MANAGE DROUGHT WITH INSURANCE, COST CONTROL, CASH FLOW

Originally published on July 26, 2001

 

The Saskatchewan and Alberta agriculture departments have added drought watch sections to their websites. Their purpose is "to assist producers with decisions about coping with the dry conditions." I checked them out at www.agr.gov.sk.ca and www.agric.gov.ab.ca.

The most intriguing part of the sites was the Saskatchewan provincial map of topsoil moisture conditions.  Areas that are considered very poor or drought afflicted were coloured orange.

 I was surprised by the amount of orange on the map. Most of the province had been coloured in.

No amount of management can alter the devastating effects of drought.  While direct seeding can ensure a good start, without rain we all end up in the same place. So what can we do? This has been the most common question asked in our office recently.

First, control your costs. Planned capital expenditures should be scrutinized and revisited in light of the harvest of a below-average crop.   Incremental operating expenses such as custom swathing and harvesting deserve a second look.

Second, learn about your crop insurance options. If you've got a market for your 2001 crop as winter feed, consider leaving your combine in the shed. Crop insurance can assess your crop in the field and pay you the difference on what's there and what's left on your production guarantee.  Remember that winter feed does not have to be baled to be sold.  It has become more common for farmers to sell their winter feed as a standing crop.  With livestock feed in such a shortage, this market could be your best means of getting the most out of a bad situation.

Third, examine your farm's cash flow as soon as possible.  This will help identify the amount of financing needed to pay your bills.  As a result of this drought, more than a few operating loans will have to termed out this fall.   Early financing will put you in a position to pay your fall bills.

When completing your farm's cash flow, remember that your Net Income Stabilization Account can be accessed early for your 2001 stabilization year through an interim withdrawal trigger. It may be the only way for you to get cash when it's most needed.  If you opt out of NISA, remember that you must wait three years before rejoining.  This is too big of a price to pay, especially if the interim withdrawal trigger would have produced the same result.

 

 

 

 

The Canadian Farm Income Program is "designed to target assistance to Canadian producers who have experienced a severe drop in farming income."  With this kind of program description, you can bet that the federal and provincial governments will be pointing to CFIP as a solution for the 2001 cash shortfall.

In the chart, I have shown an example of how a CFIP payment for 2001 will be calculated.

         

You will see that a strong support line and a collapsing claim year will trigger farm assistance. 

I recognize that there has been considerable frustration with CFIP and the former Agriculture Income Disaster Assistance program.  Just last week we received an AIDA cheque relating to a 1998 application. A three-year wait is not acceptable.  Unfortunately, we cannot afford to forego any government assistance, however flawed the programs may be.

The biggest problem with CFIP 2001 will be the timing of cash receipts.  If these applications follow past trends, then they will not be completed before August 2002.  For this reason, it would make sense for the government to put in place measures that would help drought-afflicted farmers secure an advance on their 2001 CFIP application.

What can the farmer do?  To start, he should ensure that his AIDA-CFIP reference margins are correct. Then he should do his best to have his production and sales records in order. We will be sending our clients crop production books to record their crop production, sales and ending inventory for 2001. We hope this will give us an edge in getting applications done sooner.

We must deal with this drought proactively.  While a holiday might be just what we need to replenish our energy, when we return, we must commit to dealing with all of the obstacles that a below-average crop has put on our doorstep. Denial, procrastination and "ostrich economics" only make matters worse. 

 

Allyn Tastad, certified general accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at allyn@hth-accountants.ca or website www.hth-accountants.ca. He is also involved in the family farm near Loreburn, Saskatchewan.  The opinions expressed in this column are for information only.