Ag production facing huge challenges in North America: Offerdahl

Posted on March 14, 2024 by Sunny South News

By Heather Cameron
Sunny South News

During the 2024 Ag Expo at the Agri-food Hub & Trade Centre in Lethbridge, there was an event called ‘The Dish’ on Feb. 27, where Alex Offerdahl, managing partner at Watts and Associates, served as the keynote speaker and spoke about the differences and similarities between U.S. and Canadian Ag programs.

Offerdahl started by examining what both countries are seeing for weather patterns and how risks that producers face have changed, stating that those risks have changed in a meaningful way. Offerdahl then offered a look at a recent drought monitor map, saying that there is an extreme and exceptional drought happening and it is truly an unusual weather pattern. The Canadian dollar, Offerdahl said, also currently buys about 72 American cents or a dollar in American money buys about a $1.35 exchange rate. That, Offerdahl said, is a big deal for trade because a lot of things go north and south. Offerdahl also highlighted a chart showing the snow water equivalent basis from Racehorse Creek, which is due west of the area in the top of the mountains, stating that we are at about 60 per cent of where we were last year because we’re not building snowpack. 

“We are in a different world where all of that runoff came off so fast that our opportunity for it to absorb into the soil and to be available to us unless you’ve got reservoirs that are just waiting for it, there’s a good chance that it made its way out to the sea and that changes the way that we do planning,” said Offerdahl. “When we talk about risk and living in a risky world, the elephant is that the risks that we grew up familiar with, the risks that our parents and our grandparents dealt with in our operations and the risks that we’re dealing with right now don’t look much alike. And we’ve got to think about from our planning and our perspective of what do we do with this? How do we pass this legacy on to what’s next about how we’re going to deal with this risk? It’s not just that we get less snow; it’s that the variability of that snow is greater than it’s ever been. It’s not just that we have more temperature extremes; it’s that the variability of those temperature extremes is greater than it’s been historically.”

Offerdahl also mentioned some of the other risks that are being faced at this point, including issues within the Canada and U.S. governments and its organizations, the fact that we all live in a very risky world overall. 

“The reason we’re talking about this now is that across North America, we are reconsidering the future of our agricultural policy,” said Offerdahl. “At the same time, not that long ago, Canada renewed its five-year framework for agriculture. We were supposed to do it on more or less the exact same calendar, but we instead extended our previous farm bill for a year. We got the same policy that we had before. Policy that had been out of date for three years is now out of date for four years.”

Offerdahl then compared and contrasted the two frameworks, stating that about 85 per cent of the spending for the U.S. Farm Bill is for nutrition programs. 

“Unlike Canadian or European frameworks where nutrition and direct support for underserved populations is provided as a part of different legislation, the U.S. found that they couldn’t pass farm support through those coastal constituencies if they didn’t tie it directly to nutrition support, so for every dollar we spend on the Farm Bill, we spend 85 cents on nutrition programs. That’s what it takes to get the 15 cents of direct support for agriculture approved,” said Offerdahl.

All the funding is federal, said Offerdahl, unlike in Canada, where the provinces do a cost share or a contribution component. All the money comes from the federal Congress, Offerdahl said, which really changes the perspective of policy makers in terms of how responsible they have to be with that money. 

Now with the extension this September on the Canadian side, they call it the Sustainable Canadian Act partnership, and those costs are about $750 million a year, Offerdahl said, while crop insurance programs in the US cost about $13 billion a year. 

“Canada has roughly 1/10th of the population and industry of the U.S., so take $12 billion of crop insurance alone divided by 10; that’s still $1.2 billion spent on crop insurance alone while you guys spend $750 million,” said Offerdahl. “It’s roughly half on a per capita basis with the U.S. spending on crop insurance alone. Funding is shared between the feds and the provinces, and you got a new framework that started in April. In the U.S. and in Canada, subsidy is applied in layers. In Canada, the federal government comes up with 36 per cent and the province provides 24 per cent for a total of 60 per cent subsidy. Sixty per cent is also the average subsidy rate that’s made available in the U.S. that has important implications for participation. That means that for every dollar a producer pays for insurance, if everything works exactly as expected, they can expect about $2.50 back in indemnity.”

Offerdahl said that in addition to the subsidy associated with trying premiums more affordable for farmers, we also pay about $2 billion a year for agents to sell these policies, meaning that agents fight tooth and nail to try and sell as many of these policies as they can. In Canada, Offerdahl said, they’re sold on a commission basis through Crown corporations, and most of the compensations provided these people are through salary and the people are there to provide services and assist the customers who come in. In the U.S., Offerdahl said, the agent comes looking for you and are all competing to find another angle, another opportunity to sell coverage. 

Offerdahl also briefly compared crop insurance to car insurance to provide a sense of how the two insurance programs stack up from a return-on-investment perspective before moving to talk about how challenging it is to try and insure forage. Both the U.S. and Alberta, Offerdahl said, take a similar approach and that is rather than measure the grass, they measure the weather and in particular, the amount of precipitation. 

“We measure on a grid hybrid system, so that is to say that the National Weather Service in the U.S. applies this grid to the entire country, and then using Doppler radar tries to get a sense of how much moisture fell in each of those grid items,” said Offerdahl. “In Canada, you use weather stations where you measure the amount of precipitation directly and then attribute it to the area that you’re talking about.”

The U.S. program, Offerdahl said, has not changed substantially since 2015, but here meaningful updates occur in Canada’s program all the time. The U.S. program is based on an average of 64 years of historical data, Offerdahl said, while the Canadian program is based on the most recent 25. This program has been offered in the U.S. since 2007, but Canada was offering moisture efficiency insurance before the U.S. was.

After briefly showing graphs associated with policies sold since the program began, Offerdahl shared that in 2021, Canadian producers – Alberta producers in particular – received $94 million more in indemnities than they paid in premiums while in 2022, they only received $71 million more in indemnities than they paid in in premiums. 

“The average loss ratio for the Canadian program has been a little ugly,” said Offerdahl. “You’ve paid out more than you’ve taken in. That’s a conceptual problem. But it has been absolutely a godsend for producers. For every dollar an Alberta rancher has paid for moisture deficiency, they collected $4.48 in indemnity.”

The U.S. and Canada, Offerdahl said, have remarkably similar frameworks and they’re designed to solve the same problems. 

“Producers and ranchers make up a smaller portion of the population every year, and we have highly specialized needs,” said Offerdahl. “Increasingly, we’ve got folks that are working on a local level that are embedded with your communities that are making some of these decisions on the insurance side. And that’s done to try and de-politicize this process to make sure that the tools you have and need are available to you. In the U.S., we’ve got a whole bunch of profit driven agents that are out there selling this stuff. And Canada, you’ve got a much less aggressive sales culture, but they’re very conceptually similar. We live in a risky world. The weather that we’re seeing right now from a historical perspective, from an analytical perspective looks very different than what we’ve seen historically. We have tools available to help us manage those risks and some people are taking advantage of them and others aren’t.”