Whether you’re in the AgriStability program or considering getting into the AgriStability program, it’s important that you understand a few program changes that have been made recently.
First, a quick review of how the program works.
In simple terms, AgriStability calculates your profit history, based on your income and your allowable expenses (this includes expenses like fertilizer, chemicals, and seed). If your profit in the current year (the Program Year) is less than 70 per cent of your average profit, you’ll get a payment of $0.70 on the dollar for every dollar you’re below that 70 per cent average level.
Of course, it’s not that simple when you start including the details.
Your profit in the current year, called your Production Margin, is calculated by taking your allowable income less your allowable expenses (on an accrual basis).
Your profit history is called your Reference Margin, and it’s calculated using what they call an Olympic average. This calculation uses the last five years of your history, plus inventory adjustments, drops the highest and lowest years, then averages the three remaining years to calculate your Reference Margin.
AgriStability introduced a Reference Margin Limit, to make sure farmers were not getting program payments higher than their actual expenses. Your Reference Margin Limit is an average of your allowable expenses for the five-year period, again calculated using an Olympic average.
Your Applied Reference Margin (ARM) is the lower of your Olympic Reference Margin and your Reference Margin Limit.
You can trigger a payment when your Production Margin is less than 70 per cent of your Applied Reference Margin.
For easy math, every year for the past five years, you’ve sold $1,000,000 worth of grain, and your allowable expenses have been $400,000. Your Reference Margin, your average profit over the five years, is $600,000. Your Reference Margin Limit, your average allowable expenses, is $400,000. Your Applied Reference Margin is the lower of these two numbers: $400,000. In the Program Year, you’ll trigger a payment only if your Production Margin is less than 70 per cent of $400,000, or $280,000.
The key change
A key change has been introduced for 2018 and beyond.
The change is called the Adjusted Reference Margin Limit.
Now, if your Reference Margin is higher than your Reference Margin Limit you will not be held to the lower limit.
In the example, this changes the Applied Reference Margin to $600,000, you’re no longer limited by your expenses. Now, you will trigger a payment if your Production Margin is less than 70 per cent of this amount, or $420,000 in the example.
In recent years, farms with lower overall expenses have been penalized because their Reference Margin calculation has been well below their Reference Margin calculation. This wasn’t seen as a fair way to calculate losses.
Let’s go back to the example. In the current year, you have allowable expenses of $500,000, and $900,000 in revenues. Your Production Margin is $400,000. Under the previous calculations, you would not trigger a payment. But under the rules for 2018 and beyond, you would trigger a payment. In this case, the Production Margin is less than 70 per cent of the Applied Reference Margin of $420,000.
How much would your payout be? Your Applied Reference Margin was $420,000, and your current year Production Margin was $400,000. That’s a difference of $20,000, but remember, your payment is only $.0.70 on the dollar for this difference. So, you would get a payment of $14,000. ($420,000 – $400,000 = $20,000 x 70 per cent = $14,000)
The Adjusted Reference Margin Limit has helped to level the playing field so that farms that are keeping their expenses down are not penalized for good management practices. Now the program will pay based on what you are actually producing and not based on what you are spending.
In my opinion, the program is now rewarding good management practices instead of penalizing them. This will improve coverage and payment threshold levels for many farms.
Another change that has been made for 2018 is called Simplified Participation.
For producers who are not in the AgriStability program or ones who left and want to get back in, the requirement for financial information has been reduced from five years of information to three years, to make it easier for producers to sign up.
If you are thinking about entering the program you want to get your Reference Margin set as high as possible to give you the best coverage level possible. Before you sign up, do a little number crunching to ensure you are getting the maximum coverage for your farm.
If your past three years have shown good net margins then you will want to consider using only three years of information to get into the program. But if the two years prior to these four years are even better revenue- and margin-wise you will want to include all five years, using the Olympic averaging calculation to see if that will increase your Reference Margin even more. If this is the case, use five years of financials to sign up for the program.
Or, if any of your past three years have been low-margin years, look back to your past five years to see if that will help improve your Reference Margin calculation.
Talk to your accountant to get your historical financial numbers to determine if you should use three or five years to apply. Ask what they will charge you to do your AgriStability paperwork.
If you are comfortable reading your farm’s financial statements, consider filing your annual paperwork yourself to save some fees.
I would suggest you sit down with your AgriStability Advisor so they can show you the program details before committing to anything.