ARTICLES 1

INCOME STABILIZATION FOR B.C. HOG PRODUCERS

George Kennedy and Alajandro Palacios *

The objective of this paper is to estimate the costs and effects of federal and provincial govern- ment programs designed to stabilize the incomes of B.C. hog producers. Simulation was used to provide these estimates. This involved building a mathematical model of the B.C. hog industry, in- cluding important supplyldemand relationships and the operating characteristics of alternative stabilization schemes. Successive runs of the model were made, each assuming operation of a dif- ferent stabilization scheme. Results are presented for the current Agricultural Stabilization Act and a guaranteed margin approach (federal) and the B.C. Swine Producers’ Income Assurance Program (provincial).

L’Objectif de cet article est d’bvaluer les couts et les effets des programmes provinciaw et fkdtraux destints il stabdiser les revenus des producteurs porcins de la Colombie Britanique. Ces evaluations one ttt obtenues par simulation. Ceci a nktssitt la construction d’un modMe mathtmatique du secteur du porc de la Colombie Britanique, comprenant d’une part des relations d’offre/demand et d’autre part les caracttristiques operationnelles des divers plans de stabilisa- tion. En supposant A chaque fois I’application d’une plan difftrent de stabilisation, des simulaitons successives one Ctt entreprises pour I’actuel plan ftdtral de Stabilisation (Agricultural Stabilization Act), le plan fedtral de marge guarantie. et le programme provincial actuellement utilist en Colombie Britanique (B.C. Swine Producers Income Assurance Program).

Introduction

Income Stability for primary producers continues to be an important government god at both provincial and federal levels in Canada. This is particularly true for the case of livestock producers, who must contend with well know price and production cycles.

Hog production in B.C., as elsewhere, has fluctuated widely over the years.l Major variations in prices of hogs and prices of inputs required to produce hogs have also OC-

These fluctuations in prices, combined with fluctuations in hog production, create a problem of income instability for B.C. hog producers. This paper focusses on this problem.

For purposes of this paper, “income” is defined as the product of gross margin and

University of British Columbia. The research reported in this paper was funded by the B.C. Agricultural Sciences Coordinating Committee, B.C. Ministry of Agriculture.

1 For example, hog production went from 32,566 head in 1965 to 76,799 in 1971, falling to 46,304 in 1973 [l].

2 Slaughter hog prices in B.C. (Index 100) rose from $42.18 per cwt. in January 1973 to $85.35 per cwt. in September 1975 and then fell to $47.89 per cwt. in November 1976 [l]. Ground barley prices rose from $3.77 per cwt. in November 1972 to $9.04 per cwt. in November 1974, and then fell to $7.53 per cwt. in November 1976 [13, 141.

Canadian Journal of Agricultural Economics 28(1), 1980

2 total hog production, where gross margin is the difference between total receipts and total variable costs. “Income instability” refers to variations in income from one year to the next.

Both the federal and B.C. governments have introduced programs to reduce income instability for B.C. hog producers. At the federal level, hogs are one of the commodities covered by the 1958 Agricultural Stabilization Act (ASA). The ASA makes payments to producers when market price falls below a given floor price. The floor equals some percentage of national moving average price adjusted by cash costs. Under the amended ASA (1975) the percentage is 90%.

The federal government has recently proposed further amendments to the ASA, to allow for a guaranteed margin approach. The guaranteed margin approach would guarantee farmers their current cash costs plus some proportion of a five year average margin. The margin represents the difference between average national cash costs of production and average national market prices. Under the guaranteed margin ap- proach, participating producers could be expected to pay a proportion of the actuarial costs of the program.

At the provincial level, the B.C. government introduced the Farm Income Assurance Program (FIAP) in 1974. Although initially set up as a five year program, FIAP has been modified and given permanent status for about a dozen commodities, including hogs.

Under FIAP, producers receive an indemnity payment to raise low market prices to some floor price which is based on cost of production calculations, The program was set up to be “actuarially sound” with participating producers and the provincial govern- ment paying premiums. The premiums are paid each period and bear no relationship to current market prices. If total indemnity payments exceed accumulated premiums, the provincial government makes an “advance” which it expects to recoup in periods of small indemnity payments. Producer and government premiums and possible govern- ment advances can be viewed as payments into a fund and producer indemnities as withdrawals.

The purpose of this paper is to estimate the costs and effects of federal and provincial government programs intended to stabilize the incomes of B.C. hog producers. This should allow a more informed base for designing government stabilization programs in the future.

In the next section, the methodology used in this study will be discussed. Then the results will be given, and finally the conclusions.

Methodology

Policy makers require estimates of the likely costs and effects of stabilization programs prior to their implementation. These estimates, however, are extremely difficult to ob- tain for agricultural systems which are both complex and dynamic. The current study attempted to provide estimates of this type by using simulation. This involved building a mathematical model of the B.C. hog industry, including important supply demand relationships and the operating characteristics of alternative stabilization schemes. Ex- periments were then performed on the model, involving successive runs with each assuming operation of a different stabilization scheme.

The model used in dynamic and can simulate the behaviour of the B.C. hog system

3

over whatever period 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. Finally, the model is deterministic. It is recognized that stochastic models can often better represent agricultural production systems. However, relative to many agricultural systems, the supply and demand for hogs in B.C. do not appear to be great- ly influenced by stochastic factors. Thus, a deterministic model was initially tried, and once shown to be an acceptable representation of the B.C. hog system (by the validation process to be discussed subsequently) it was adopted. The avoidance of the increased complexity which the inclusion of stochastic variables would necessitate was thought to outweigh advantages in terms of added r ea l i~m.~

The model attempts to represent the hog production system in B.C. through a set of equations and contains the following modules: ( 1 ) EQUILIBRIUM MODULE: refers to the price and quantity prevailing in the

( 2 ) GOVERNMENT PROGRAMS MODULE: describes alternative government

( 3 ) FARMER PRODUCTION DECISION MODULE: provides the production

The equations of module (3) can be grouped into three categories:

market when no stabilization scheme is in operation.

stabilization programs for B.C. hog producers.

responses by farmers to changes induced by stabilization programs.

( a ) Behavioral equations: the behavioral equations of the model include parameters

( i ) Holdover price response. This involves farmers shifting market hogs for- ward or back one month in response to changes in slaughter hog and/or input prices.

( i i ) Gilt retention price response. This involves farmers retaining more or less gilts for breeding in response to changes in slaughter hog and/or in- put prices.

( i i i )Gilt retention non-price response. This involves farmers retaining more or less gilts for breeding in response to changes in the stability of the pro- ductive en~ironment.~

Note that (i) and (ii) are responses to changed agricultural margins induced by govern- ment stabilization programs, while (iii) might be viewed as a response to a government program per se.

( b ) Flow relationships and accounting identities. These incorporate hog production assumptions relevant for B.C. and account for changes in production resulting from earlier farmer responses to government stabilization efforts. Since it is reasonable to assume that in the short run farmers have resource constraints, upper limits on gilts retained and hogs held over are included in the model.

( c ) Market identity. This ensures that all hogs supplied are purchased in the market. The demand for slaughter hogs is assumed to be perfectly elastic since it is reasonable to assume that market price in B.C. is exogenously determined.5

which allow three farmer responses to government stabilization efforts:

3 Naylor has indicated that the inclusion of stochastic variables in computer simulation usually gives rise to methodological problems [9].

4 The possibility of this non-price supply response has been recognized in [2, 6. 7, 81. 5 There is substantial evidence that an important percentage of Canadian livestock price varia-

tions can be explained by variations in U.S. prices [3, 12, 15, 171.

4 (4) SUMMARY MEASURES MODULE: computes statistical parameters used to in- dicate the degree of stability and other important policy variables.

A flowchart representing the components of these modules in given in Figure 1 .6

r I

I I I I I I I I I

I I I I I I I I I I I I I I I I I

I I

I

-9 I I

Figure 1: Flow Chart Representing the Mathematical Model and its Four Modules. The broken line traces the situation when no stabilization is in operation, the solid line traces the impact of government programs.

6 For a detailed presentation of the equations of the model see [lo].

5 Model Validation

14.0-

13.0-

12.0,

Historical validation of the model was possible given that the B.C. Swine Producers’ In- come Assurance Program had operated for several years. To compare results generated by the model with historical results, the model was run over the period January, 1974-December, 1976.7 To determine the ability of the model to reproduce historical data the Mann-Whitney (Sum Rank) Test and Theil’s U inequality coefficient were us- ed.8 The calculated coefficient of the Mann-Whitney Test was *0.46. This means at a 99% level of significance the null hypothesis, i.e., that both samples come from the same population having equal means and dispersion, cannot be rejected. Theil’s U coef- ficient was 0.029, further indicating that the model has the ability to reproduce real it^.^

Since both of the above coefficients measure only the overall ability of the model to reproduce reality, not giving insights about the degree of over or under estimation, a graphical comparison was made to show the ability of the model to predict turning points. The graphical analysis (see Figure 2) showed that in 97 percent of the cases the

Monthly hog production (thousand of cwt.)

real - simulated ---- - - - t

I

I

9.0

8.0-

7.0-

1 1 1 1 1 I I I L I I I I I I I I I I I I l l I I 1 1 1 1 1 June Dec. June Dec . June Dec. 1974 1975 1976

Figure 2. A Graphical Analysis of Model Validation (1974-1976)

7 This was the period over which data existed for the B.C. Swine Producers’ Income Assurance Program.

8 A detailed explanation of the use of the Mann-Whitney non-parametric test can be found in [4]. An application of Theil’s U coefficient is presented in Zwart’s study of the North American pork system [17].

9 A coefficient of zero indicates perfect ability to reproduce reality whereas a coefficient of one indicates complete inability.

6 model was able to predict the direction of turning points. This rather unusual ability of the model to reproduce reality, as indicated by the statistical tests and graphical analysis, is partially due to the fact that the model was built to predict monthly increases or decreases in hog production resulting from government stabilizing efforts, as oppos- ed to total supply.l0 The only exception was May, 1976 where the model indicated a decline in hog production but real world data showed an increase.l

In summary, the results of both the statistical tests and the graphical analysis suggest the model is a reasonably accurate representation of the B.C. hog industry and can thus be used to derive real world conclusions.12

Results

The likely effects of alternative provincial and federal stabilization schemes for B.C. hog producers are presented below. The results were obtained from simulating the model over a 13 year period, 1964-1976. The effects are measured in terms of their im- pact on what are considered to be key policy variables.

As indicated above, the model has been shown to be valid. However, use of the model requires that certain parameter values be assumed and it is important to recognize that the simulation results which follow are dependent on these assumptions. Where possi- ble, parameter values are based on previous research results and/or consultation with B.C. Ministry of Agriculture hog specialists.

It was noted in the last section that the model allows three farmer responses to government stabilization efforts. Parameter values relevant to these responses were selected as follows:

(i) Holdover price response. The relevant paramter value was selected via the valida- tion procedure.

(ii) Gilt retention price response. The relevant parameter value was based on [16].13 (ii) Gilt retention non-price response. The paramter value was selected in an ad hoc

way.14

10

11

12 13

14

Total supply is easily computed by adding the predicted increases or decreases in hog produc- tion to the “equilibrium” values (i.e. those prevailing in the absence of government interven- tion). This type of graphical analysis has been used in [17]. It should also be pointed out that the parameter value relevant to the holdover price response was arrived at through successively running the model to achieve a good fit. In this sense, the validation procedure itself con- tributed to the good results of the statistical tests. However, this contribution is not important as the model was shown not to be sensitive to the parameter value relevant to the holdover price response [l I]. A more complete presentation of model validation can be found in [ll]. Experiments were performed varying the levels of the parameters relevant to (i) and (ii) [ll]. These experiments showed that the results of the model are not particularly sensitive to the levels of these parameters. ,

For the government programs analysed in this study (with one exception which will be noted) it was assumed that farmers increase gilts retained for breeding (over and above any gilt reten- tion price response) when the government stabilization programs exist. Specifically, it was assumed farmers would increase gilts such that hog production increased 9 percent for the first three years, 6 percent for the next three, 3 percent for the next five years, and zero for the last two years of a thirteen year government program.

7

Results are presented first for provincial stabilization approaches and then for federal approaches.

1. ESTIMATED EFFECTS OF PROVINCIAL GOVERNMENT STABILIZATION SCHEMES

Results are given below from simulating the model assuming the operation of each of the following provincial stabilization schemes over the period 1964-1976:

( 1 ) The B.C. Swine Producer’s Income Assurance Program as it existed in 1978,

( 2 ) FIAP (1978) with several modifications; and ( 3 ) FIAP (1978) incorporating a ceiling premium. ( 1 ) Estimated effects of FIAP (1978) As indicated above, FIAP (1978) refers to the B.C. Swine Producers’ Income

Assurance Program as it existed in 1978. The main features of FIAP (1978) were (a) farmers and the provincial government shared the premium on a % to ?4 basis; the farmer premium was $1.50/cwt. and the government premium was $3.OO/cwt.; and (b) farmers received an indemnity when the market price of slaughter hogs fell below a computed floor price. The floor price equded 75vo of the returns deficit, where the returns deficit equalled the difference between cost of production (including return to land and management fee) and the market price of slaughter hogs (index 103).15

The model was initially run assuming the absence of any government program. The results are reported under “NO Scheme” in Table 1. For example, hog producer in- come16 over the period 1964-1976 was estimated to average 631 thousand dollars per year in the absence of either federal or provincial government intervention.

The model was then run assuming the operation of FIAP (1978). The results for this second run are also shown in Table 1. Hog producer income, for example, was estimated to average 788 thousand dollars per year assuming FIAP (1978) had operated over the period 1964-1976. Since the introduction of FIAP (1978) was the only change between this run and the initial run, differences in results can be attributed to the pro- gram. These differences are reported in Table 1 and imply the following effects of FIAP (1978), had it operated from 1964-1976:

(a) The average level of hog producer income would have increased 157 thousand dollars per year;

(b) The absolute variability of hog producer income from one year to the next would have been reduced. This is indicated by a reduction in average standard deviation of 2 thousand dollars per year;

(c) The relative variability of hog producer income from one year to the next would also have been reduced, shown by a reduction in coefficient of variation equal to 18.

referred to as “FIAP (1978)”;

(d) Average hog production would have increased 581 thousand pounds per year;

15 The market price of slaughter hogs relevant for FLAP was changed from index 100 to 103 in 1977.

16 Hog producer income in obtained by multiplying gross margin (i.e., the difference between total receipts and total variable costs) by total B.C. hog production.

8 TABLE 1 Estimated Effects of FIAP (1978), 1964-1976

No F IAP Variables Scheme (1978) Difference

1.

2 .

3 .

4 .

5.

6.

7.

8.

LEVEL OF B.C. HOG PRODUCER INCOME (average per year in thousand dollars) 631

ABSOLUTE VARIATION OF HOG PRODUCER INCOME (average st. dev. per year in thousand dollars)

RELATIVE VARIATION OF HOG PRODUCER INCOME (average coefficient of variation)

577

91

LEVEL OF B.C. n m PRODUCTION (average per year in thousand lbs.) 8,510

PRODUCER PREMIUM (thousand dollars/ period) 0

B.C. GOVEPXMENT PREMIUM (thousand dollars/ period) 0

B . C . GOVERNMENT ADVANCE (thousand dollars/ period) 0

TOTAL B. C . GOVERNMENT CONTRIBUTION (thousand dollars/period 0

788 151

575

73

-2

-18

9,091 581

594 594

1,188 1,188

178 178

1,366 1,366

(e) Hog producers would have paid cumulative premiums of 594 thousand dollars; ( f ) The provincial government would have paid cumulative premiums of approx-

(g) Cumulative government advance would have amounted to 178 thousand dollars,

(h) Total government contribution (i.e., government premiums and advance) would

(2) Estimated effects of Modified FIAP (1978) In early 1978, the B.C. Minister of Agriculture suggested the following modifications

imately 1.2 million dollars;

and;

have amounted to approximately 1.4 million dollars.

of FIAP (1978):17

17 B.C. Ministry of Agriculture News Release, February 23, 1978.

9

(a) Support level increased to 100% of returns deficit; (b) Farmer premium increased to half share; government premium reduced to half

(c) Land return and management fee removed from cost of production calculations. FIAP (1978) incorporating these modifications will be referred to as “Modified FIAP (1978)”. The estimated effects of Modified FIAP (1978) are given in Table 2. The level of hog producer income, for example, would have averaged 734 thousand dollars per year, had Modified FIAP (1978) operated from 1964-1976. Table 2 also reports the ef- fects of FIAP (1978). Comparing the two sets of effects implies certain conclusions regarding the likely impact of the combined modifications relative to FIAP (1978). The combined modifications would have:

(a) a lowering effect on the level of hog producer income relative to FIAP (1978) (on

(b) a stabilizing effect with respect to absolute variability of hog producer income

(c) a zero effect with respect to relative variability of hog producer income (average

(d) a lowering effect on the level of hog production (on average, 35 thousand Ibs. less

(e) an increasing effect on cumulative producer premium (282 thousand dollars); (f) a lowering effect on cumulative government premium (287 thousand dollars less); (g) an increasing effect on cumulative government advance (59 thousand dollars

(h) a lowering effect on total B.C. government contribution (228 thousand dollars

In summary, relative to FIAP (1978), Modified FIAP (1978) would greatly reduce ab- solute variation of hog producer income. However, producers would pay greater premiums, resulting in lower income levels. B.C. government contribution would be reduced.

In addition to the combined effects of the four modifications, estimates of the separate impact which each modification would likely have may also be of interest. To provide these estimates, the model was run for each modification in isolaiton, and the results are also reported in Table 2. For example, if the only modification to FIAP (1978) was an increase in the support level from 75010 to 100V0, this would have an in- creasing effect on hog producer income amounting to 58 thousand dollars per year. Raising the farmer premium from ?h to ‘/2 share, on the other hand, would have a lowering effect on producer income equal to 26 thousand dollars per year. Interestingly enough, this reduction in producer income due to increased farmer premium is less than the reduction caused by removing land return and management fee (39 thousand dollars per year).

share; and

average, 20 thousand dollars less per year);

(average standard deviation falls 16 thousand dollars per year);

coefficient of variation remains at 74);

per year);

more);

less).

(3) Estimated Effects of FIAP (1978) With Ceiling Premium Given a goal of producer income stability, it seems logical to require producers to pay

a premium in times of high hog prices (or wide margin) but not to require them to pay a premium when prices are 10w.l~ FIAP (1978) with this logic built into it will be referred to as “FIAP (1978) With Ceiling Premium”.

18 Hudson recognized this logic in his proposal of an “Agricultural Stabilization Fund” (51.

TABL

E 2

Com

para

tive

Eff

ects

of

Mod

ified

FIA

P (1978) w

ith F

IAP (1978), 1967-1976

Variables

1.

OF B.C.

HOG PIxwxlcER

(average per year in thousand

dollars).

PRDMlcER INCCME

(average st. d

w. per year in

thou

sand

dollars)

2.

ABSO

LUJX

VA

NA

TIO

N

Q!?

HOG

3. R

EIA

TIV

E VA

RIAT

ION

OF H

OG

PR

mm

INca

m

(average coefficient of

vari

atio

n)

4.

LEVE

TA O

F B.C.

HOG

Pw)w

CpJ

.CN

(average per yea

r in thousand

lbs.)

pe

rid

)

(thousand dollars/pericd)

(tb

usa

nd

dollars/pricd)

(thousand dollars/pericd)

5. P-

PREMIUM

(th. dollars/

6. B.C.

G(N

ER

”p P

lUM

IW

7. B.C.

AWANCE

8.

TWBL

B.C.

cam

umIa

-

FIAP

(1978)

754

559 74

8,675

569

1,138

175

1,313 - Mo

dified

FIA

P (1

978)

734

54 3 74

8,640

851

851

234

1,085

~~~

~~

Differences

Due

to

To

tal

Modifications

-2 0

-16 0

-35

282

-287

59

-228

Effect o

75% - 100%

Level

Su

pp

rt

58

16

-3

81 7 14

623

637

Isolated M

r

1/3 to 1/2

-26

-16 1

-38

281

-288

-2

-290

~ ~~

ifications

ma

1 of

Land

Retm &

vhnagen-ent Fe

-39 -8 3

-58 -5

-10

-416

-426

* Fo

r ea

ch o

f th

e runs r

epor

ted

in T

able

2, t

he p

rodu

cer

gilt

rete

ntio

n no

n-pr

ice

resp

onse

was

ass

umed

zer

o in

ord

er t

o si

mpl

ify th

e co

mpa

riso

ns. T

his

acco

unts

for

the

diff

eren

ce in

the

est

imat

ed e

ffec

ts o

f FI

AP

(197

8) in

Tab

le 1

(whe

re a

posit

ive

gilt

rete

ntio

n non

- pr

ice r

espo

nse

was

ass

umed

) and

Tab

le 2

.

11

FIAP (1978) With Ceiling Premium would operate as follows. There would be no government premium, only a producer premium. When market price exceeded a ceiling price, producers would pay premiums into a fund to that effective price received equall- ed the ceiling. In times of low prices, producers would receive an indemnity from the fund to raise effective price to the floor, as is the case for FIAP (1978). If necessary, the fund could be initiated with a government advance.

The fundamental difference between FIAP (1978) and FIAP (1978) With Ceiling Premium is that with the latter, producer premiums would no longer be routine. They would occur only in high price periods. The fact that all government contributions under FIAP (1978) With Ceiling Premium are referred to as “advance” rather than viewing part of this contribution as government premiums is not an important dif- ference.

The estimated effects of FIAP (1978) With Ceiling Premium, had it operated from

TABLE 3 Comparative Effects of FIAP (1978) With Ceiling Premium and FIAP (1978)’ 1964-1976

F I A P With Ceiling Variables ( 1 9 7 8 ) Premium Difference

1.

2 .

3.

4 .

5 .

6.

7 .

8 .

LEVEL OF B.C. HOG PRODUCER INCOME (average per year in thousand dollars)

ABSOLUTE VARIATION OF HOG PRODUCER INCOME (averaqe st. dev. per year in thousand dollars)

RELATIVE VARIATION OF HOG PRODUCER INCOME (average coefficient of variation)

LEVEL OF B . C . HOG PRODUCTION (average per year in thou- sand lbs.)

PRODUCER P R E M I U M (thousand dollars/period)

B.C - GOVEF3PlENT PREMIUM (thousand dollars/period)

B.C. GOVERNMENT ADVANCE (thousand dollars/period)

TOTAL B . C . GOVERNMENT CONTRIBUTION (thousand dollars/period)

788

5 7 5

7 3

9 , 0 9 1

594

1 , 1 8 8

1 7 8

1 , 3 6 6

707

544

6 9

9 , 0 7 8

597

0

1 , 3 5 1

1 , 3 5 1

-1

-31

- 4

- 1 3

3

1,188

1 , 1 7 3

- 1 5

12 1964-1976, are reported in Table 3. The floor price was set equal to the support level of FIAP (1978) -- i.e., 75% of returns deficit, where returns deficit equals cost of produc- tion (including return to land and management fee) minus market price of slaughter hogs (index 103). The ceiling price was set 4.0% above the floor price.19 The results of FIAP (1978) from Table 1 are also reported in Table 3 for comparative purposes.

In comparing the effects of FIAP (1978) With Ceiling Premium with those of FIAP (1978) in Table 3, we see that both schemes would have led to almost identical levels of hog producer income and hog production over the period 1964-1976. Furthermore, cumulative producer premiums and total government contribution would have been vir- tually the same under both schemes. However, they would have differed with respect to their impact on variability of hog producer income. FIAP (1978) With Ceiling Premium would have caused a greater reduction in both absolute and relative variability. Given that government contributions would be almost the same for both schemes, the model results suggest FIAP (1978) With Ceiling Premium would achieve a greater reduction in the variability of producer income per dollar of government expenditure than would FIAP (1978).

11. ESTIMATED EFFECTS OF FEDERAL GOVERNMENT STABILIZATION SCHEMES

Results are given below assuming each of the following two federal approaches to

( 1 ) the current ASA (as amended in 1975), i.e., a floor price equalling 90% of the national five year moving average price plus the difference between the current (national average) cash costs of production and five year moving average cash costs; producers are not required to pay premiums; and

( a ) a guarantee to producers of cash costs of production plus 100% of the five year margin; and

( b ) a producer premium equal to one-third of actuarial program costs and a federal government contribution to cover the remaining two-thirds.

Table 4 presents the results of the ASA and the GM100 stabilization approaches described above. By comparing these results to the no scheme situation (also given in Table 4) we can determine their likely impacts on B.C. hog producers had they operated over the period 1964-1976. These impacts are summarized below:

stabilizing incomes for B.C. hog producers:

( 2 ) a guaanteed margin approach, (referred to as ‘‘GM100’p)20, involving:

The ASA and GMlOO would have increased average income for B.C. hog pro- ducers from 631 thousand dollars per year to 708 and 746 thousand dollars respectively. The ASA and GMlOO would have stabilized producer income, lowering average standard deviation from 577 thousand dollars per year to 570 and 559 thousand dollars respectively, and lowering average coefficient of variation from 91 to 81 and 75 respectively.

19 Of course the ceiling price could be determined in a number of ways. Four percent was used because it implied a level of government contributions equivalent to that of FIAP (1978).

20 “GM100’ was proposed by the federal government at the federal and provincial ministers of agriculture meeting in Ottawa, Nov. 20, 1978.

13

( c ) Both the ASA and GMlOO would have increased average hog production from 8,510 thousand pounds per year to 8,927 thousand pounds.

( d ) While producers would not have to pay premiums under the ASA, they would have had to pay a cumulative premium of 551 thousand doIlars under GMlUO.

( e ) Total federal government contribution would have amounted to 618 thousand dollars under the ASA and 1.1 million dollars under GMlOO.

TABLE 4 Comparative Effects of GMlOO with ASA, 1964-1976

Difference Between

F-s 1/3 CMlOO h ASA

m o o No RSA

Variables Scheme (90%) Fed. Gov. 2/3

1.

2.

3.

4.

5.

6.

(average/year in thousand dollars) 631 708 746 38

AESOWIE VARIATION CF Hoc, PFQIXCER INoTlE (average st. dev./year in thousand dollars) 577 570 559 -11

RELATIVE VARIATION CFHoGPT(0WcER INCCME (average aefficient of variation) 91 81 75 -6

USEL CF B.C. H X PRODUCPICN (average/ year in thousand Ibs.) 8,510 8,927 8,927 0

P R M x l c E R P m (thousand dollars/ p i & ) 0 0 551 551

TOTAL E E D m GmEFmEm crWImm1ON (thousand aOllars/period) 0 6 18 1,102 484

Differences in the effects of GMlOO and the ASA are also noted in Table 4. Relative to the ASA, GMlOO would have raised average hog producer income (38 thousand dollars per year) and also stabilized it (lowering standard deviation by 11 and coefficient of variation by 6). For GMlOO to achieve higher and more stable incomes than the ASA would have required 551 thousand dollars of producer premiums plus an increased con- tribution of 484 thousand dollars from the federal government. 111. IMPACT OF REPLACING ASA PLUS FIAP (1978) BY GMlOO

Given that the federal government's proposal of 'GM100 assumes the gradual withdrawal of FIAP by the provincial government, it is of interest to determine the im-

14 pact of replacing both the ASA and FLAP (1978) with GM100. The estimated impact over the period 1964-1976 is presented in Table 5 and can be summarized as follows:

level of B.C. hog producer income would fall on average 55 thousand dollars

variation of hog producer income would decrease in an absolute sense (average standard deviation falls 19 thousand dollars per year), but would increase in a relative sense (average coefficient of variation would increase by 3); level of B.C. hog production would fall on average I64 thousand pounds per Year; cumulative producer premium would fall 43 thousand dollars; total B.C. government contribution would be reduced from 914 thousand dollars21 to zero; and total federal government contribution would increase 483 thousand dollars.

per year;

TABLE 5 Impact of Replacing ASA ond FIAP (1978) with GM100, 1964-1976

ASA (90%) m o o PI- F m r s 1/3

Variables FIAP (1978) Fed. Gov. 2/3 Difference

1.

2.

3.

4.

5.

6.

7.

LEVEL OF B.C. HCG pRc[xILwINcoME [average/year in thousand dollars)

INCCME (average st. dev./year, in t h o u s a n d dollars)

coefficiat of variation)

E3EL OF B.C. HCG PIlowcTICN (average/ year in ttnusand Ibs.)

PKDUCER PREMlIpl (&usand dollars/ period)

‘ItXAL B.C. cxNrF.IEUrIrn (thousand aOllars/period)

mAL mEaL GCNERNMENT ccE;ppRIm10N (thwsand dollars/period)

801

578

746

559

-55

-19

72 75 3

9,091 a, 927 -164

594 551 -43

914 0 -914

619 1,102 483

21 FIAP (1978) would involve a B.C. government premium of 1,188 thousand dollars and a B.C. government advance of 178 thousand dollars, implying a total contribution of 1. 366 thou- sand dollars (as in Table 1). However, given the ASA, the provincial government’s contribu- tion would be reduced by 452 thousand dollars to 914 thousand doIIars.

15 Since GMl00 would result in a lowering of hog producer income relative to the cur-

rent situation of ASA plus FIAP, it may be of interest to determine what level of guarantee would be required to provide an equivalent level of hog producer income. Ac- cording to the model, B.C. hog producers would have to be guaranteed cash costs of production plus 113% of the five year moving average margin; i.e., GM113 with farmer premium !A and federal government premium 45 would provide a level of hog producer income equivalent to the current ASA and FIAP.

Conclusions

As pointed out earlier, the results of this study are dependent on assumed values of parameters and the particular model used. Given this caveat, we offer policy makers the following conclusions regarding income stabilization for B.C. hog producers, based on the period 1964-1976.

The first two conclusions relate to provincial government programs, the second two to federal government programs.

The B.C. Farm Income Assurance Program as it existed in 1978 (“FIAP (1978)”) would contribute to a government goal of income stability for B.C. hog pro- ducers. More income stability per dollar of B.C. government expenditure could be achieved if FIAP (1978) were adjusted such that producers paid premiums only in high price periods (rather than routinely). A guaranteed margin approach set at 100% with one-third producer premium (“GM100”) would reduce the variation and increase the level of B.C. hog pro- ducer incme more than the current Agricultural Stabilization Act (ASA). However, to obtain these advantages, producers would have to contribute via premiums and the federal government would have to increase its contribution. Relative to ASA plus FIAP (1978), GMl00 would stabilize hog producer income in an absolute sense, but not in a relative sense. GMl00 would lead to a lower level of hog producer income in B.C.

REFERENCES

1 Agriculture Canada. Canada Livestock and Meat Trade Report. Livestock Division, Produc- tion and Marketing Branch.

2 Barichello, Richard. “An Economic Analysis of the Dairy Farm Income Assurance Program”, Department of Agricultural Economics Research Bulletin, University of British Columbia, September, 1977.

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16

7 Kennedy, George. “A Simulation Analysis of Alternative Stabilization Schemes for Hog- Pork Prices”. Unpublished Ph.D. Thesis, Department of Agricultural Economics, Purdue University, 1973.

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