Answers to some frequently asked questions...

Questions

How does CAIS measure farm income?
Why does CAIS not use gross margin like NISA or OFIDP?
How is production margin calculated?
Why does the CAIS program include Production Insurance payments as income?
Why would a producer continue to take Production Insurance when they could participate in CAIS?

Answers

How does CAIS measure farm income?

The CAIS program uses a calculation of farm income known as a production margin.

Why does CAIS not use gross margin like NISA or OFIDP?

NISA and OFIDP used a calculation of farm income known as gross margin. Over time it was found that some of the expenses that were considered eligible for the NISA or OFIDP gross margin actually reduced the amount of assistance producers could receive when they were experiencing financial problems on the farm.

For example, eligible NISA or OFIDP expenses such as machinery repairs, building repairs or legal and accounting fees, although very real business expenses, are in fact discretionary in any one year.

Therefore, in years when there are financial problems these expenses decrease because cash flow is tight and there is less need for expenses to minimize income taxes. In this case, the NISA or OFIDP gross margin falsely gave the impression that the producer was better off. In years when there are no financial problems, cash flow is high and there is a need for expenses to minimize income taxes, these expenses increase. In this case, the NISA or OFIDP gross margin falsely gave the impression that the producer was in a poor financial situation.

Production margin eliminates these discretionary expenses and provides a better reflection of how the farm is doing in any one year.

How is production margin calculated?

Production margin is calculated by subtracting production expenses from farm revenue. Only income and expenses directly related to the production of a commodity - like fuel, fertilizer, pesticide or feed costs-are included.

Farm Revenue includes:

Farm Sales
Production Insurance payments

Production Expenses include:

Feed
Livestock
Hired labour
Seed
Production Insurance Premiums
Fertilizer & Pesticides
Containers & Twine
Fuel/Electricity
Trucking
Storage & Drying
Custom Feeding

NISA Code	Income	Gross Margin	Production Margin
Total A	NISA qualifying commodities and program payments	X	X
Total B	NISA non-qualifying commodities and program payments	X	X
9540	Other program payments
9544	Disaster assistance payments
9574	Rebates for eligible expenses	X	X
9575	Rebates for non-eligible expenses
9601	Contract work	X
9605	Patronage dividends
9607	Interest
9610	Gravel
9611	Trucking	X
9612	Resales of commodities purchased
9613	Leases
9614	Machine rentals
9600	Other
NISA Code	Expenses	Gross Margin	Production Margin
Total D	NISA Qualifying Commodity Purchases	X	X
9661	Containers and twine	X	X
9662	Fertilizers and lime	X	X
9663	Pesticides	X	X
9665	Insurance premiums (crop)	X	X
9713	Veterinary fees, medicine, A.I. fees	X	X
9714	Minerals and salts	X	X
9760	Machinery (repairs, licences, insurance)	X
9764	Machinery (gasoline, diesel fuel, oil)	X	X
9792	Advertising and marketing costs	X
9795	Building and fence repairs	X
9798	Agricultural contract work	X
9799	Electricity	X	X
9801	Freight and trucking	X	X
9802	Heating fuel	X	X
9804	Other insurance premiums	X
9807	Memberships/subscription fees	X
9808	Office expenses	X
9809	Legal and accounting fees	X
9815	Salaries (other than spouse)	X	X
9816	Salaries paid to dependents	X
9819	Motor vehicle expenses	X
9820	Small tools	X
9821	Soil testing	X
9822	Storage/drying	X	X
9823	Licences/permits	X
9824	Telephone	X
9828	Salaries paid to spouse or common-law partner	X
9830	Prepared feed (35% of non-itemized invoices)	X	X
9831	Custom feeding (50% of non-itemized invoices)	X	X
9897	Other (specify)	X
Total E	NISA non-qualifying commodity purchases	X	X

Why does the CAIS program include Production Insurance payments as income?

The Business Risk Management section of the APF has two programs, CAIS and Production Insurance (PI). The two have been designed to complement each other. PI payments are treated as income for CAIS to ensure that a producer is not paid twice for the same yield loss.

Why would a producer continue to take Production Insurance when they could participate in CAIS?

There are several reasons why a cash crop producer would continue to participate in Production Insurance (PI):

There is a linkage between CAIS and PI. Premium adjustments are paid when a separate calculation for participants who received PI benefits relating to the program year determines that the participant is entitled to additional benefits as a result of participating in both CAIS and PI.
CAIS will not cover negative margins for crop losses that could have been covered by PI. For example, a producer that has reduced corn yields but did not take PI would not receive negative margin coverage.
PI counts as income when calculating the reference margin, which prevents the reference margin from declining due to years with reduced yields. For example, producers who had PI in 2003 or 2004 will have a much higher reference margin for CAIS than if they had not had PI.
Because PI is quantity-based it still provides a valuable tool to assist producers in using marketing techniques such as forward or basis contracts. The CAIS program does not provide such marketing options.