Canadian Net Income Stabilization Accounts and Other Options for Achieving Counter-Cyclical Program Payments with Planting Flexibility

This discussion outHne describes the Canadian Net Income StabiHzation Account (NISA) concept; provides comparisons to U.S. proposals for Farm and Ranch ^sk Management (FARRM) and Individual Risk Management Accounts (IRMA); and compares these concepts to other selected policy options with respect to the counter cyclical nature ofpayments and planting flexibility criteria. Staff Paper 333 embodies the discussion outlineused by the author in presentation to the National Commission for 21st Century ProductionAgriculture. The 1996FAIR Act established the Commission to develop recommendations on future U.S. FarmPolicy for theCongress and the President prior to expiration of the current farm policy. Canadian Net Income Stabilization Accounts and Otiier Options for Achieving Counter-Cyclical Program Payments with Planting Flexibility Discussion Objectives: • Describe the nature and context of the Canadian Net Income Stabilization Account (NISA) concept. • Compare the NISA concept to U.S. proposals for Farm and Ranch Risk Management (FARRM) and Individual Risk Management Accounts (IRMA). • Compare the savings account concepts to other selected policy options with respect to the counter-cyclical nature ofpayments and planting flexibility criteria. I, The NISA Concept: • Federal Govt. matches farmer NISA deposits up to 3% Eligible Net Sales (ENS). (Gross Sales of qualifying commodities less Qualifying Purchases such as seed, plants, livestock purchases.) • Maximum ENS eligible for match is limited to $250,000 per year per entity. So, maximum Govt. match is $7,500 per year. • Some Provinces offer enhanced matching contributions above 3 % level. • Farmers can deposit additional non-matchable deposits above 3% up to 20% ENS per year with no Govt. match. • Govt. pays 3 percent interest rate bonus on farmer deposits over bank rate. II. The NISA Process: • Farmers make application and deposit to their NISA Fund I account at their own banking institution. • Annual deadline: Individual June 15th; EntitiesJune 30th; Application Fee $55. • Entitlementis reduced 5%per month for late applications up to December31st. Govt. matching funds and interest payments are deposited in a NISA Fund II account held by Govt. Farmer uses after tax dollars for farmer deposits. Interest earnings and Govt. matching funds become taxable upon withdrawal. Unused matchable deposit allocations can be carried forward 5 years. Max NISA balance: 1.5 times 5-year average ENS. No additional fimds can be deposited until balance falls below ceiling. III. NISA Withdrawal Triggers: 1. Stabilization Trigger: • A farmer's currentyearGross Margin falls belowthe average for farm forup to 5 previous years. Participation for oneyear is required to use this trigger. • Gross Marginequals Net Sales from all ag commodities, plus income from contract work andmachine rental, minus eligible expenses. 2. Minimum Income Trigger: • Farmer's current year net income from all sources falls below a threshold level plus matchable deposit. (Raised 6/21/99 from $10,000 perindividual or$20,000 per family to $20,000 per individual or$35,000 perfamily.) IV. Deeming a Deposit Farmer may use triggered withdrawal to make all or part ofmatchable deposit. This allows a farmer tomake amatchable deposit to receive theGovt. match ina year with low cash flow. Ifthe triggered withdrawal is less than the matchable deposit, the farmer can only deem up to the amount ofthe trigger. Ifthe farmer wishes to deposit the rest of maximum matchable deposit, itmust beaccomplished from the farmer's own resources. V. Interim Withdrawals (Advanced Payments) • Introduced June 1998 (Annual Application Deadline is December 31st.) • Allows farmer to receive withdrawal funds from his/er NISA account in the year in which financial need arises. • The farmer's Maximum Actual Withdrawal Trigger is reduced by the Interim Withdrawal amount. • If the Interim Withdrawal exceeds the Maximum Actual Withdrawal Trigger entitlement by more than 10 %, an overpayment charge of3% ofthe excess withdrawal amount is charged to the farmer. • A farmer has one year to repay the overpayment amount and overpayment charge into the Fund I Accoimt. • Failure to repay by deadline results in mandatory opt out ofthe NISA program. • Partial payment does not result in extension ofdeadline. VI. Closing a NISA Account 1. Voluntary Opt Out • Notify NISA in writing anytime and request lump sum or annual installments for up to 5 years. • If youvoluntarily leaveyou canrejoin NISA in oneyearby repaying previous NISAbalance or rejoinNISA in two yearswithoutrepayingpreviousbalance. 2. Mandatory Opt Out • Failure to complete application for two years causes mandatory optout. • Failure to complete application after receiving Interimwithdrawal • Failure to repay overpayment of interim withdrawal within 1yeardeadline. • Balance paid in limip sum. Must miss 2 consecutive years before rejoining NISA.