285

30 (November 1982) Cdn. J. of Agric. Economics

An Analysis of Alternative Income Stabilization Programs

for B.C. Beef Producers George Kennedy and Yan Sing Tang*

This paper uses simulation to estimate the costs and effects of provincial government programs designed to stabilize the incomes of B.C. beef producers. assuming that these programs had operated over the period 1959-78. A rnathemaiical model of the British Columbia beef industry was constructed and successive runs were made, each assuming operation ofone of the threeprograms: the 1977 and I980 Farm Income Assurance Programs (FIAPs) and a guaranteed price scheme. Al l rhree programs were found to have a similar impact on increasing producer incomes, but FIAP(1980) was inferior in terms of its effecf on reducing income variability. The income gains to producers dflered depending on whether calves, cayyearlings or yearlings were involved.

Dans cette communication, on utilise la simulation pour evaluer les cohs et les effers des programmes provinciaux visanr a stabiliser les revenus des producreurs de boeufs de C. B. On suppose que ces programmes ont ere en vigueur durant la periode 1959-78. On a bari un mode‘ le mathimatique de I’industrie du boeuf en C. B. et erudii plusieurs possibilites. chacune d’elles ayant comme hypothese que I’un des trois programmes suivants etait en vigueur: les programmes d‘assurance de revenu agricole de I977 ei 1980 (FIAP) et un plan de prix garanti. On a trouvl. que ces troisprogrammes avaient comme effet commun d’augmenter les revenu du producreur, mais FIAP (1980) n’avait pas autant fait diminuer la variabiliti des revenu que les deux autres programmes. Les gains en revenus pour les producteurs dyfiraient, suivant qui’l s’agissait de veaux, de veaux d’un an ou dbutres animaux dirn an.

Provincial and federal governments in Canada view the income instability facing farmers as an important problem. To alleviate this problem, govern- ments have implemented a variety of income stabilizing measures. In British Columbia, the provincial government provides deficiency payments to beef producers under its Farm Income Assurance Program (FIAP). This study examines the 1977 and 1980 versions of FIAP and a guaranteed price scheme for stabilizing the incomes of B.C. beef producers.

The purpose of this paper is to provide estimates of the costs and effects of the above income stabilization programs. These estimates will be helpful to provincial policy makers in designing improved programs and to both federal and provincial policy makers faced with the task of harmonizing federal and provincial programs. Agriculture Canada’s recent discussion paper, “Strategy for the Agri-Food Sector,” recommends that new income stabilization programs with producer participation be developed.

*Department of Agricultural Economics. University of British Columbia The research reported in this paper was conducted under ARDSA project no 271025

‘Canadian Agricultural Economics Society. 1982

286

Methodology This study uses simulation to estimate the likely costs and effects of

alternative income stabilization schemes for B.C. beef producers. The methodology and specific model used follow closely an earlier study of income stabilization for B.C. hog producers (Kennedy and Palacios). A mathematical model of the B.C. beef production system was built, including important supply demand relationships and operating features of alternative stabilization schemes. Experiments were then performed on the model, involving successive runs with each assuming operation of a different stabilization scheme.

The model used is dynamic and can simulate the behavior of the B.C. beef system over any period that is appropriate, on a monthly basis. The model is non-optimizing, given that the objective is to determine the costs and effects of alternative stabilization programs, rather than choose an optimal one. Finally, the model is deterministic. Although stochastic models can often better represent agricultural production systems, it is usually at the cost of increased complexity (Naylor).

The model attempts to represent the beef production system in B.C. through a set of equations. It contains four modules.

1. The equilibrium module contains prices, quantities, and production costs occurring in the absence of any government stabilization schemes.

2. The farmer production decision module provides production responses by farmers to changes induced by stabilization schemes. Equations of this module can be grouped into three categories.

(a) behavioral equations, which include parameters which allow up to three farmer responses to government stabilization efforts:

(i) holdover price response, which allows farmers to feed calves and/or yearlings for a longer or shorter time in response to changes in their respective prices (ii) heifer retention price response, which allows farmers to retain more or less heifers for breeding in response to changes in the price of calves and/or yearlings (iii) heifer retention non-price response, which allows farmers to retain more or less heifers in response to changes in the stability of the productive environment resulting from government intervention'

(It should be noted that the model does not provide a farmer response to price changes in terms of cows culled. If data on cow numbers were available, a culling response could be incorporated into the model.)

I The possibility of this non-price supply response has been recognized by Just and by Martin and Mac- Laren.

287

(b) flow relationships and accounting identities, which incorporate beef production assumptions relevant to B.C. and account for changes in production resulting from earlier farmer responses. Given that produc- tion constraints are likely to exist, the model includes upper bounds to restrict changes in heifer retention as well as calves and yearlings held 0ver.l

(c) market identity, which ensures that all beef produced in B.C. is eventually purchased. Demand functions for calves and yearlings are assumed to be perfectly elastic given that market prices in B.C. are largely determined outside the province.)

3. The government programs module presents operational details for alternative stabilization schemes for B.C. beef producers.

4. The summary measures module computes statistical parameters for purposes of summarizing the impact of government programs on important policy variables.

Model Validation Because the B.C. Beef Producers' Income Assurance Program has been in

effect since 1974, historical validation was feasible. To compare quantity predictions of the model with actual data, the model was run over the period January, 1974, to December, 1978. To show the ability of the model to reproduce actual results Theil's U inequality coefficients were calculated. The calculated coefficients were 0.06 1 for calves, 0.056 for yearlings, and 0.064 for calf-yearlings. These coefficients show that the model has the ability to reproduce reality.' The coefficients are particularly close to zero, which would indicate perfect ability to reproduce reality. This closeness is expected in the sense that the model predicts only changes in supply which result from government intervention, as opposed to total supply.

Values for the technical parameters of the model were determined in consultation with B.C. Ministry of Agriculture and Food beef specialists. Where applicable, values for the behavioral parameters were based on previous studies relevant to beef cattle supply in Western Canada (Kerr; Kulshreshtha; Martin and Haack; Tryfos). The behavioral parameters representing the three farmer responses referred to earlier were selected as

2

3 4

These upper bounds ere particularly important in the m d e l . given that cow culling decisions are assumed to be unaffected by the stabilization schemes. Tryfos has given evidence that US. livestock prices largely determine Canadian livestock prices. Additional validation suppon for the twenty year period is given in Tang.

288

follows: (i) holdover price response, with appropriate parameter values selected via the validation procedure; (ii) heifer retention price response, with appropriate parameter values based on estimates from Martin and Haack; and (iii) heifer retention non-price response, which was assumed to be zero, lacking research evidence of an appropriate parameter value.

Several experimental runs were conducted using different parameter values. Changes in each of the summary measures were in the expected direction. This gives support to the internal consistency of the model.

This model could be extended to include federal stabilization programs. This would allow specific questions regarding the harmonization of federal and provincial programs to be answered. For example, what is the impact of replacing current programs for B.C. beef producers - i.e., the federal Agricultural Stabilization Act and the provincial FIAP - with the federal government’s proposed “GM loo”? Or, what level of guarantee under “GM 100” would provide equivalent level and stability of income to the current programs?

Once the model was extended to include federal programs, it could be run on a national level by simply changing the data base. It could then be used to predict the impact (including treasury costs for the federal government and any producer contributions) assuming different national programs and alternative scenarios for grain and beef prices. Martin has recently simulated an econometric model of the North American beef sector to compare federal price and margin stabilization programs.

Results This paper provides results from simulating the following three stabilization

schemes, assuming they had operated over the 20 year period, 1959-78: (1) the B.C. Beef Producers Income Assurance Program as it existed in 1980, referred to as “FIAP (1980)”; (2) the B.C. Beef Producers Income Assurance Program as it existed in 1977, referred to as “FIAP (1977)”; and (3) a guaranteed price scheme.

The effects of each of these schemes as predicted by the model are presented below. The effects are measured in terms of their impact on what are considered to be key policy variables.

Although the model has been shown to be valid, it is important to recognize that the simulation results which follow are dependent on the parameter values and relationships assumed in the model. The results also depend on the data used. Market prices were obtained from Agriculture Canada’s Livestock Market Review. Necessary production data for this study had to be compiledS and are reported in Palacios and Kennedy. Cost of production data were

5 Published production data needed lo be adapted lo make it consistent with specific eligibility requirements of FIAP indemnity payments. For example. only heifers and steers of B.C. origin are eligible for the yearling indemnity.

289

derived from the B.C. Ministry of Agriculture and Food‘s beef income assurance model.6

Effects of the B.C. Beef Producers Income Assurance Program (1980)

The B.C. Farm Income Assurance Program (FIAP) was introduced by the B.C. government in 1974. FIAP currently applies to about a dozen comodities, including beef. In times of low market returns, producers receive an indemnity payment based on cost of production calculations. The program was set up to be “actuarially sound” with participating producers and the provincial government paying premiums each period.

The main features of FIAP (1980) are, first, that when cost of production exceeds market price, farmers receive an indemnity equal to 100 percent of the difference (i.e., “gross deficit”); and second, that farmers pay an advance cash premium which is matched by the provincial government, plus an additional premium based on cost of production and indemnity payments in the current year.’

As with FIAP (1977), FIAP (1980) provides indemnities at the calf, calf-yearling, and yearling levels. Beef calves born and marketed within the same year are eligible for the calf subsidy, to a maximum of 400 lbs. For calves marketed the year after birth, the first 400 lbs. are eligible for the calf-yearling subsidy and the next 450 Ibs. are eligible for the yearling subsidy (i.e., to a maximum of 850 lbs.). Unlike FIAP (1977), FIAP (1980) has extended coverage to finished animals, but this additional subsidy is not examined in this paper due to the lack of data.s

The model was initially run assuming the absence of any government program. The results are reported under “No Scheme” in Table 1. For example, it was estimated that beef production at the calf level over the period 1959-78 would have averaged 15.7 million pounds per year, assuming no government intervention.

The model was then run assuming FIAP (1980) had operated over the period 1959-78. The results for this second run are also shown in Table 1. For example, it was estimated that beef production at the calf level would have averaged 18.3 million pounds per year under FIAP (1980). Since the

6 These cost of production estimates are determined through negotiations between the B.C. Ministry of Agriculture and Food and the B.C. Federation of Agriculture. Their realism. however. is not critical for achieving comparative results of alternative stabilization schemes.

This additional premium is computed as follows: ( i ) i n years when the gross indemnity is no greater than 5 percent of production cost. the additional producer premium per pound equals the full gross indemnity: (ii) in years when the gross indemnity is greater than 5 percent but no greater than 3 I percent of production cost, the additional producer premium per pound equals 50 percent of the gross indemnity: and (iii) in years when the gross indemnity is greater than 3 I percent of production cost. the additional producer premium per pound equals 50 percent of the gross indemnity less the initial advanced premium payment.

Now that cost of production data for finished animals are available, the analysis could be extended to incorporate the subsidy on finished animals.

7

8

290

introduction of FIAP (1980) was the only change between this run and the initial “No Scheme” run, differences in results can be attributed to the program. These differences are reported in Table 1 and imply the following effects of FIAP (1980), had it operated from 1959-78.

1. Average calf production would have increased 2.6 million pounds per year, while yearling and calf-yearling production would have decreased 0.4 and 0.3 million pounds per year, respectively.

2. Effective beef prices (i.e., market prices plus any indemnities) would have increased $5.24 per cwt. for calves, $2.44 per cwt. for yearlings, and $6.24 per cwt. for calf-yearlings.

3. Beef producer gross revenue would have increased $1.9 million per year for calves, $0.8 million for yearlings, and $0.9 million for calf-yearlings.

4. The absolute variability of beef producer gross income from one year to the next would have been reduced. This is indicated by a reduction in standard deviation of $0.2 million per year for calves, $0.6 million for yearlings, and $0.7 million for calf-yearlings.

Table 1: Estimated Effects of FIAP (1980), 1959-78

FIAP( 1980) Inrlemn i t y

Level N o Scheme 1 0 0 % D i f f e r e n c e

1. Level of Beef P r o d u c t i o n Calf 15.7 18.3 2.5

( a v e r a g e per y e a r i n Y e a r l i n g 31.0 30.6 -.4 m i l l i o n pounds) Cal f -Year l ing 14.1 13.8 -.3

T o t a l : 60.9 62.8 1.9

2. Level of E f f e c t i v e Beef Cal f 29.50 35.74 5.24 P r i c e Received by Averaye Y e a r l i n g 29.38 31.82 2.44 Farmer ( a v e r a g e per month Cal f -Year l ing 29.50 35.74 6.24 i n d o l l a r s per hundred weight )

3. Level of Beef Producer Cal f 5.1 7.0 1.9 Gross Revenue a Y e a r l i n g 9.7 10.5 .8 ( a v e r a g e per y e a r i n Cal f -Year l ing 4.5 5.4 .9 m i l l i o n nollars) T o t a l : 19.3 22.9 3.6

4. Absolute V a r i a t i o n of C a l f 2.8 2.5 -.2 Producer Gross Incomeb Y e a r l i n g 3.2 2.6 -.6 ( a v e r a g e s t a n d a r d Cal f -Year l ing 2.3 1.6 -.7 d e v i a t i o n p e r y e a r i n m i l l i o n dollars)

‘Producer gross revenue is the product of beef output and beef price. bGross income is defined as the product of beef output and gross margin (where gross margin IS equal to total receipts less total variable costs).

29 1

Comparative Effects of FIAP (1980) This section compares FIAP (1980) with its predecessor, FIAP (1977), and a

guaranteed price scheme. FIAP (1977) differed from FIAP (1980) by providing farmers with an indemnity equal to 75 percent (as opposed to 100 percent) of the gross deficit, and by requiring producers to pay one third of total premiums, the provincial government two thirds. Total premiums were based on a five year moving average ratio of total indemnities and total beef output. Unlike FIAP (1980), there was no additional premium based on cost of production and indemnity payments in the current year.9

The guaranteed price scheme to be considered differs from FIAP (1980) and FIAP (1977) first by guaranteeing a price (via indemnities) equal to 90 percent of the average market price over the previous five years plus the difference between current cost of production and average cost of production over the preceeding five years,IO and second, by not requiring producers to pay a pre- mium.

Comparative effects for each of these schemes are given in Table 2. They are highlighted below, assuming (in turn) that each had operated over the period 1959-78.

1. FIAP (1980) would generate the largest total beef production (62.8 million pounds per year).

2. Producers would receive the highest effective prices under FIAP (1977) for calves ($38.04 per cwt.), for yearlings ($32.27 per cwt.), and for calf-yearlings ($38.35 per cwt.).

3. Producers would receive the highest gross revenues under FIAP (1977) for calves ($7.7 million per year) and calf-yearlings ($5.8 million per year). Producers of yearlings would receive the highest revenues under FIAP ( 1980) ($10.5 million per year).

4. FIAP (1977) would provide the least variable producer gross income for calves, yearlings, and calf-yearlings (standard deviations equal to I .O, 1.7 and 0.5 million dollars per year, respectively).

5. Producers would pay the least premiums under the guaranteed price scheme (none), the most under FIAP (1980) ($3.8 million per year).

6. Net government payment would be least under the guaranteed price scheme ($2.3 million per year), and most under FIAP (1977) ($3.9 million per year).

Net government payment equals net producer receipts, i.e., the amount of

9 Both FlAP (1977) and FlAP (1980) set allowable participation levels. FlAP (IYLIO) increased these levels and also imposed a scale-down in the indemnity rate once an individual rancher had received an initial $20.000 per annum. Because these changes apply a1 the individual rancher level. the aggregate model used in this study is unable to incorporate them. The model can. however, limit expansion of aggregate production via the upper bounds on heifer retention and hoIdovers of calves and yearlings.

10 Note that this method of calculating a guaranteed price is similar to the method used under the Canada Agricultural Stabilization Act.

292

government payment producers are left with after paying any premiums. For example, for calves under FIAP (1980), total government contribution would be approximately $2.8 million per year, producer premiums would be !§ 1.7 million, leaving $1.1 million of net producer receipts. Net producer receipts would be greatest under FIAP (1977) for calves ($1.7 million per year) and calf-yearlings ($1.4 million per year). Producers of yearlings would receive the greatest net receipts under FIAP (1980) ($1.0 million per year). Net producer receipts would be lowest for all three categories of animals under the guaranteed price scheme. Table 2: Comparative Effects of FIAP (1980), 1959-78

Guaranteed P r i c e

FIAP(1980) FIAP( 1977) Scheme Indemnity Indemnity 90%

100% 75% Guarantee

1. Level of Beef Product ion

(average pe r year i n mi l l i on pounds)

2 . Level of E f f e c t i v e Beef P r i c e Received

by Average Farmer (average per month in

d o l l a r s per hundred weight)

3. Level of Beef Producer Gross Revenuea

(average per year in coillion d a l l a r s )

4. Absolute v a r i a t i o n of producer g ross

incomeb (average etandard dev ia t ion

pe r year i n mi l l i on d o l l a r s )

5. Total Producer Premium

(average pe r year i n mi l l i on d o l l a r s )

6 . Bet Government Paymentc

(average pe r year i n mi l l l on d o l l a r s )

Calf

Yearling

Calf-Yearling

Total :

Calf

Yearl ing

Calf-Yearl ing

Calf

Yearl ing

Calf -Yeariing

Total:

Calf

Yearling

Calf-Yearling

Calf

Yearling

Calf-Yearling

Total :

Calf

Yearl ing

Calf-Yearl ing

To ta l

18.3

30.6

13.8

62.8

34.74

31.82

35.74

7.0

10.5

5.4

22.9

2.5

2.6

1.6

1.7

.7

1.4

3.8

1.1

1 .o

1.1

3.2

14.4

30.1

13.5

62.0

38.04

32 .27

38.35

7 . 7

10.3

5.8

23.8

1 .O

1.7

.5

.7

- 2

.5

1.4

1.7

.8

1.4

3.9

16.4

30.8

1 3 . 8

6 1 . 0

34 .17

31.88

32 .82

6.3

10.4

5 . 1

21.7

1.2

2.0

.8

0.0

0.0

0 . 0

0.0

.9

.7

-6

2.3

'Producer gross revenue is defined as the product of beer output and beef price. bGross income is defined as the product of beef output and gross margin (where gross margin is equal to total

'Net government payment equak net producer receipts. receipts less total variable costs).

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Since each of these schemes involves different expenditures from the provincial government as well as producers, it is interesting to compare them on the basis of net government expenditure. This is done for changes in beef producer gross revenue level and income variability in Table 3, for each category of animal.

Table 3: Effectiveness of Alternative Schemes per $1,000 Net Government Payment per Year, 1959-78

Guaranteed Price

FIAP( 1980 ) FIAP( 1977 ) Scheme Indemnity Indemnity 90%

1 0 0 % 75% Guarantee

1 . Increase i n level of beef Calf 1,634 1,589 1,364

producer gross revenue per Yearl ing 808 726 94 3

$1,000 n e t government Calf-

payment per year

(average per year in d o l l a r s )

Yearl ing 832 895 873

2. Reduction in absciliite Cal E

v a r i a t i o n o€ producer gross Yearl ing

income per $ 1 , 0 0 0 n e t Calf-

government payment per year

(average standard deviat ion

per year in d o l l a r s )

--___

Yearl ing

202 1,069 1,742

647 I, 746 1,733

623 1,293 2 , 3 2 6

For each $1,000 of net government payment per year to calf producers, gross revenue would be increased the most under FIAP (1980) ($1,634 per year). For yearlings, gross revenue would be increased the most under the guaranteed price scheme ($943 per year), and for calf-yearlings it would be increased the most under FIAP (1977) ($895 per year).

For each $1,000 of net government payment per year to calf producers, absolute variation in gross income would be reduced the most under the guaranteed price scheme ($1,742 per year). For yearlings, variation in income would be reduced the most under FIAP (1977) ($1,746 per year), and for calf-yearlings it would be reduced the most under the guaranteed price scheme ($2,326 per year).

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It is also of interest to compare the impacts of the alternative schemes assuming government expenditures were equal under each. This can be simulated by lowering the indemnity level of FIAP (1977) from 75 to 59 percent and raising the guarantee level of the guaranteed price scheme from 100 to 106 percent. This equates the respective net government payments of the two programs to that of FIAP (1980) (i.e., $3.2 million per year). The results of these runs are given in Table 4.

Table 4: Comparative Effects of FlAP (1980), 1959-78, Assuming Equal Net Government Payment

Guaranteed Price

e t A W CiYJ I BLl\P( 1977 ) Scheme 1n.lennity indemnity 106'1

iooe 59% Guarantee

1. Level of Beef Product ion Calf 18.3 18.3 17.3

(average pe r year in mil l ion pounds)

2. r ave l of E f f e c t i v e Beef P r i ce Received

Average Farmer (avers- per month in

d o l l a r s per hundred weight)

3. Level oe ser f ~c,.iuc:ec CCQRS Revenue'

(average per year in mi l l i on d o l l a r s )

4. Absolute v a r i a t i o n of producer g ross

incomeb (average s tandard dev ia t ion

pe r year i n mi l l i on d o l l a r s )

5 . Tota l Producer Premium

Yearl ing

Calt-Year1 i n 9

Total :

Calf

Yearl ing

Calf-Yearl ing

Calf

Yearl ing

Calf-Yearling

To ta l :

Calf

Yearl ing

Calf-Yearl ing

Calf

30.6

13.8

62.8

34.74

31.82

35.74

7.0

10.5

5.4

22.9

2.5

2.6

1.6

1.7

30.3 30.4

13 .6 13.6

62.1 61.0

36.59 35.74

31.65 33.26

36.49 35.00

7.4 6 -9

10.2 10.6

5.5 5.3

23.1 22.8

1.2 .9

2.0 I .7

.8 .6

.5 0.0

(average pe r year in mi l l i on d o l l a r s ) Yearl ing .7 .2 0.0

Calf-Yearl ing 1.4 .4 0.0

To ta l : 3.8 1.1 0.0

6 . Net Government Payment" Calf 1.1 1.4 I .2

(average pe r year in mi l l i on d o l l a r s ) Yearl ing 1 .o .7 1.1

Calf-Yearl ing 1.1 1 . 1 .9

Tota l : 3.2 3.2 3.2

aProducer gross revenue is defined as the product of beef output and beef price. bGross income is defined as the product of beef output and gross margin (where gross margin is equal to total

'Net government payment equals net producer receipts. receipts less total variable costs).

295

Regarding the level of beef producer gross revenue, the impact under each scheme would be very similar (approximately $23 million) assuming $3.2 million net government payment per year. The impacts are more striking regarding absolute variation of producer gross income, where variation is the lowest under the guaranteed price scheme and the highest under FIAP (1980) for all three categories of animals.

Conclusions As pointed out earlier, the results of this study are dependent on a number

of assumptions, the data and the particular model used. Given this caveat, one may make the following conclusions regarding the effects of FIAP (1980), FIAP (1977), and the guaranteed price scheme for B.C. beef producers over the period 1959-78.

FIAP (1980) is capable of: (a) expanding calf production in B.C.; (b) raising effective beef prices and producer revenues; and (c) stabilizing producer in- comes.

Relative Effectiveness. For a given expenditure, the effectiveness of FIAP (1980) in raising producer revenues is similar to FIAP (1977) and the guaranteed price scheme. However, FIAP (1980) is inferior to the other schemes with respect to reducing income variability. The method of calculating producer premiums under FIAP (1977) (based on a moving average ratio of indemnities and output) reduced income variability more than the method used by FIAP (1980) (advanced premium plus additional premium based on gross indemnities). The even greater success of the guaranteed price scheme in reducing income variability is due to the way gross deficit is calculated - it is based on a five year moving average of product prices and input costs. FIAP (1980) and FIAP (1977), on the other hand, calculate gross deficit on the basis of current product prices and input costs, and these tend to fluctuate more widely between years.

Net Producer Receipts. In terms of net producer receipts, FIAP (1980) offers greater benefits to yearling producers, but less benefits to calf and calf-yearling producers than FIAP ( 1977).

[Received November, 1981; Revisions accepted May, 1982)

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