Regulations Amending the Agricultural Marketing Programs Regulations: SOR/2024-53

Canada Gazette, Part II, Volume 158, Number 8

Registration
SOR/2024-53 March 25, 2024

AGRICULTURAL MARKETING PROGRAMS ACT

P.C. 2024-269 March 25, 2024

Her Excellency the Governor General in Council, on the recommendation of the Minister of Agriculture and Agri-Food with the concurrence of the Minister of Finance, makes the annexed Regulations Amending the Agricultural Marketing Programs Regulations under paragraph 40(1)(c)footnote a of the Agricultural Marketing Programs Act footnote b.

Regulations Amending the Agricultural Marketing Programs Regulations

Amendment

1 Subsection 10(6) of the Agricultural Marketing Programs Regulations footnote 1 is replaced by the following:

(6) For the purposes of subsection 9(1) of the Act, the amount fixed by regulation is $250,000 for program year 2024.

(7) The following definitions apply in this section.

Coming into Force

2 These Regulations come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary

Issues: Canada’s agricultural producers continue to deal with the lasting impacts of global economic factors, which have resulted in high interest rates and increased costs for some farm inputs (seed, pesticides, etc.). While there appears to be some improvement in the sector since 2023, it is expected that producers will still face cash flow challenges, as they will need to pay these expenses prior to growing their commodities this coming spring and summer. Such financial pressures in the sector are also contributing to food inflation.

Description: The amendment to the Agricultural Marketing Programs Regulations would temporarily set the interest-free limit under the Advance Payments Program (APP) at $250,000 for the 2024 program year. The current overall loan limit of $1 million will remain the same.

Rationale: This amendment will reduce the cost of borrowing under the APP and improve producer access to cash flow so they can manage their operating costs over the upcoming 2024 growing season and into the fall. It will help stabilize the primary agricultural sector, which is crucial for food security, stabilizing food prices, and mitigating the impacts of inflation on the cost of living for all Canadians.

Issues

Over the past several years, Canada’s agricultural producers have faced a number of factors that have negatively impacted their access to affordable cash flow and their bottom lines. In 2022, the Russia-Ukraine conflict began, disrupting supply chains and increasing farm input costs, including fuel and fertilizer. These pressures compounded in 2023 as a result of general inflation, further increases to the cost of key inputs, continuing supply chain disruptions, and higher debt-servicing costs due to a surge in interest rates.

In 2022, rising global oil prices contributed to inflation, and inflation concerns led the Bank of Canada to increase interest rates. As a result, interest expenses in the sector increased by 26.1% to $5.0 billion in 2022. Interest expenses, accounting for about 7% of total farm expenses, are forecasted to further increase by 36.6% in 2023, as inflation concerns continued to drive monetary policy decisions by the Bank of Canada. While interest rates are expected to remain elevated in 2024, they seem to have stabilized and there is some expectation that the Bank of Canada may begin to reduce them later in 2024.

According to Farm Credit Canada (FCC), the Canadian crop input market (fertilizer, chemical, seed, and fuel) is projected to have grown by 26.1% in 2022, reaching an estimated record $21.8 billion in sales. Most of this growth was driven by increases in fertilizer and fuel prices stemming from global supply chain disruptions and the war in Ukraine. FCC is projecting a further 5.9% increase in 2023 to $23.1 billion, making the 2023 crop the most expensive ever planted. According to an FCC report from September 2023, while the pricing of chemicals and seed remain uncertain going into 2024, other key input prices, such as fertilizer and fuel, have softened somewhat over the past year.

Financial pressures in the agricultural sector are contributing to food inflation. According to the monthly Consumer Price Index data from September 2023, prices for food purchased from stores have been increasing at a faster rate than overall inflation for 22 consecutive months on a year-over-year basis since December 2021. Economy-wide prices were 3.8% higher in September 2023 than they were in the same month in 2022. In September 2023, consumer prices for food from stores were 5.8% higher than they were in September 2022.

Agriculture and Agri-Food Canada’s (AAFC) latest farm income forecast results projected an increase of 11.8% ($25.9 billion) in net farm income in 2023 relative to the record of $23.2 billion in 2022. These forecasts, combined with potential reductions in interest rates and softening input prices, seem to show some improvement in the sector heading into the 2024 crop year.

As the APP provides Canada’s primary agricultural producers with access to cash advances over the growing season, it is best suited to respond to their cash flow needs. Canada’s agricultural producers have an important role to play in minimizing the impacts of food inflation and security. Providing additional interest saving benefits and making the APP more affordable will help alleviate residual cash flow challenges, due to elevated borrowing costs and high costs for some necessary farm inputs. As this amendment is targeting primary producers of agricultural products, it will directly impact primary food production, support a stable and consistent food supply and help to reduce some of the pressures resulting in food inflation and economic volatility in the sector.

Background

The APP is a statutory program under the Agricultural Marketing Programs Act and its regulations. It is a federal loan guarantee program that provides eligible agricultural producers with access to low and no-interest cash advances to increase their cash flow over the production and marketing period and increase their marketing opportunities, allowing producers to sell when it is most opportune for them.

Under the program, eligible producers can access cash advances of up to 50% percent of the estimated market value of eligible agricultural products being produced or held in storage. The maximum APP advance is $1 million (i.e. $1 million against a crop value of $2 million), with the federal government typically paying the interest to the lender on the first $100,000 advanced to each producer (referred to as the interest-free limit). Most major agricultural commodities are eligible under the program, including grains and oilseeds, fruits and vegetables, and livestock.

The program is administered by 27 industry associations (APP administrators) across the country, which issue advances using credit that they are able to negotiate with their lenders (banks, credit unions, etc.). Because of the federal guarantee, APP administrators are able to negotiate lower interest rates, which allows them to offer competitive interest rates to producers on the interest-bearing portion of advances.

Advances are typically available starting on April 1 of each year until March 31 of the following year (when advances for the next program year become available). Producers are required to make repayments within 30 days of a sale of the commodity on which an advance was obtained, with up to 18 months to fully repay advances on most eligible commodities, including grain and oilseed crops (with up to 24 months for cattle and bison advances).

For example, the application deadline for 2023 advances closes on March 31, 2024, with a repayment deadline of September 30, 2024. New advances for the 2024 program year will be available beginning on April 1, 2024, with an advance deadline of March 31, 2025, and a repayment deadline of September 30, 2025 (March 31, 2026, for cattle and bison advances).

On average (based on 2016–2021 data), and under normal program parameters, the APP issues $2.5 billion in advances to over 20 000 producers and pays approximately $17.3 million in interest on behalf of producers. However, interest rates were much lower during these years, so costs were also lower. As APP advances are guaranteed under the Act, where necessary, AAFC will repay defaulted advances to the lender, which then become debts to the Crown. This, however, is a rare occurrence under the program (only around 0.91% of total advances) and on average, 50% of defaulted amounts are recovered.

In 2022, the interest-free limit was increased from $100,000 to $250,000 for the 2022 and 2023 APP program years. For the 2022 program year, the APP provided $3.5 billion in total advances to 18 804 producers across Canada. A total of 9 568 producers were able to benefit from the interest-free limit increase, and of these, 3 273 received the maximum interest-free benefit of $250,000 interest-free. Budget 2023 further increased the interest-free limit to $350,000 for the 2023 program year. To date, 19 929 producers have received advances totalling $4.1 billion. A total of 11 799 producers have received interest-free advances above $100,000 and of these, 6 859 producers have received interest-free advances above $250,000. A total of 4 493 producers received the maximum interest-free benefit of $350,000 interest-free.

Objective

The regulatory amendment would temporarily increase the interest-free limit under the APP from $100,000 to $250,000 for the 2024 program year. The current overall loan limit will remain at $1 million. The amendment is anticipated to have a positive impact for nearly 12 000 primary agricultural producers by decreasing the cost of borrowing under the program and, therefore, increasing their access to cash flow over the 2024 growing season. This amendment would reduce the interest-free limit by $100,000 from $350,000 in 2023 for reasons of fiscal prudence and some improvements in the sector heading into 2024, as mentioned above. It is, however, still expected that this temporary measure will help stabilize the primary agricultural sector, which is crucial for food security, stabilizing food prices, and mitigating the impacts of inflation on the cost of living for all Canadians.

Description

The amendment will require making the following amendments to section 10 (Fixed Amounts) of the Agricultural Marketing Programs Regulations.

Adding the following as the new subsection 10(6):

Renumbering the current 10(6) to 10(7) and adding the following:

Regulatory development

Consultation

There has been sustained media coverage concerning the many challenges farmers are facing, including the impacts of the St. Lawrence Seaway strike, increased farm input costs, and inflation. Farmers also continue to face impacts of extreme weather conditions and events.

Media coverage generated on the increase to the APP interest-free limit for 2023 announced in Budget 2023 was largely neutral to positive in both traditional and social media. Stakeholder reactions were also largely positive. Some associations expressed hope that the increase in the interest-free portion would continue beyond 2023–2024.

Through consultation with APP administrators, it was determined that producers would welcome the additional interest savings in 2024–2025. With the interest-free limit dropping from $350,000 for 2023 to $250,000 for 2024, however, the reaction from industry and media is expected to be neutral to negative.

Modern treaty obligations and Indigenous engagement and consultation

An assessment of modern treaty implications was conducted on the amendment. The assessment did not identify any modern treaty implications or obligations. It is anticipated that producers in modern treaty areas could be recipients of the cash advances and benefit from the increased interest savings, where they meet the program’s eligibility criteria. However, Indigenous partners have indicated that financial resources for agricultural opportunities are difficult to access due to multiple factors, including legal impediments under the Indian Act. AAFC will continue to engage with First Nations, Inuit, and Métis groups to help to improve access to capital. AAFC will also monitor and assess for implications during the delivery of funds.

Instrument choice

Under the Agricultural Marketing Programs Act, an increase to APP limits must be made by obtaining approval of the Governor in Council to amend the Agricultural Marketing Programs Regulations. The Minister of Finance must concur with the program change.

Regulatory analysis

Benefits and costs

The benefit to producers of the program change will be in the form of increased interest savings on advances over $100,000 and up to $250,000. It is expected that the program change will provide approximately 11 950 participants with a combined $58.7 million in interest savings for the 2024 program year, with average incremental savings of $4,916 per producer depending on the value of their 2024 advance. These estimates are based on average advances over $100,000 experienced in 2022 and 2023, no further increases to the current prime rate of 7.20%, and the average rate of interest charged by APP administrators across the program.

The total estimated cost to the government of the program change includes the cost of bearing the added interest payments for 2024, as well as cost related to defaulted advances paid by the government under the guarantee. It is expected that this amendment would result in incremental costs to the government of $63.7 million, with $56 million in interest costs split between the 2024–2025 and 2025–2026 fiscal years, and the remainder being for default costs (net of recovered amounts). These estimates are based on average advances over $100,000 experienced in 2022 and 2023, a small decrease in defaulted advances (less than 1%), and no further increases to the current prime rate of 7.20%.

To cover the costs of delivering the program, the not-for-profit APP administrators charge producers interest rates on the interest-bearing portion of advances slightly above the rate they pay their lenders (i.e. an interest spread). As a result, the producer interest savings will be slightly higher than the interest cost to government.

They also charge certain fees, such as administrative and default management fees. Fees vary significantly across the program and are determined by the administrator’s business model and the size of its APP clientele. To offset the loss of interest spread revenue resulting from the interest-free limit increases in 2022 and 2023, five APP administrators increased their fees. It is expected that fee increases will continue as a result of the increase to the interest-free limit to $250,000 for the 2024 program year.

Through this amendment, the government would provide a transfer payment to producers. However, in doing so, it would generate corresponding benefits in the form of an increase in the interest-free portion of APP advances in order to provide participating farmers with access to affordable financing at a time when they are facing significant cash flow pressures resulting from increased interest rates and farm input costs.

Small business lens

Analysis under the small business lens concluded that the regulatory amendment would impact small businesses, as defined under Treasury Board Secretariat’s (TBS) Policy on Limiting Regulatory Burden on Business (fewer than 100 employees or less than $5 million in annual gross revenues). The majority of Canadian farms fall under this definition. The amendment is not anticipated to result in additional direct costs to small businesses. It would increase the affordability of the APP and, therefore, increases farming businesses’ access to credit with which to cover their operating costs over the growing season.

One-for-one rule

The one-for-one rule does not apply. The amendment would not result in an increase or decrease in administrative burden to farming businesses.

Regulatory cooperation and alignment

The amendment is not anticipated to result in any regulatory cooperation and/or alignment issues and is not related to a work plan or commitment under a formal regulatory cooperation forum.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, an initial review was conducted for this amendment. The review indicated that the extension of the temporary increase to the interest-free limit does not require further environmental analysis because it is seeking renewal or extension to an existing program and is of low environmental risk.

Gender-based analysis plus

A gender-based analysis plus (GBA+) assessment was undertaken for this amendment. Its conclusions were as follows.

The majority of APP advances are issued on grains, oilseed and pulse commodities, the production of which is dominated by men. In 2021, women represented 26% of farm operators in these sectors. In 2021, 60.5% of farm operators were aged 55 and older, while 8.6% of operators 35 and younger. Given the demographics of the sector, the amendment would mainly support farms where the operation is managed by white males over the age of 55 years. However, in recent years, an increase in farms operated by underrepresented groups, such as women and Indigenous individuals, has been noted. It is likely that underrepresented or marginalized groups would benefit from this amendment in proportion to their current participation in the sector.

As this amendment would target primary food producers, the government would support a stable, consistent food supply, help producers better manage their finances and withstand economic volatility, and help reduce pressure on food inflation, which will benefit the general population. It is also expected that those employed by farms which utilize the APP would benefit from the increased support provided to their employers.

This amendment would generate positive economic impacts in regions where agriculture is a main economic driver. Further, it supports jobs and competitiveness in the agriculture and agri-food sector, which will have a positive impact on all demographic groups.

Implementation, compliance and enforcement, and service standards

For the majority of producers, the 2024 program year of the APP will begin on April 1, 2024. Should the amendment be approved, once it comes into force, the government will announce that it has temporarily set the interest-free limit at $250,000 for the 2024 program year.

AAFC will contact APP administrators to discuss this program change and what will be needed to roll it out to producers in time for the start of the 2024 program year. As in past years, federal officials will work with administrators to implement the program change, including drafting and amending 2024 advance guarantee agreements, updating program documents, promoting the extension of the interest-free limit increase, and taking any other steps necessary.

Contact

Justin Sugawara
Director
Financial Guarantee Programs Division
Programs Branch
Agriculture and Agri-Food Canada
Email: justin.sugawara@AGR.GC.CA