CAIS CAN INFLUENCE A DECISION TO RENT OR CUSTOM FARM

Originally published on April 8, 2004

 

I recently met with a farmer who was considering the impact of the Canadian Agricultural Income Stabilization program on his decision to either hire a custom seeder or cash lease his farm this spring.

He had reviewed his CAIS coverage and wanted to see his farm's estimated CAIS benefits for 2004 in the event of another drought.

We examined three scenarios: cash rental of his farm; seeding the whole farm on a custom farming basis and seeding only half the farm and chemical-fallowing the other half on a custom farming basis.

In alternative 1, one section of farmland has been rented out at $30 per acre or $4,800 per quarter. Property taxes are $3,078 and the gross profit is $16,122.

      

 

 

In alternative 2, one section is seeded to wheat. Grasshoppers are fought by spraying Decis twice, incurring a pesticide cost of $5,120 and a high-clearance sprayer application cost of $3,840. Fighting grasshoppers costs $8,960. The drought continues and the farm yields only 12 bushels an acre. Crop insurance pays the farmer up to his individual yield but only after harvesting costs were incurred.

Prior to CAIS, the farm loss would be $17,112. Prior farm profitability has given the farm some CAIS protection, and that gives an estimated 2004 net CAIS payment of $35,573. There will also be a refund of crop insurance premiums due to the farmer being labelled "CAIS disadvantaged." After CAIS and the crop insurance premium recovery, the farm generates a gross profit of $21,507.

In alternative 3, wheat is seeded to half the acres while the rest is chem-fallowed. The grasshopper fight continues on the seeded area and control cost is halved to $4,480. Yields and individual yield coverage remain the same as in alternative 2. The reduced acres invoke a structure change in the CAIS calculations and reduce the 2004 net CAIS payment to $20,474. Again, the farmer is "CAIS disadvantaged" and the crop insurance premiums are refunded. The final gross profit is $5,182.

In reviewing this, the farmer had some questions.

How secure is the 2004 CAIS entitlement? Many farmers' response to all government assistance is "I'll believe it when I see it." Unexpected structure changes, lack of provincial funding and other income plan interpretations have left more than a few farmers with adjustments that have reduced and even eliminated previously estimated assistance.

Also, the farmer has to be able to cash flow his final decision. Renting the farm is easier on cash flow than paying for inputs and operators.

As well, the farmer has to examine the risk-return payoff. Custom farming is more risky, but has a larger upside. If the farmer has an average to better year, he exceeds his cash rental alternative. CAIS seems to cover the downside of custom farming while keeping the up side available.

In the end, the farmer decided to custom farm his entire operation. This will surprise many, considering the attractive cash rent. His chem-fallow decision will be made closer to spring, but he knows any move to chem-fallow will reduce CAIS entitlement.

CAIS should have an impact on farm decisions this spring. Farmers would be wise to examine their CAIS support levels and understand the effect of reducing their seeded acreages.

 

 

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.