Why does the reference margin limit matter?

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The reference margin limit was made part of AgriStability in 2013 and the federal government says removing it will increase payments for farmers from the program by $75 million annually.

But while most farm groups said the change is a positive one, the Canadian Pork Council said it would do “very little” for its members.

How it might impact your farm depends on your circumstances, and it helps to know how the reference margin limit worked.

It was calculated based on an ‘olympic average’ of the farm’s production margins for the previous five years, dropping the highest and lowest years.

A payment would be triggered when a farm’s production margin for a given program year fell more than 30 per cent below its reference margin, and would cover 70 per cent of that decline beyond the 30 per cent level. (The 70 per cent figure is known as the ‘compensation rate.’)

The limit part of ‘reference margin limit,’ however, meant that a farm’s reference margin could not exceed its average allowable expenses for the three years used to calculate it. If it did, program administrators would have applied the lower amount as the reference margin limit.

That said, the provision could not reduce a farm’s reference margin by more than 30 per cent — which, according to the previous program guide, “ensure(d) you have support for at least 70 per cent of your reference margin.”

With the reference margin limit in effect, using Agriculture and Agri-Food Canada’s example of a farm with a reference margin of $249,000 and a reference margin limit of $150,000 in a program year, the applied reference margin would still not be lower than $174,300 — 70 per cent of the $249,000 olympic-average reference margin.

A payment for that farm would thus be triggered if its production margin fell further than 30 per cent below the reference margin. In other words, its payment trigger level would be $122,010.

If, for example, the production margin dropped that year to $80,000 — a decline of $42,010 below the trigger level — the farm would see an AgriStability benefit worth 70 per cent of that net decline, or $29,407.

All the arithmetic makes it confusing but one that is clear from this example is that the compensation rate also matters. After prolonged urging by farm groups, Ottawa had offered to up the rate to 80 per cent. But the Prairie provinces didn’t come on board, saying it was too expensive.

If the 80 per cent compensation rate was used, the payout in the above example would be $33,608.

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