three loads of cattle from the area; this July, he took 14 loads. “A lot of people, once they sell, they won’t get back into it,” says Sarapuk. “It takes years to build a herd. It’s not like pigs or chickens – it’s one cow at a time.” Mackenzie County reeve Bill Neufeld put it this way: “One farmer could sell his herd for $90,000 or buy $90,000 worth of feed. Which option could anybody take?”
Which brings us to that $1-billion payout for drought-afflicted farmers. AFSC covers 80 per cent of crop producers in Alberta and collects a premium from its 40,000 clients, which funds those payouts. If the payouts exceed the booked premium, then the minister of agriculture, Gerry Ritz, has to get his cabinet members to approve an order to access to a $2-billion reserve fund – a process kicked off by the province’s declaration of an agricultural disaster.
AFSC booked a $658-million premium for 2015, and the payouts are expected to be between $700 million and $900 million, so AFSC received access to $350 million from the reserve fund, which is from where the $1-billion figure originates. (For reference, 2002 insurance payments required 400 per cent of the year’s booked premium.)
AFSC has received around 8,900 claims this year. In late August, Nikki Booth, a spokesperson for AFSC, said the organization had already paid out $114 million, accounting for roughly 3,500 claims. The amount of each payment varies wildly: “It depends on what kind of property you have, how many acres you have and where you are in the province,” she says. “There isn’t really an average.” Coverage is based in part on historic yield averages, and not all producers will get a payout.
But there are two misconceptions about this massive projected payout. For one, the producers are not solely responsible for funding them. Producers fund just 40 per cent of AFSC’s premiums – the provincial and federal governments fund the remaining 60 per cent, in varying degrees. Taxpayers have a role in the payouts, to the tune of $600 million in 2015 alone, which highlights the importance of getting drought relief right. We’re all invested in it.
Second, of those 8,900 claims, which constitute the projected $700-$900 million, the majority are not all related to drought conditions. Twenty-seven hundred of them are pre-harvest claims, indicating the producers changed the intended purpose of their crops (converting it to feed, for example, rather than preparing it for the market), and 280 are post-harvest claims, for crops with marginal yields. The remainder, 5,900 claims, is for damage caused by hail.
The amount of money booked for hail damage is a difficult figure to pinpoint, since claims fall within such a broad spectrum. But assuming that such claims are of equal proportion to those for damage caused by the drought, that means $469 million to $603 million (67 per cent of the $700-$900 million range) is booked for hail damage. Which makes sense – last year, which yielded a bumper crop, still saw $374 million in AFSC payouts.
In fact, as Booth says, the majority of claims come from the “hail belt” in southern Alberta, around Red Deer and Lacombe. At least 2,960 claims, then, are for hail in southern Alberta– almost as much as for all drought-related claims combined.
And this is all about crop insurance, mind you – what options are there for livestock producers like Sarapuk? AFSC offers pasture and forage insurance, but the uptake is scant. AFSC says just 29 per cent of pasture acreage was insured this year. “Typically, it hasn’t been something that producers insure,” says Booth. “A lot of them have their own risk-management strategies.”
Smith, however, faults the program for the low percentage. “The reason so many fewer producers have forage or pasture insurance is they’re not seeing that the insurance programs meet their needs,” he says. After the drought of 2009, his organization and others worked with AFSC to make pasture and forage insurance a more viable option for farmers. “As an industry, we’ve generally supported the strong insurance programs,” says Smith, “so we believe that with the right improvements to forage and pasture insurance, we’d have more producers use it.”
The main reason why it’s such a difficult project is that cattle producers don’t need a payout on what their pasture was projected to produce – they need feed. “If you’re a grain producer, you just suck it up and say, ‘We’ll make money next year,’” says Sarapuk. “When you’ve got 200 hungry cows to feed, it makes a difference.” Sarapuk is one of the few who has pasture insurance, but the payout for his 800 acres was just $16,000, “which doesn’t go very far when you buy hay at $200 a ton,” he says.
This means that despite the spotlight on the $1-billion payout, the livestock producers impacted the most, whose tumult we’ve heard rendered in painstaking detail, will see little to no relief from AFSC.
The government, to its credit, has taken some proactive measures, including tax deferrals on cattle, a 50 per cent reduction in fees for the province’s emergency water pumping program, and hay permits, which allow producers to graze their cattle on crown land and collect feed from ditches or sloughs on crown land. But these are drops in the bucket. Sarapuk says the ditches could contribute a few bales a month, but “wouldn’t even account for a tenth of a per cent of what’s needed.” And the community grazing reserve in Mackenzie County, whose use is administered by the provincial government, will shut farmers out as of September 30. The early deadline is baffling, and the county has formally requested an extension until the end of October, which for Jorgenson alone would add between 100 and 150 bales of hay. Smith, too, agrees that it’d be a boon for the government to make more land available.
This is why it’s so important to see the forest for the trees. There are, indeed, potential solutions that can ease producers’ pain, and the government is implementing them. But some of them are flawed – they don’t go far enough, or they don’t impact enough people. It seems that in shining the spotlight on the $1-billion payout, we’ve passed over some more practical local solutions, and we’ve left the province’s most vulnerable farmers in a precarious position heading into next year.
Reprinted with permission from Alberta Venture.