2011/12 LENDING AND INSURANCE - BUILDING A STRONG RURAL MANITOBA

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1 2011/12 Annual Report LENDING AND INSURANCE - BUILDING A STRONG RURAL MANITOBA

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3 Table of Contents Transmittal Letters... 2 Chair s Message... 4 Vision / Mission / Values / Goals... 6 Corporate Governance... 7 Administration... 8 Organization Chart... 8 Strategic Plan Review... 9 Performance Indicators...12 Current Programs Insurance...13 Lending Other Initiatives...23 Financial Statements Responsibility for Financial Statements...28 Auditor s Report...29 Statement of Financial Position...31 Statement of Operations Statement of Change in Net Financial Assets...33 Statement of Cash Flows...34 Notes to Financial Statements Schedule 1: Schedule of Administrative Expenses...57 Schedule 2: Schedule of Operations and Accumulated Surplus...58 Office Locations...60 Board of Directors John Plohman (Chair) Frieda Krpan (Vice Chair) Harry Sotas (Vice Chair) Bryan Ferriss Frank Fiarchuk Wilfred Harder Carol Masse Sandy Yanick Executive Management Neil Hamilton President & CEO Paul Bonnet Vice President, Research & Program Development Kevin Craig Vice President, Lending Operations Jim Lewis Vice President, Finance & Administration Craig Thomson Vice President, Insurance Operations Lester Vopni Vice President, Corporate Services & General Counsel This annual report can be found online at masc.mb.ca. La version française de ce rapport annuel se trouve sur le site Internet masc.mb.ca. 2011/12 Annual Report 1

4 The Honourable Philip S. Lee, C.M., O.M. Lieutenant-Governor of Manitoba 235 Legislative Building Winnipeg, Manitoba R3C 0V8 Your Honour: I am pleased to submit the Annual Report of the Manitoba Agricultural Services Corporation for the fiscal year ended March 31, Yours truly, Original signed by Ron Kostyshyn Minister 2 Manitoba Agricultural Services Corporation

5 The Honourable Ron Kostyshyn Minister of Agriculture, Food and Rural Initiatives 165 Legislative Building Winnipeg, Manitoba R3C 0V8 Dear Sir: On behalf of the Board of Directors, I am pleased to submit the Annual Report of the Manitoba Agricultural Services Corporation for the fiscal year ended March 31, Yours truly, Original signed by John S. Plohman Chair, Board of Directors 2011/12 Annual Report 3

6 Chair s Message There can be no doubt that 2011 was one of the most challenging years in MASC s long history. Flooding, excess moisture and drought saw Manitoba s farmers and rural communities facing the perils of nature in nearly every part of the province. Along with the high level of activity in its regular programming, MASC was assigned by the Manitoba Government the significant task of administering its response to the 300-year flood event of the Assiniboine River. True to its motto of Building a Strong Rural Manitoba, MASC accepted these increased duties in stride, managing the support for rural Manitobans with commendable timeliness and professionalism in Manitoba began as a year of unsure footing and flooded foundations. Heavy rains loomed over much of the province the previous fall, followed by heavy winter snowfalls in Manitoba and Saskatchewan along the Assiniboine River basin, and finally a wet spring, all contributing to a waterlogged beginning to the year. A record 2.9 million insured acres went unseeded due to excess moisture, with many more acres threatened by continued inundation. Many farmers wisely topped up their AgriInsurance coverage, insuring a record 9.6 million acres ($1.7 billion in liability). The combination of record enrolment and the year s wet conditions led to the largest Excess Moisture Insurance payout in MASC s history, putting over $162 million into the hands of producers who experienced losses. Fortunately, hail was a much lesser concern for farmers in 2011, with relatively few hail storms occurring across the province. The Hail Insurance Program protected 3.5 million acres ($493 million in liability), with a loss to premium ratio of only 28%, one of the lowest in the program s history. A total of 2,500 acres qualified as Canadian Foodgrains Bank projects, for which the associated hail insurance premiums were waived. We applaud and continue to support this humanitarian effort. MASC s continued support of rural Manitoba was also seen through adjustments to our lending programs. MASC kept pace with increasing land values by increasing the lending limits. MASC s Direct Loan activity increased to one of the highest levels in recent years, resulting in a combined loan and guarantee portfolio of $642 million. And with the confidence of rural borrowers, MASC is finalizing preparations for a further expansion of its lending mandate in Even with the support provided to rural Manitoba by MASC s core programs, it soon became apparent that additional compensation would be required for those affected by the flooding of the Assiniboine River. As the flood waters rose to record levels, the Manitoba Government looked to MASC to administer a host of emergency assistance programs. MASC s Flood Recovery Office opened its doors in May 2011 for the purpose of administering the various components of the Manitoba Government s Flood 2011 Building and Recovery Action Plan. Handling flood issues for the Hoop and Holler Bend and areas surrounding Lake Manitoba, Lake Dauphin and Shoal Lakes, the Flood Recovery Office continues to operate in As of March 31, 2012, a total of $56.4 million had been paid to claimants. In addition to the Flood Recovery Office, further administrative support was required to deliver financial assistance to Manitoba farmers through the 2011 AgriRecovery Programs. This series of programs, which were designed to mitigate the impacts of excess moisture and flooding by providing additional funds to restore and rehabilitate farm operations, was delivered jointly with Manitoba Agriculture, Food and Rural Initiatives. A total of $119 million had been paid to affected producers as of March 31, Although these emergency assistance programs provided much needed support to the rural farms and rural communities of Manitoba, they also impacted in a very significant way, the day-to-day workflow of MASC s staff. Many MASC staff were re-assigned from their regular job duties to work alongside new staff at the Flood Recovery Office, while others throughout the corporation carried out additional duties in order to facilitate the administration of the flood programs. I would like to take this opportunity to applaud and thank them all for their tireless efforts. 4 Manitoba Agricultural SeRVICes Corporation

7 Although 2011 was a year in which MASC concentrated its efforts on program administration, efforts were also dedicated to looking forward and expanding MASC s products and services. MASC added the Overwinter Bee Mortality Insurance Program in 2011 to provide coverage for uncontrollable overwinter losses for apiarists, who previously had no framework for dealing with such production risks. The level of compensation for the Wildlife Damage Compensation Program was increased from 80% to 90%. Rebates of school taxes on agricultural land were increased to 80% through the Farmland School Tax Rebate Program. Many of the enhancements that MASC has made are influenced by those directly involved in the industry. Focus group meetings with producers were held this year in Dauphin and Carman. The Board of Directors and Management continued with their regular initiative, meeting with a number of producer groups in February and March. Their insight and recommendations continue to provide invaluable input into MASC s programming and practices, and we look forward to further cooperative efforts. MASC continued to improve on its business processes in 2011/12, as detailed in the Strategic Plan Review included later in this Annual Report. As we move forward, it is our intention to develop a strong plan for the inevitable changes MASC will need to address, such as succession planning and the transition of our IT systems to extend the efficient services our clients have come to expect. We ve seen many new faces at MASC and the Flood Recovery Office. Notably, I d like to welcome all of our new staff who contribute to this great team effort. I also want to thank all our staff for their untiring efforts on behalf of our clients in rural Manitoba. Their dedication, coupled with the cooperation and support of other government agencies at all levels, has allowed us to succeed in a very difficult year. MASC and the people we serve in rural Manitoba have persevered and grown to share an even stronger vision of a united future. Original signed by John S. Plohman Chair, Board of Directors Executive Management (L to R) Back Row: Paul Bonnet, Jim Lewis, Craig Thomson Front Row: Kevin Craig, Neil Hamilton, Lester Vopni Board of Directors (L to R) Back Row: Carol Masse, Frank Fiarchuk, Sandy Yanick, Bryan Ferriss, Wilfred Harder Front Row: Harry Sotas, John Plohman, Frieda Krpan 2011/12 Annual Report 5

8 Vision A strong rural economy with successful farms and businesses Mission Enhance financial stability in rural Manitoba by providing risk management solutions, lending options and other programs and services to address emerging needs Values Innovation in developing programs and services Responsiveness in program delivery Excellence in customer service Consultation with client and government stakeholders Accountability in managing public funds Social Responsibility in balancing public policy and business objectives Employees in a productive and positive work environment Goals Insurance provide programs that mitigate risk for the majority of farmers Lending assist farming and other rural businesses in accessing credit Other Programs and Services deliver emergency assistance, other initiatives that align with government priorities and inspection services Corporate carry on business effectively and efficiently 6 Manitoba Agricultural SeRVICes Corporation

9 Corporate Governance Mandate of the Board MASC was established through the introduction of The Manitoba Agricultural Services Corporation Act, and is a Crown corporation of the Manitoba Government. MASC s Board of Directors is comprised of up to nine directors who are appointed by the Lieutenant-Governor in Council, as are the Board chair and the two vice chairs. The Board is responsible for the overall stewardship of MASC, discharging its responsibilities either directly or through the assistance of three sub-committees. The Board sets MASC s strategic direction and organizational objectives with the assistance of Executive Management, and provides final approval of all applicable budgets. The Board also makes recommendations for future programming to the Minister of Agriculture, Food and Rural Initiatives, ensures that the corporate governance policies by which MASC operates are relevant and current, and is responsible for overseeing and monitoring corporate operations according to applicable legislative requirements and with acceptable levels of risk. Board Committee Structure The Board of Directors is assisted by the work of the following committees: Board Planning and Priorities Committee acts in place of the Board on matters requiring immediate action, and reviews policies as required prior to Board consideration; Board Audit and Finance Committee reviews MASC s financial reporting, risk management, actuarial and audit functions, as well as monitors corporate integrity and compliance with applicable authorities; and Board Producer Relations Committee assists the Board with interactions and communications with producers and producer groups. 2011/12 Annual Report 7

10 Administration MASC has a permanent staff of 153, complemented by part-time staff and over 150 adjustors who are employed as needed. MASC is represented by 19 insurance and 15 lending offices located across the province, with corporate offices in Portage la Prairie and Brandon. MASC reports to the Minister of Agriculture, Food and Rural Initiatives (MAFRI), with the province s contribution to MASC s regular programming representing over 40% of MAFRI s budget. An independent three-member Appeal Tribunal hears disputes between insured producers and MASC respecting MASC s assessment of insurance loss. The Appeal Tribunal s decisions are final and binding on both parties. With direction from the Manitoba Government s initiatives under The Sustainable Development Act, MASC encourages and facilitates day-to-day green business practices that conserve our natural resources. MASC actively promotes teleconferencing and videoconferencing, and has significantly reduced its printed materials by replacing most internal paper manuals with digital versions. MASC is also increasing the opportunities for producers to use paperless web-based transactions, such as reporting their harvested production and carryover grain through MASC s Online Services and opting for a digital version of the AgriInsurance contract. MASC has established the Flood Recovery Office in Portage la Prairie to handle matters concerning the Flood 2011 Building and Recovery Action Plan. As of March 31, 2012, over 40 staff operate out of the Flood Recovery Office, including several MAFRI staff who are on secondment and a number of adjustors and appraisers contracted from private firms. The Flood 2011 Appeals Commission has been appointed to hear appeals relating to 2011 flood programming. Organization Chart As of March 31, 2012: MINISTER OF AGRICULTURE, FOOD & RURAL INITIATIVES BOARD OF DIRECTORS PRESIDENT & CHIEF EXECUTIVE OFFICER NEIL HAMILTON Vice President, Insurance operations CRAIG THOMSON Vice President, Research & Program Development Paul Bonnet Vice President, FINANCE & ADMINISTRATION JIM LEWIS Vice President, CORPORATE SERVICES & GENERAL COUNSEL LESTER VOPNI Vice President, LENDING OPERATIONS KEVIN CRAIG INSURANCE PROJECTS, SALES & SERVICE PREMIUM RATES, COVERAGES & FORECASTING FINANCIAL SERVICES RISK MANAGEMENT LENDING PROGRAMS CLAIM SERVICES PROGRAM DEVELOPMENT HUMAN RESOURCES COMMUNICATIONS & PLANNING GUARANTEE PROGRAMS FARMLAND SCHOOL TAX REBATE AGRONOMY RESEARCH & ADVICE ADMINISTRATIVE SERVICES INTERNAL AUDIT LOAN ADMINISTRATION INSPECTION SERVICES INFORMATION TECHNOLOGY SERVICES FLOOD RECOVERY OFFICE 8 Manitoba Agricultural SeRVICes Corporation

11 Strategic Plan Review MASC s vision of a strong rural Manitoba is achieved through a series of focused goals, as identified in its Strategic Plan. The following is a review of the associated actions implemented in 2011/12, along with the progress towards MASC s goals. The actions identified are considered to be new initiatives and are incremental to MASC s ongoing day-to-day operations and to the administration of emergency assistance programming. Goal: Insurance provide programs that mitigate risk for the majority of farmers Due to rising input costs, AgriInsurance will be offering an additional $15 per acre option in 2012, bringing the total available coverage for Excess Moisture Insurance to $80 per acre. The dollar coverage for Forage Establishment Insurance and the Forage Restoration Benefit will be increasing in 2012, providing more coverage to forage producers. Under the new Overwinter Bee Mortality Insurance program, which provided protection against overwinter bee losses starting in the winter of 2011/12, 44 Manitoba beekeepers insured 29,200 colonies for total insured liability of $3.0 million. Manure Management Loans were introduced to provide financing for projects approved under MAFRI s Manure Management Financial Assistance Program. This initiative provides financing to eligible hog producers in order to assist with construction costs associated with manure storage, as well as construction of new manure treatment projects. MASC staff made 22 presentations across Manitoba to producers, producer groups and rural lenders to enhance awareness of MASC s loan and guarantee programs. An additional 25 presentations were made specifically promoting MASC s new Operating Credit Guarantee for Rural Small Business. Work continues with Agriculture and Agri-Food Canada and other provinces to finalize guidelines for livestock insurance proposals. A premium replacement provision for the AgriInsurance reinsurance program was negotiated for 2012, which will reduce the program s loss in the event of a large unseeded acreage component such as the one that occurred in This feature will assist in the financial sustainability of the AgriInsurance Program, thereby protecting future programming. Goal: Lending assist farming and other rural businesses in accessing credit An in-depth strategic review of MASC s lending programs led to the approval of a new lending mandate, which will raise lending limits and remove certain eligibility criteria for new and existing borrowers. This will allow more Manitoba producers access to MASC loans starting in /12 Annual Report 9

12 Goal: Other Programs and Services deliver emergency assistance, other initiatives that align with government priorities and inspection services In response to unprecedented water levels in western and central Manitoba in the spring of 2011, a number of emergency assistance programs were developed. A special unit of MASC, operating as the Flood Recovery Office, was established to deliver compensation, with the assistance of MAFRI, for the Flood 2011 Building and Recovery Action Plan and the 2011 AgriRecovery Program. A total of 11 emergency assistance programs involving MASC administration were offered, with some of these programs continuing into Administration of the 2010 Canada-Manitoba Feed and Transportation Assistance Program and the 2010 Assiniboine Valley Producers Flood Assistance Program was completed. Compensation under the Wildlife Damage Compensation Program was increased from 80% to 90%, effective April 1, Inspection services were expanded to include assessing crop damage associated with the construction of a wind farm. Goal: Corporate carry on business effectively and efficiently Two focus group meetings were held with producers to seek input on the future direction of MASC s Online Services. Enhancements that make it easier for producers to complete their paperwork are ongoing, with the ability to file Seeded Acreage Reports online being new for In addition, producers can complete their Harvested Production Reports, declare their carry-over grain, apply for hail insurance, track the status of their claims, and access a number of their insurance and billing statements online. Cross-training between insurance and lending field staff occurred during the year, enabling field staff to provide a higher level of customer service for clients on all of MASC programs. Enhancements were made to MASC s website to allow users of mobile devices better viewing capacity. Visitors to the website via this medium increased substantially, with mobile devices now representing 3% of all MASC website traffic. A succession planning process was initiated for higher level positions. Corporate core competencies were established and the identification of potential candidates has commenced. 10 Manitoba Agricultural SeRVICes Corporation

13 Progress on MASC s corporate-wide workplace Diversity Strategy continued, with the establishment of a policy that sets out specific initiatives and goals to enhance staff diversity at MASC. MASC s Geographic Information System was enhanced to provide spatial information such as unseeded land, percentage hail losses and crop yields, which are used to enhance the reporting of losses and to verify claims made through producer declarations. A computerized grain bin information database has been implemented, reducing data inputting time and improving the accuracy of bin calculations for postharvest claims that are completed by adjustors using laptop computers. The claim tracking process for post-harvest interim payments was improved, providing better monitoring of claim adjustments. A new risk rating model for loans has been developed, which will increase the level of assessment and reduce the turnaround time for loan approvals. Processes have been automated in order to reduce the amount of printed material: single-copy forms for a number of insurance reports are in place, and producers can now opt to download an electronic version of the AgriInsurance contract rather than having a printed copy mailed out. A number of internal lending forms have also been automated to increase processing efficiencies and reduce the amount of paper used. The annual loan activity statement was modified to improve readability for clients. MASC s Board of Directors and staff met with 15 producer groups for the purpose of assessing how programs and services can be improved. Suggestions made at these meetings are very valuable and will be considered in future programming. 2011/12 Annual Report 11

14 Performance Indicators AgriInsurance Just under 6.7 million acres of annual crops and forages were insured in 2011/12, which was about 2.6 million acres below the targeted amount. The decrease was due to over 2.9 million acres that could not be seeded as a result of excess moisture. Total AgriInsurance liability was $1.72 billion, roughly the same as in 2010/11, though significantly below the $2.05 billion that was budgeted, again due to the unseeded acreage. The average insured coverage level increased from 76.4% to 77.3%, exceeding the 76.5% that was targeted. Indemnities totalled $326.9 million, significantly above the breakeven budgeted amount of $178.5 million. Out of the $326.9 million, $162.3 million was for Excess Moisture Insurance claims, with the balance due to damage to seeded crops. The number of claims totalled 14,130 (14% higher than budgeted), with more than 5,800 of that number being Excess Moisture Insurance claims. The average indemnity per claim was 61% higher than budgeted. Hail Insurance Hail Insurance participation was 3.5 million acres, with liability of $493 million (down from 4.3 million acres and $596 million of liability in 2010/11, and significantly below the targets of 4.6 million acres and $640 million of liability). This decline is attributed to the significant acreage that could not be seeded due to excess moisture in Hail losses for the year were $4.8 million, which was considerably below the breakeven budgeted amount of $17.1 million. Loans MASC approved 852 loans in 2011/12 totalling $107.7 million. The number of loans increased by 145 compared to 2010/11, with the associated dollar amount being $30.1 million (39%) higher. The target for the year was 766 loans totalling $82.4 million. The increase in agricultural lending is attributed to increased profitability in the sector. Loan Guarantees MASC approved 195 guarantees in 2011/12 on loans totalling $79.4 million. Compared to 2010/11, the number of guarantees and the dollar amount of the associated loans decreased by 51 and $15.5 million, respectively. The target for the year was 276 guarantees on loans totalling $92.3 million. Improved farm profitability in 2011/12 resulted in fewer requests by lending institutions for loan guarantees. Administration MASC s 2011/12 administrative expenses for its regular programming totalled $17.4 million, roughly $3.6 million under budget. The variance was mainly due to allocations to emergency assistance programs for staff time and overhead relating to these programs, lower than expected numbers of adjusted AgriInsurance and Hail Insurance claims, and other expenditures that were either postponed or cancelled. 12 Manitoba Agricultural SeRVICes Corporation

15 Current Programs Essential to Manitoba s economy and fundamental to the social fabric of rural regions, agriculture is the cornerstone of Manitoba s success. Through financial and risk management programs, MASC contributes to the development, growth and sustainability of a strong rural Manitoba. MASC s insurance programs offer protection against losses due to natural perils for a wide range of agricultural crops, including cereals, oilseeds, special crops and forages. MASC s financial products include direct loans and loan guarantees to assist agricultural producers and rural entrepreneurs in developing, diversifying and expanding their farms and businesses. MASC is also entrusted to deliver efficient and effective emergency assistance programs on behalf of the governments of Manitoba and Canada. Insurance MASC administers two major insurance programs, AgriInsurance and Hail Insurance, which provide producers with a single source of risk management for crop production. Insurance programs are ongoing, with enhancements being made based on input from producers and producer groups, priorities established by MASC s Board of Directors and staff, and direction from the Manitoba Government. AgriInsurance AgriInsurance provides protection against crop production and quality losses caused by natural perils, including drought, excess moisture (rainfall and flood), frost, hail, fire, excess heat, wind, wildlife, disease and pests. Losses that are within a producer s control are not covered. AgriInsurance provides insurance for 60 different crops, as well as for forages during the establishment stage, and the inability to seed land in the spring due to wet conditions. Producers can select coverage levels of 50, 70 or 80%. Coverage levels can be varied by crop, with the option of completely excluding a crop from insurance. Insured coverage (liability) is based on a producer s expected (probable) yield, multiplied by the selected coverage level, multiplied by the number of insured acres. If harvested production (adjusted for quality loss) falls below coverage, the producer is paid an indemnity equal to the production shortfall multiplied by the insured dollar value. A reseeding benefit is provided to compensate insured producers who suffer early crop losses and reseed to an eligible crop prior to the seeding deadline. Producers have the option of insuring all of their eligible crops under Crop Coverage Plus, which pays an indemnity if the combined production of all crops falls short of the whole farm guarantee. Depending on a producer s mix of crops, Crop Coverage Plus can provide whole farm coverage of up to 90% for the same premium cost as 80% crop-specific coverage. Excess Moisture Insurance (EMI), a basic feature of Manitoba s AgriInsurance Program, provides insurance for land that is too wet to seed. Producers with an active AgriInsurance contract automatically receive basic EMI coverage and pay a corresponding premium. A producer who is unable to seed insured land by June 20 due to wet conditions is paid basic compensation of $50 per eligible acre, subject to a minimum deductible of 5%. Additional protection of $15 per acre is available as an option, increasing a producer s coverage to $65 per acre. An option is also available whereby the deductible can be eliminated. The Forage Restoration Benefit provides protection similar to basic EMI for tame hay and forage seed crops that are destroyed due to excess moisture. For producers with tame hay insurance, pasture insurance is available based on the type and number of livestock. Producers tame hay yields are used as a proxy for estimating pasture productivity, and any pasture insurance payment is based solely on the payout percentage on their tame hay production. The Pasture Days Insurance Pilot Program, which is available to livestock producers on a limited basis, provides protection against grazing shortfalls during the pasture period. Under this program, an indemnity is paid when the actual grazing period is less than 90% of the insured producer s animal unit days (which is based on the 2011/12 Annual Report 13

16 expected grazing period and the number of animal units on pasture). In 2011, 48 producers enrolled in the pilot program, with roughly 13,650 head of livestock (61,300 acres of pasture) being covered for a total liability of $1.6 million. Insurance is available for the establishment of eligible forage crops. Spot-loss compensation is provided when a crop fails to establish in the year of seeding due to natural perils. Vegetable Acreage Loss Insurance provides commercial vegetable producers with protection against crop losses that are severe enough to warrant working down all or part of the crop. Commercial strawberry and saskatoon growers are able to protect themselves against losses during the establishment period. Growers are eligible for compensation when plant losses exceed 20% of the total stand. The Overwinter Bee Mortality Insurance Program, which was introduced in 2011/12, enables commercial beekeepers to insure their honeybee colonies against unmanageable overwinter losses. In 2011, 44 beekeepers with 29,200 colonies enrolled for a total liability of $3.1 million. For insurance purposes, MASC divides the Province of Manitoba into 15 areas of similar crop protection risk. These risk areas form the geographic basis for determining insurance coverages (liabilities) and premiums for most crops. The probable yield methodologies used to determine coverages are individualized, and depending on the crop, are based either on a producer s relative yield history (compared to the area average), or the producer s individual yield history Crop Year The 2011/12 growing season presented Manitoba s producers with considerable challenges including flooding from rivers and lakes, excess moisture, and even drought conditions. Many fields entered the spring already saturated by heavy rains during the previous fall. Over eight inches of rain fell across much of Manitoba from August to November of Higher than normal rainfall and cooler than normal temperatures occurred in the spring of 2011, resulting in late seeding or no seeding in many cases. Waterlogged fields resulted in a record 2.9 million insured acres not being seeded. The areas surrounding Lake Manitoba, the Parkland and the Southwest were the hardest hit. Weather conditions changed drastically in late June, with hot dry conditions continuing through September. During this time, very few severe thunderstorms were experienced, with hail damage being substantially below average. Heading into winter, the dry conditions continued with below normal amounts of precipitation from October to December. Poor early season growing conditions delayed seed emergence and plant development, resulting in delayed harvesting for some crops. Harvesting conditions were generally favorable, with the first killing frost occurring in mid-september. For most crops, provincial average yields were below average for The exceptions were the heatloving crops (corn, dry edible beans and sunflowers), for which yields were above average. Figure 1 shows the major causes of loss for all crops in 2011/12, compared to the historical average. In 2011/12, excess moisture and drought/heat accounted for 73% and 25% of the losses, respectively. For most AgriInsurance programs, premiums are paid 40% by insured producers, 36% by the Government of Canada and 24% by the Manitoba Government. The exception is the EMI Zero Deductible Option premium, which is paid entirely by participating producers. Administrative expenses for the AgriInsurance Program are shared 60% by Canada and 40% by Manitoba. 14 Manitoba Agricultural SeRVICes Corporation

17 Figure 1 AgriInsurance Causes of Loss Causes of Loss 2011/12 Figure 2 AgriInsurance Premiums and Indemnities ($ millions) Historical Causes of Loss (1966 to 2010) Excess Moisture (73%) Drought & Heat (25%) Hail (1%) Other (1%) / / / / /12 Excess Moisture (39%) Drought & Heat (35%) Frost (10%) Hail (7%) Disease (2%) Wind (1%) Other (6%) In summary, a total of 9.6 million acres were protected by AgriInsurance in 2011/12, with 6.7 million seeded acres and 2.9 million unseeded acres (due to excess moisture). Total premiums were $168.8 million on $1.72 billion of coverage (liability). Indemnity payments for the year totalled $326.9 million, of which $162 million was paid out for Excess Moisture Insurance claims. Figure 2 shows how 2011/12 premiums and indemnities compare to the previous four years. After accounting for interest revenue of $2.4 million, reinsurance premiums of $40.1 million and prior year premium adjustments of $0.5 million, AgriInsurance had a net loss of $196.3 million for 2011/12. The net loss resulted in the AgriInsurance reserve decreasing from $271.7 million to $75.4 million. Premiums Indemnities Large fluctuations in reserve levels are normal in AgriInsurance. When the surplus is high, a negative surplus load reduces premium rates and when the surplus is low, a positive surplus load increases premium rates. Normally, the reserve plus premium income and the additional protection provided by the purchase of private reinsurance, is sufficient to deal with the expected loss for the year. With back-to-back losses in 2010/11 and 2011/12, the federalprovincial reinsurance program may be required to provide deficit financing should another loss be experienced in 2012/13. The AgriInsurance loss ratio (loss as a percentage of total premium) was 194% for 2011/12. Loss ratios for individual crops are listed in Table /12 Annual Report 15

18 Table 1: Summary of 2011/12 AgriInsurance Crop Acres Insured Coverage (000) Total Premium (000) Indemnities (000) Loss Ratio (%) Red Spring Wheat 1,690,520 $346,446.7 $27,940.2 $30, Durum Wheat Extra Strong Wheat 1, Prairie Spring Wheat 2, Hard White Wheat 14,772 2, Feed Wheat 26,709 3, Winter Wheat 181,386 36, , , Barley 230,046 37, , , Oats 398,496 78, , , Mixed Grain Fall Rye 38,695 4, , Triticale Canola 2,528, , , , Rapeseed 11,695 3, Flax 83,482 18, , , Mustard 1, Oil Sunflowers 14,616 3, Non Oil Sunflowers 19,207 6, , Buckwheat 2, Grain Corn 170,487 47, , , Silage Corn 32,309 9, , Potatoes 57, , , , Vegetables 1 1,535 4, Field Peas 18,996 3, Lentils Fababeans 1, Dry Edible Beans 2 47,379 16, , Soybeans 545, , , , Tame Hay 3 263,066 23, , , Pasture - 1, Pasture Days Pilot Program - 1, Native Hay 19, Forage Establishment 37,876 2, Strawberry Establishment Saskatoon Establishment Pedigreed Timothy Seed 11,277 1, Alfalfa Seed 12,302 2, Canaryseed 9,762 1, Annual Ryegrass Seed 1, Perennial Ryegrass Seed 22,911 5, Proso Millet Seed 1, Tall Fescue Seed 1, Hemp Grain 2, Greenfeed 172,013 12, , , Open Pollinated Corn Overwinter Bee Mortality - 3, Estimate of Incomplete Claims , Subtotal 6,679,417 $1,560,839.8 $151,472.4 $164, Excess Moisture Insurance 4 2,948, , , , Total 9,627,862 $1,723,168.8 $168,827.5 $326, Vegetables include carrots, cooking onions, rutabagas, parsnips and Vegetable Acreage Loss Insurance. 2 Dry edible beans includes white pea, pinto, black, kidney, cranberry, small red and other dry edible beans. 3 Tame hay includes alfalfa, alfalfa /grass mixtures, grasses and sweet clover. 4 Excess Moisture Insurance (EMI) acreage and coverage shown in the table is only for land that could not be seeded due to excess moisture and on which claims were paid. Total EMI insured acreage and coverage were 8,980,937 and $499,613,128, respectively. 16 Manitoba Agricultural SeRVICes Corporation

19 Hail Insurance A separate policy covering spot-loss hail damage is available to producers who participate in AgriInsurance. Producer premiums fund all Hail Insurance costs, including administrative expenses. Premium rates are determined based on AgriInsurance risk areas, rather than by township as is done by private insurers. Coverage can be selected at any time during the growing season, and is available in various dollar amounts depending on the crop. Hail Insurance also provides coverage for loss due to accidental fire. The Continuous Hail Insurance Option (CHIO) allows producers to automatically insure all eligible crops without an annual application. Producers are eligible for an increased premium discount (above the base 2%) if they maintain their CHIO coverage for more than two years. Now in its fifth year, CHIO continues to be very well accepted with 54% of all hail contract holders participating. Figure 3 Hail Insurance Premiums and Indemnities ($ millions) / / / / /12 Premiums Indemnities MASC insured 3.5 million acres in 2011/12 for a total coverage (liability) of $493 million. Premiums prior to discounts were $17.1 million, with indemnities of $4.8 million, resulting in a loss ratio (loss as a percentage of premium) of 28%. Figure 3 provides a summary of Hail Insurance premiums and indemnities for the past five years. In 2011/12, MASC s Hail Insurance represented 55% of Manitoba s crop hail insurance market. After accounting for CHIO discounts and early payment discounts totalling $0.9 million, interest revenue of $1.0 million, reinsurance premium of $1.1 million and administrative expenses of $2.2 million, Hail Insurance had net income for the year of $9.1 million. As a result, the Hail Insurance reserve increased from $57.9 million to $67.0 million. 2011/12 Annual Report 17

20 Table 2 - Five Year Insurance Statistics 2011/ / / / / /12 AgriInsurance Number of producer contracts 9,893 9,737 9,402 9,174 8,929 Insured acres (millions) Total coverage (liability) ($ millions) 1, , , , ,723.2 Producer premiums ($ millions) Total premiums ($ millions) Average coverage level selected (%) Number of claims paid 8,177 6,001 8,612 11,346 14,131 Indemnities paid ($ millions) Income (loss) for the year ($ millions) (64.0) (196.3) Funds retained, end of year ($ millions) Indemnities to total premium ratio (%) Indemnities to coverage ratio (%) Hail Insurance Number of producer contracts 4,468 4,757 4,504 4,320 3,937 Insured acres (millions) Total coverage (liability) ($ millions) Premiums, prior to discounts ($ millions) Number of claims paid 2,448 1,919 1,440 1, Indemnities paid ($ millions) Income (loss) for the year ($ millions) (2.1) Funds retained, end of year ($ millions) Indemnities to premium ratio (%) Indemnities to coverage ratio (%) Note: The above statistics are based on the insurance crop year and, as such, may not correspond exactly to the 2011/12 financial statements. 18 Manitoba Agricultural SeRVICes Corporation

21 Lending MASC s lending programs give Manitoba s agricultural producers and rural businesses reasonable access to credit. MASC provides direct loans and guarantees loans from private sector financial institutions, thereby assisting in the creation and expansion of operations in rural Manitoba. The Bridging Generations Initiative supports young farmers under the age of 40 by assisting in the inter-generational transfer of assets through flexible financing options, Young Farmer Rebates and Management Training Credits. Despite the general trend toward fewer young farmers, MASC s involvement with this target group has increased for the third consecutive year. In 2011/12, MASC issued 435 loans to producers under the age of 40, an increase of 49% over 2010/11 and 61% over 2009/10. In dollar amounts, the total of $63.5 million in direct loans to young farmers represents a 56% increase compared to the previous year and a 93% increase relative to 2009/10. Loans to young farmers accounted for 81% of MASC s direct lending business. The Young Farmer Rebate (YFR) reduces the cost of borrowing in the critical start-up phase of an operation. YFR provides an annual rebate of 2% on the first $150,000 of principal, and is available for the first five years of a loan, resulting in a lifetime maximum rebate of $15,000. In 2011/12, YFR totalled $1.5 million. Flexible financing options give young farmers a choice between 90% financing or five years of interest-only payments, allowing them the flexibility of reducing their initial down payment or easing their operation s cash flow pressure during its start-up phase. In 2011/12, MASC approved 118 loans for $14.5 million under the 90% financing option. Given that interest rates are currently at historical lows, the interest-only option is not attracting much attention at this time. Young farmers can earn a Management Training Credit (MTC) of 1% of the principal amount of an eligible Direct Loan (to a maximum of $2,500) in each of the first five years of the loan. In 2011/12, young farmers earned MTCs totalling $188,000. Loans MASC provides short, intermediate and long-term financing with reasonable interest rates to eligible Manitoba agricultural producers and rural businesses. Clients are not penalized for prepayment, and have the flexibility of either locking in an interest rate for the full amortization period (up to 25 years) or selecting renewable interest rates for one to five years. As shown in Table 3, as of March 31, 2012, MASC had 4,394 outstanding loans with current balances totalling $347.1 million. Direct Loans are available for such purposes as purchasing land and buildings, constructing or renovating farm production buildings, purchasing breeding livestock, constructing or renovating farm homes, purchasing supply management quota, and consolidating and refinancing debts. 2011/12 Annual Report 19

22 Also included in this category are Alternate Energy Loans, Environmental Enhancement Loans, Onsite Wastewater Management Loans and Manure Management Loans. Environmental Enhancement Loans provide financial assistance to producers who improve the environmental sustainability of their operations and management practices. Alternate Energy Loans are available to finance the construction, equipment, and other approved capital costs associated with alternate energy projects such as ethanol, bio-diesel and wind energy production. Onsite Wastewater Management Systems Loans facilitate sewage ejectors being replaced with more environmentally friendly disposal fields. New in 2011, Manure Management Loans, together with MAFRI s Manure Management Financial Assistance Program, provide eligible hog producers with the financing necessary to comply with environmental regulations. In 2011/12, MASC approved 539 new loans for a total of $77.6 million. The number of new loans increased by 48%, with loan amounts increasing by 55%. MASC s Direct Loans have been progressively increasing in size over time, averaging $144,000 in 2011/12. As of March 31, 2012, MASC s total Direct Loan portfolio was $248.3 million (3,008 loans). As shown in Figure 4, the Direct Loans issued in 2011/12 were used predominantly for purchasing land and buildings (58%), refinancing (19%) and consolidating debt (12%). Figure 4 Direct Loan Purposes Direct Loan Purposes 2011/12 Historical Direct Loan Purposes Land/Building Purchases (58%) Refinancing (19%) Debt Consolidation (12%) Livestock Purchases (6%) Land/Building Improvements (3%) Other (2%) Land/Building Purchases (65%) Debt Consolidation (22%) Refinancing (1%) Livestock Purchases (5%) Land/Building Improvements (5%) Other (2%) Stocker Loans provide producers with short-term financing to purchase feeder cattle and calves, or as a cash advance on their own retained feeders. MASC issued 221 Stocker Loans in 2011/12 (down 7% from the prior year). At $23.3 million, the total value of Stocker Loans was up 11%, while the number of head financed was down 19% at 35,375. Comprehensive Refinancing Loans assist existing MASC clients who are in financial difficulty. The interest rate for the first five years of these loans is set at one-half a percentage point below MASC s prevailing five-year rate at the time the loan is taken out. In 2011/12, the number of refinancing loans decreased 12%, with 92 loans approved, though the dollar amount increased 2% for a total of $6.8 million. These loans primarily assisted producers experiencing prolonged excess moisture related problems and extended periods of poor cattle returns. As of March 31, 2012, the Comprehensive Refinancing Loan portfolio consisted of 499 loans for $29.9 million. Enterprise Development Loans were introduced in 2008/09 to provide financial support for the Manitoba Government s initiative of developing and diversifying the rural economy. As of March 31, 2012, the Enterprise Development Loan portfolio had two loans for $3.9 million. Property Management As a result of debt settlement negotiations and foreclosure proceedings, MASC periodically acquires title to property. During 2011/12, MASC acquired no land and sold 1,244 acres, reducing the inventory to 3,363 acres as of March 31, Of these acres, 3,208 acres are long-term leases under the Land Lease Option Program and 155 acres are on a short-term lease. 20 Manitoba Agricultural SeRVICes Corporation

23 Table 3 Loan Summary Approvals 2010/11 Approvals 2011/12 Outstanding as of March 31, 2012 Number Millions Number Millions Number Millions Direct Loans $ $77.6 3,008 $248.3 Stocker Loans Comprehensive Refinancing Loans Enterprise Development Loans Manitoba Hog Assistance Loans BSE Recovery Loans Enhanced Flood Proofing Assistance Loans Producer Recovery Loans Total 707 $ $ ,394 $ Includes Environmental Enhancement, Alternate Energy and Onsite Wastewater Management Systems loans. 2 Prior programming for which outstanding loans are still being administered. Loan Guarantees MASC guarantees various types of loans made by private sector lending institutions. In partnership with credit unions, caisse populaires and certain chartered banks, MASC helps provide rural Manitobans with access to credit with reasonable interest rates and terms that otherwise would likely not exist. This partnership provides agricultural producers and rural entrepreneurs with opportunities to develop and expand their operations. In addition, MASC s loan guarantees encourage financing in areas that the private sector generally considers to be higher risk. As shown in Table 4, as of March 31, 2012, MASC had 510 outstanding guarantees amounting to $82.0 million, which facilitated loans by participating lenders totalling $295.3 million. Diversification Loan Guarantees assist producers and agricultural enterprises in diversifying their operations and/or adding value to agricultural commodities. MASC provides a 25% guarantee of the principal amount of the loan made by a participating lender. In 2011/12, MASC approved 17 guarantees (63% of the 2010/11 total) for loans totalling $18.7 million. As of March 31, 2012, MASC had 182 active guarantees with related loan amounts of $224.0 million. Manitoba Livestock Associations Loan Guarantees provide producers who are members of livestock associations with cost savings created through more favourable financing terms and reduced costs due to higher cattle transaction volumes. MASC guarantees 25% of the principal amount of a loan made to a livestock association by a participating lender. Individual livestock associations are limited to a maximum guarantee of $1.25 million, which results in a maximum loan of $5 million. As of March 31, 2012, there were nine associations (down by one from 2010/11), with 99 active association members and an approved maximum total loan amount of $19.4 million. Operating Credit Guarantees for Agriculture assist producers in obtaining lines of credit with reasonable terms from lenders participating in the program. MASC s 25% guarantee of an approved line of credit makes financing available, which otherwise likely would not be offered by the private lending institution. As of March 31, 2012, MASC had 131 active guarantees with a total maximum loan amount of $38.5 million. Operating Credit Guarantees for Rural Small Business were introduced in 2009 to assist small rural non-agricultural businesses in obtaining lines of credit with reasonable terms from participating lenders. MASC guarantees 25% of the maximum authorized loan amount. The guaranteed lines of credit may be used to purchase inventory, finance receivables and cover general operating expenses. The program guarantees loans up to a maximum of $200,000. As of March 31, 2012, there were five active guarantees with a total maximum loan amount of $0.7 million. 2011/12 Annual Report 21

24 Rural Entrepreneur Assistance (REA) provides a guarantee of up to 80% of the principal loan amount made by a participating lender to small rural non-agricultural businesses. REA guarantees loans up to a maximum of $200,000. In 2011/12, REA approved 37 guarantees on loans totalling $4.3 million. As of March 31, 2012, the REA portfolio had 183 active guarantees (down 6%) with related outstanding loans of $12.7 million (down 1%). In April 2011, MASC assumed full responsibility for the contingent liability associated with existing and future REA loan guarantees. Table 4 Loan Guarantee Summary Loan Approvals 2010/11 Loan Approvals 2011/12 Related Outstanding Loans by Lending Institutions as of March 31, 2012 Outstanding Guarantees as of March 31, 2012 Number Millions Number Millions Number Millions Millions Diversification Loan Guarantees 1 27 $ $ $ $56.0 Manitoba Livestock Associations Loan Guarantees Operating Credit Guarantees for Agriculture Operating Credit Guarantees for Rural Small Business Rural Entrepreneur Assistance Total 246 $ $ $295.3 $ Outstanding loans from the original Diversification Loan Guarantee Program and the existing Enhanced Diversification Loan Guarantee Program are included. 2 Amounts reflect the original loan amounts that were guaranteed under the program as of March 31, Related outstanding loan amounts represent the loan balances as of March 31, 2012 for participating lending institutions associated with the guarantees administered by MASC. Table 5 Agricultural Lending Activity by Sector as of March 31, 2012 Primary Enterprise Direct Lending % Manitoba Livestock Associations Loan Guarantees % Operating Credit Guarantees for Agriculture % Diversification Loan Guarantees* % Grains/Oilseeds Potatoes Other Crops Cattle Hogs Poultry Dairy Other Share of All Programs (%) * Includes the previous Diversification Loan Guarantee Program as well as the existing Enhanced Diversification Loan Guarantee Program. Notes: 1. The table does not include Enterprise Development Loans, Enhanced Flood Proofing Assistance Loans, Operating Credit Guarantees for Rural Small Business and Rural Entrepreneur Assistance. 2. In the case of guarantee programs, this table includes only MASC s guaranteed amounts (i.e. the contingent liability), rather than the loan activity generated by the guarantees. TOTAL % 22 Manitoba Agricultural SeRVICes Corporation

25 Figure 5 Five Year Lending Statistics Year End Totals ($ Millions) / / / / /12 Direct Loans Loans with MASC Guarantees Other Initiatives MASC has extensive experience in designing, administering and delivering support programs for rural Manitobans on behalf of the governments of Manitoba and Canada. In 2011/12, MASC assisted in the delivery of an unprecedented number and magnitude of emergency assistance programs, in response to flooding and excess moisture conditions. Wildlife Damage Compensation Provided a producer has taken reasonable steps to mitigate damage, the Wildlife Damage Compensation Program reduces financial losses caused by livestock predators, big game and migratory waterfowl. Starting in 2011/12, compensation was increased from 80% to 90% of lost production. This change in level of compensation needs to be considered when comparing program results for Table 6 Wildlife Damage Compensation Program 2011/12 with previous years. Administration and program payments up to the 80% level are funded by Canada (60%) and Manitoba (40%), with the remaining 10% of compensation being funded entirely by Manitoba. In 2011/12, Wildlife Damage Compensation Program payments and related administration totalled $2.4 million, down slightly from the previous year. Table 6 provides a breakdown by type of loss. Cause of Damage Number of Claims Compensation (000) Administration (000) Total (000) 2010/ / / / / / / /12 Big Game $1,159.3 $882.2 $202.3 $123.8 $1,361.6 $1,006.0 Waterfowl Livestock Predation 1,869 1, ,078.8 Total 2,763 2,407 $2,388.6 $2,042.5 $456.6 $354.2 $2,845.2 $2, /12 Annual Report 23

26 Farmland School Tax Rebate Since 2005, MASC has been responsible for administrating the Manitoba Government s Farmland School Tax Rebate Program. For 2011, the rebate was increased to 80% (up from 75% in 2010) of the school tax paid on farmland. Farmland owners have three years to apply for the rebate. As of March 31, 2012, MASC had disbursed rebates relating to the 2011 tax year to 30,034 applicants for a total of $31.6 million, with incurred administrative expenses of $387,000 (1.2% of the rebate amount). Details are provided in Table 7. Table 7 Farmland School Tax Rebates (as of March 31, 2012) Program Year Rebate Level Applications Paid Rebate Paid (Millions) % 36,515 $ % 36,258 $ % 35,066 $ % 33,422 $ * 80% 30,034 $31.6 *Represents less than a full year of activity. Young Farmer Crop Plan Credit A one-time Young Farmer Crop Plan Credit of $300 on AgriInsurance premium is available to new AgriInsurance entrants (under the age of 40). To qualify, a young farmer must complete a cropping plan that is acceptable to their MAFRI Farm Production Advisor. In 2011/12, 67 young farmers qualified for credits totalling $18,500. Program costs are paid by the Manitoba Government. Land Lease Option Program From 1974 to 1977, the former Manitoba Agricultural Credit Corporation had a program whereby farmland was purchased from willing sellers and leased to qualifying producers. As of March 31, 2012, 10 long-term leases covering 3,208 acres remain in place. Inspection Services In support of Manitoba s agricultural sector, MASC provides inspection services at a reasonable cost. In 2011/12, MASC: conducted stored grain audits for cash advances issued by the Canadian Wheat Board; provided crop adjusting services in situations where windmill construction or maintenance activities resulted in crop damage; certified that the products sold at the St. Norbert Farmers market had been produced locally; assessed third-party crop loss appraisals for private sector property insurers; and conducted livestock inspections for the Manitoba Livestock Cash Advance Program. Total revenue of $68,200 was generated by these services in 2011/ Manitoba Agricultural SeRVICes Corporation

27 Flood 2011 Building and Recovery Action Plan Announced in May 2011, the Building and Recovery Action Plan (BRAP) programs were developed to help families, producers and businesses cope with the 2011 flood, strengthen communities affected by flooding, and build for future flood mitigation. The Manitoba Government has fully funded these programs, with cost sharing for some components to be received from the Government of Canada under the Disaster Financial Assistance Arrangements (DFAA). The BRAP components that MASC, in conjunction with MAFRI, has and in some cases continues to be involved in delivering, include: Lake Manitoba Financial Assistance Program Part A Lake Manitoba Pasture Flooding Assistance provided financial assistance to help Manitoba livestock producers manage their feed requirements due to the loss of pasture in the designated Lake Manitoba Flood Zone. Part A allowed producers to rent new pasture and purchase feed for animals displaced from flooded land. As of March 31, 2012, a total of $2.7 million had been paid to 265 producers under Part A. Part B Lake Manitoba Agricultural Infrastructure, Transportation and Crop/Forage Loss assisted agricultural crop and livestock producers in managing and recovering from the impacts of the 2011 flooding in the Lake Manitoba Flood Zone. Part B provided assistance for flood mitigation measures, lost crop production, damage to agricultural infrastructure, and extra costs for transporting livestock and feed. Producers were also compensated for debris cleanup, damage to fences, corrals and crop inventory. As of March 31, 2012, over $19.9 million had been paid to 872 producers under Part B. Part C Lake Manitoba Business, Principal and Non- Principal Residence provided compensation for the cost of uninsurable property damage and flood protection measures taken as a direct result of the elevated water levels in the Lake Manitoba Flood Zone. Components of Part C provided compensation to: principal residence owners for mitigation measures, structures, infrastructure, landscape, contents, and temporary accommodation costs in cases of evacuation; principal residents of First Nations for compensation for loss of contents; non-principal residence owners for mitigation measures, building and infrastructure losses; and business owners for flood mitigation measures, building and infrastructure losses, inventory losses and income loss. As of March 31, 2012, nearly $19.9 million had been provided to individuals and businesses under Part C. Part D Lake Manitoba Flood Protection for Principal Residences, Non-Principal Residences and Businesses provided financial assistance for flood protection measures undertaken individually or cooperatively for the purpose of protecting principal residences, non-principal residences and business structures in the Lake Manitoba Flood Zone. Primarily intended to compensate for the construction of rock barriers and dikes to protect structures from flood damage, funding was also available to hire professional engineers for the design of permanent flood protection measures. Part D also covered the first $20,000 on projects eligible for the Individual Flood Protection Initiative and for the Financial Assistance for Cottage Owners Program, administered by Manitoba Water Stewardship (a division of Manitoba Infrastructure and Transportation). As of March 31, 2012, 141 individuals and businesses had received approximately $1.8 million for such measures. Hoop and Holler Compensation Program provided compensation to residents and businesses (including farms) within the designated area for property damage, income loss, and flood protection measures taken as a direct result of the controlled release of water from the Assiniboine River near Hoop and Holler Bend, or from the overflow of water diverted into the Portage Diversion. As of March 31, 2012, this program had compensated 631 applicants for $6.2 million of losses. Dauphin River Flood Assistance Program provided compensation for income losses to commercial fishers in the Dauphin River area who were unable to access the fishery and fish processing facilities due to record high water levels resulting from maximum outflows from Lake Manitoba. As of March 31, 2012, this program had provided 65 applicants with a total of $1.8 million in compensation. 2011/12 Annual Report 25

28 Lake Dauphin Emergency Flood Protection Program provided financial assistance for emergency structural flood protection measures undertaken for the purpose of protecting principal residences and non-principal residences in the Lake Dauphin Flood Zone. As of March 31, 2012, 54 program applicants had received compensation totalling $0.3 million. Shoal Lakes Agricultural Flooding Assistance Program provided financial support for agricultural production losses caused by chronic flooding in the Shoal Lakes Complex in the Interlake area of Manitoba. As of March 31, 2012, this program had provided 124 applicants with $3.8 million in compensation. This amount does not include the buy-out of flooded properties, which is directly handled by MAFRI Manitoba AgriRecovery Program Announced in June 2011, the 2011 Manitoba AgriRecovery Program provided financial assistance to crop, forage and livestock producers affected by extreme excess moisture and flooding in Certain parts of the first three programs listed were cost shared by Canada and Manitoba through the Canada-Manitoba AgriRecovery Program. The remaining three programs were funded entirely by Manitoba. Manitoba Excess Moisture Assistance Program assisted crop producers affected by extreme excess moisture and flooding in Producers received assistance of $30 per acre for land that was too wet to seed by June 20, 2011, as well as for land that was seeded and subsequently destroyed by excess moisture. As of March 31, 2012, this program had paid compensation to 10,078 producers for $107.6 million. This amount represents 3.1 million acres of land that was too wet to seed and an additional 0.5 million acres of seeded crop that was destroyed by excess moisture Program payments were made based on the need to transport feed to livestock or livestock to feed over distances greater than what is normally experienced. As of March 31, 2012, 122 producers had been paid a total of $0.4 million under this program. Manitoba Forage Shortfall Assistance Program assisted livestock producers who incurred extraordinary costs to maintain the feed requirement for their livestock herds as a result of the forage shortage caused by flooding or excess moisture conditions in Program assistance was based on covering shortfalls that would have occurred over the 2011/12 pasture and winter feeding periods. As of March 31, 2012, 436 livestock producers had been paid compensation totalling $7.4 million. Manitoba Forage Restoration Assistance Program assisted forage producers to restore established tame forage and forage seed damaged by excess moisture in Producers were eligible for compensation of $50 per acre to help re-establish forage and forage seed crops. Producers are required to destroy and reseed the forage crop prior to compensation being paid. Consequently, as of March 31, 2012, no program payments had been made. Manitoba Greenfeed Assistance Program assisted producers to increase livestock feed production by seeding and harvesting greenfeed. As of March 31, 2012, 1,147 producers had received compensation totalling $2.8 million. Manitoba Infrastructure and Individual Assessment Program assisted crop and livestock producers in recovering from flood losses related to mitigation, and losses to agricultural property and inventory that were not eligible for Disaster Financial Assistance or for the Flood 2011 Building and Recovery Action Plan. As of March 31, 2012, 21 producers had received compensation totalling $0.8 million. Manitoba Transportation Assistance Program assisted livestock producers who incurred extraordinary transportation costs as a result of forage shortages caused by extreme moisture conditions in 26 Manitoba Agricultural Services Corporation

29 Financial Statements 2011/12 Annual Report 27

30 Responsibility for Financial Statements The management of the Manitoba Agricultural Services Corporation is responsible for the integrity, objectivity and reliability of the financial statements, accompanying notes and other financial information in the annual report. Management maintains internal control systems to ensure that transactions are accurately recorded in accordance with established policies and procedures. In addition, certain best estimates and judgements have been made based on a careful assessment of the available information. The financial statements and accompanying notes are examined by the Auditor General for Manitoba, whose opinion is included here. The Auditor General has access to MASC s Board of Directors, with or without management present, to discuss the results of their audit and the quality of MASC s financial reporting. Original signed by Original signed by Neil Hamilton President & Chief Executive Officer Jim Lewis Vice President, Finance & Administration July 31, Manitoba Agricultural Services Corporation 2011/12 Annual Report

31 MANITOBA AGRICULTURAL SERVICES CORPORATION 2011/12 ANNUAL REPORT 29

32 Original signed by 30 MANITOBA AGRICULTURAL SERVICES CORPORATION 2011/12 ANNUAL REPORT

33 Statement of Financial Position As at March 31, 2012 (in thousands of dollars) FINANCIAL ASSETS Note March 31, 2012 March 31, 2011 April 1, 2010 (Restated - Note 4) (Restated - Note 4) Cash $ 5,223 $ 2,291 $ 1,177 Accounts receivable 8 1,916 2,131 3,931 Receivables from the Province of Manitoba 9 107,277 9,684 12,835 Receivables from the Government of Canada 10 5,659 6,938 6,625 Investments , , ,051 Loans receivable , , ,777 Total Financial Assets $ 629,797 $ 681,719 $ 729,396 LIABILITIES Accounts payable and accrued liabilities 13 $ 35,866 $ 14,609 $ 7,620 Claims payable ,650 21,164 16,893 Loans from the Province of Manitoba , , ,372 Provisions for losses on guaranteed loans 16 15,829 15,206 15,324 Future employee benefits 17 8,775 8,698 8,239 Total Liabilities $ 530,229 $ 394,425 $ 387,448 Net Financial Assets $ 99,568 $ 287,294 $ 341,948 NON-FINANCIAL ASSETS Inventories held for use 2 $ 480 $ 588 $ 501 Prepaid expenses Tangible capital assets Total Non-Financial Assets $ 803 $ 938 $ 869 Accumulated surplus $ 100,371 $ 288,232 $ 342,817 Loan guarantees and contingencies 16 Commitments 18 The accompanying notes and schedules are an integral part of these financial statements. Approved by the Board: Original signed by John S. Plohman Chair, Board of Directors Original signed by Harry Sotas Vice Chair, Board of Directors Manitoba Agricultural Services Corporation 2011/12 Annual Report 31

34 Statement of Operations For the Year Ended March 31, 2012 (in thousands of dollars) Budget actual actual REVENUE Premiums from insured producers $ 105,471 $ 87,275 $ 91,448 Interest from loans 19,810 19,523 19,751 Contribution from the Province of Manitoba 98, , ,080 Contribution from the Government of Canada 84, , ,628 Investment income 4,050 3,701 3,470 Other income , , ,521 EXPENSE Lending Programs 25,710 25,703 22,153 AgriInsurance Program 228, , ,976 Hail Insurance Program 20,810 8,097 14,508 Wildlife Damage Compensation Program 3,224 2,397 2,845 Farmland School Tax Rebate Program 35,515 36,935 33,373 Other Programs ,861 55, , , ,106 Deficit for the year $ (908) (187,861) (54,585) Accumulated surplus, beginning of year 288, ,817 Accumulated surplus, end of year $ 100,371 $ 288,232 The accompanying notes and schedules are an integral part of these financial statements. 32 Manitoba Agricultural Services Corporation 2011/12 Annual Report

35 Statement of Change in Net Financial Assets For the Year Ended March 31, 2012 (in thousands of dollars) actual Actual Net loss $ (187,861) $ (54,585) Tangible capital assets Acquisition of tangible capital assets (41) (54) Amortization of tangible capital assets Other non-financial assets Disposal (acquisition) of inventory held for use 108 (87) Increase in prepaid expenses (7) (17) 101 (104) Decrease in net financial assets (187,726) (54,654) Net financial assets, beginning of year 287, ,948 Net financial assets, end of year $ 99,568 $ 287,294 The accompanying notes and schedules are an integral part of these financial statements Manitoba Agricultural Services Corporation 2011/12 Annual Report 33

36 Statement of Cash Flows For the Year Ended March 31, 2012 (in thousands of dollars) Cash provided by (used for): Operating Deficit for the year $ (187,861) $ (54,585) Amortization of tangible capital assets Changes in: (187,786) (54,496) Receivables (96,099) 4,638 Loans receivable 639 (2,370) Accounts payable and accrued liabilities 21,257 6,989 Claims payable 103,486 4,271 Provisions for losses on guaranteed loans 623 (118) Future employee benefits Prepaid expenses (7) (17) Inventories held for use 108 (87) Cash used for operating activities (157,702) (40,731) Capital Acquisition of tangible capital assets (41) (54) Cash used for capital activities (41) (54) Investing Investments redeemed 153,070 32,158 Loans disbursed (95,898) (77,009) Loan principal received 87,460 79,708 Cash provided by investing activities 144,632 34,857 Financing Debt repayments to the Province of Manitoba (73,639) (68,824) Loans from the Province of Manitoba 84,000 64,200 Cash provided by (used for) financing activities 10,361 (4,624) Net decrease in cash and cash equivalents (2,750) (10,552) Cash and cash equivalents, beginning of year 76,603 87,155 Cash and cash equivalents, end of year $ 73,853 $ 76,603 Cash and cash equivalents are comprised of the following: Investments $ 191,475 $ 350,227 Investments with terms greater than 90 days (122,845) (275,915) Investments with terms of 90 days or less 68,630 74,312 Cash 5,223 2,291 $ 73,853 $ 76,603 Supplemental Cash Flow Information Interest paid $ 15,857 $ 16,619 Interest received $ 23,620 $ 22,843 The accompanying notes and schedules are an integral part of these financial statements. 34 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

37 Notes to Financial Statements as at March 31, 2012 (tabular amounts in thousands of dollars) 1. NATURE OF ORGANIZATION The Manitoba Agricultural Credit Corporation (MACC) was established under The Agricultural Credit Corporation Act. The Manitoba Crop Insurance Corporation (MCIC) was established under The Crop Insurance Act. As a result of the proclamation of The Manitoba Agricultural Services Corporation Act, C.C.S.M. c.a25 on September 1, 2005, MACC and MCIC were amalgamated to form a provincial Crown corporation called the Manitoba Agricultural Services Corporation (MASC) and the legislation establishing the former corporations was repealed. MASC provides lending, insurance and other programs and services. Its core programs include direct loans to agriculture producers, loan guarantees, AgriInsurance and Hail Insurance. MASC also delivers the Wildlife Damage Compensation Program, Farmland School Tax Rebate Program and other programs and services. 2. SIGNIFICANT ACCOUNTING POLICIES AND REPORTING PRACTICES MASC s financial statements are presented in accordance with Canadian Public Sector Accounting (PSA) standards. MASC adopted PSA standards with a transition date of April 1, More details on this transition are provided in Note 4. MASC elected the early adoption of PS3450 Financial Instruments and PS3041 Portfolio Investments. No adjustment to financial assets and liabilities was required. (A) (B) Investments Funds in excess of operational needs are invested with the Province of Manitoba, in accordance with Section 52(1) of The Manitoba Agricultural Services Corporation Act. Investments are carried at cost or amortized cost. Investments are normally held to maturity, but if early redemption is required and results in a gain or loss, the gain or loss is realized on disposal. Loans Receivable Loans receivable are recorded at cost or amortized cost less any amount for provisions for credit losses. Provisions for impaired loans are made when collection is in doubt. Interest is accrued on loans receivable until the date of write-off. The provision represents management s best estimate of probable losses. Where circumstances indicated doubt as to the ultimate collectability of principal or interest, specific provisions are established for individual accounts. These accounts are valued at the lower of their recorded value or the estimated net realizable value of the security held for the accounts. In addition to the provision for loss on loans identified on an individual loan basis, MASC establishes a general provision representing management s best estimate of additional probable losses based on other factors including the composition and credit quality of the portfolio and changes in economic and business conditions. Actual loan accounts that have been written off are charged to the appropriate provision once the available security has been realized and all other collection efforts have been exhausted. Periodically the Province of Manitoba will approve special assistance loans with concessionary interest rates. These loans are discounted using the present value method when they involve significant concessionary elements. The discounted amount is expensed at the time the loans are disbursed and is amortized to revenue over the life of the concessionary terms. Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 35

38 (C) Claims Payable Claims payable is comprised of claims approved but not yet disbursed and a provision for claims in process. The provision represents management s best estimate of probable claims against the programs and is determined through a review of each program. For most programs, the provision is established by reviewing outstanding claims and either providing individual claim estimates or establishing an average loss and multiplying this amount by the number of claims outstanding. The provision for the Lake Manitoba Financial Assistance Program Part C Lake Manitoba Business, Principal and Non-Principal Residence Component has the largest provision and was established by reviewing the separate components, which are: flood mitigation, property damage to principal and non-principal residences; property damage and income loss for businesses; and the temporary accommodation costs for evacuated residents. The largest portion of the provision for Part C is for property damage to principal and non-principal residences. This provision was established using: actual costs for claims that had been finalized by June 30, 2012; estimates of repair costs where the appraisal had been completed, but the claim had not yet been processed; and the results of a phone survey that requested the property owner to estimate the damage to their property as a percentage of the total value of the residence. The loss percentages from the phone survey were then multiplied by the building property tax assessment values inflated to account for the average amount that market values exceed the property tax assessments. For the balance of properties where there was limited information on the amount of damage, the average loss for the above calculated properties was applied. In addition, a contingency was included for other unknown damages, appeals, etc. If the property damage for principal and non-principal residences is incorrect by a factor of 10%, the resulting change in the provision would be $5.6 million. (D) Loans from the Province of Manitoba Loans from the Province of Manitoba are carried at cost. (E) Provision for Losses on Guaranteed Loans The provision for losses on loan guarantees is determined annually through a review of each guarantee program. The provision represents management s best estimate of probable claims against the loan guarantees. Such provision is intended to cover principal, accrued and unpaid interest and any additional amounts that are recoverable by the financial institution that issued the loan. Current year provisions for guaranteed loan losses are charged as expenses to the provision for guaranteed loan losses. Actual loan guarantee claims that have been paid are charged to the appropriate provision. (F) Future Employee Benefits The employees of MASC belong to The Civil Service Superannuation Pension Plan, which is a multi-employer joint trustee plan. This plan is a defined benefit plan, providing a pension on retirement based on the member s age at retirement, length of service and highest earnings averaged over five years. Inflation adjustments are contingent upon available funding. The joint trustee board of the plan determines the required plan contributions annually. Pension costs included in these statements are comprised of: the cost of employer contributions for the current year of service of employees, employer costs for past service costs relating to a portion of current and retired employees, plan amendments and accrued benefits. MASC employees are entitled to vacation and severance pay in accordance with the terms of the collective agreements and corporate policy. The severance pay liability is recorded based on an actuarial valuation and vacation pay is recorded based on management s best estimate. As a first time adopter as per PS2125, MASC has elected to recognize all cumulative actuarial gains and losses as at the date of transition to Canadian PSA standards directly into accumulated surplus and amortizing subsequent gains and losses over EARSL. 36 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

39 (G) Inventories Held for Use Real estate that was acquired for the purpose of providing long-term leases to producers through the Land Lease Option Program is recorded at cost. Occasionally, real estate is acquired through foreclosure and voluntary transfer of title in the settlement of loans and is recorded at the appraised value of the real estate at acquisition date. (H) Prepaid Expenses Prepaid expenses are payments for goods or services, which will provide economic benefit in future periods. The prepaid amount is recognized as an expense in the year the goods or services are consumed. (I) Tangible Capital Assets MASC s tangible capital assets are recorded at historical cost and amortized on a straight-line basis over their estimated useful life, as follows: leasehold improvements Furniture and equipment Computer hardware and software Major software development remaining term of lease 10 years 4 years 8 years (J) Revenue Recognition Revenues are recognized in the period in which the transactions or events occurred that gave rise to the revenues. All revenues are recorded on an accrual basis, except when the accruals cannot be determined with a reasonable degree of certainty or when their estimation is impractical. Transfers (revenues from non-exchange transactions) are recognized as revenue when: the transfer is authorized, all eligible criteria are met, and a reasonable estimate of the amount can be made. (K) Premiums and Government Contributions MASC recognizes as revenue all premiums earned on insurance policies in force during the year. The Canada-Manitoba AgriInsurance Agreement, which is consolidated in Annex B of Growing Forward: A Federal Provincial Territorial Framework Agreement on Agriculture, Agri-Food and Agri-Based Products Policy, provides for the cost sharing of AgriInsurance premiums. Premiums for most of the crop loss programs and basic Excess Moisture Insurance are shared between insured producers (40%), the Government of Canada (36%) and the Province of Manitoba (24%). The exception is the Excess Moisture Insurance Zero Deductible Option, for which premiums are paid entirely by participating producers. (L) Administrative Expenses Identifiable administrative expenses for all of the programs administered by MASC are charged directly to the specific program. Where the direct charging of administrative expenses to specific programs is not possible, these expenses are allocated to each program on a basis approved by MASC s Board of Directors. The Canada-Manitoba AgriInsurance Agreement referred to in Section (K) of this note, stipulates that associated administrative expenses, net of any administrative revenues, will be shared by the Government of Canada (60%) and the Province of Manitoba (40%). (M) Financial Instruments MASC s financial instruments include cash, receivables, investments, loans receivable, accounts payable and accrued liabilities, claims payable, loans from the Province of Manitoba and provisions for losses on guaranteed loans. All financial instruments are held at cost or amortized cost. The effective interest method is used to recognize interest income or expense. Transaction costs related to all financial instruments are expensed as incurred. Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 37

40 (N) Measurement Uncertainty The preparation of financial statements that conform with Canadian PSA standards requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, all at the date of the financial statements; as well as the reported amounts of revenues and expenses during the period. Items requiring the use of significant estimates include: provisions for losses on accounts receivable, loans receivables, loan guarantees, liabilities for claims and program payments, future employee benefits and accrued administration liabilities. 3. FINANCIAL STRUCTURE (A) (B) Funding The Board of Directors approved MASC s 2011/12 budget in April Provincial funding for the approved budget of $98,410,000 was authorized by the Legislative Assembly. Other Programs, with the exception of the Inspection Services component, do not contain the budgeted amounts. AgriInsurance and Hail Insurance Fund Balance Restrictions The AgriInsurance and Hail Insurance funds are restricted as set out in Sections 58 and 61 of The Manitoba Agricultural Services Corporation Act. The only items to be paid out of these funds are: indemnities payable under the contracts of insurance; premiums or other amounts payable for reinsurance; interest on any money borrowed for the purpose of the funds; and expenses relating to the administration of the funds (for Hail Insurance only). 4. FIRST TIME ADOPTION OF PUBLIC SECTOR ACCOUNTING STANDARDS In previous fiscal years, MASC s financial statements were presented in accordance with Canadian generally accepted accounting principles for profit oriented enterprises. The Public Sector Accounting Board has approved the accounting framework choices for other government organizations. Effective April 1, 2011, MASC adopted Canadian Public Sector Accounting (PSA) standards. These new standards are required to be applied retroactively to the transition date of April 1, 2010; however MASC is electing to adopt certain exemptions under PS2125 as follows: - PS requires actuarial gains and losses for future employee pension and severance benefits to be amortized over a reasonable future period. MASC is electing to adopt PS and recognize all cumulative actuarial gains and losses as the date of transition directly in the accumulated surplus/deficit. - PS requires accrued benefit obligations for future employee pension and severance benefits to be determined by applying a discount rate with reference to its plan s asset earnings or with reference to its cost of borrowing. MASC is electing to adopt PS and delay the application of this section until the date of the next actuarial valuation which will be within three years of the transition date. The adoption of these standards resulted in changes to the format of the financial statements. There was no impact on the accumulated surplus or net income reported for the March 31, 2011 comparative period. The impacts of these changes on the format of the financial statements are as follows: 38 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

41 a) Accounts receivable march 31, 2011 april 1, 2010 Accounts receivable as per previous financial statements $ 19,565 $ 23,755 Less: amounts reclassified from accounts receivable to receivables from the Province of Manitoba (9,684) (12,835) Less: amounts reclassified from accounts receivable to receivables from the Government of Canada (6,938) (6,625) Less: accrued investment interest reclassified to investments (812) (364) $ 2,131 $ 3,931 b) Receivables from the Province of Manitoba march 31, 2011 april 1, 2010 Receivables from the Province of Manitoba as per previous financial statements $ - $ - Add: amounts reclassified from accounts receivable to receivables from the Province of Manitoba 9,684 12,835 $ 9,684 $ 12,835 c) Receivables from the Government of Canada march 31, 2011 april 1, 2010 Receivables from the Government of Canada as per previous financial statements $ - $ - Add: amounts reclassified from accounts receivable to receivables from the Government of Canada 6,938 6,625 $ 6,938 $ 6,625 d) Investments march 31, 2011 april 1, 2010 Investments as per previous financial statements $ 349,415 $ 393,687 Plus: accrued interest reclassified from accounts receivable to investments $ 350,227 $ 394,051 e) Reinsurance premiums payable march 31, 2011 april 1, 2010 Reinsurance premiums payable as per previous financial statements $ 2,360 $ 2,549 Less: amounts reclassified from reinsurance premiums payable to accounts payable and accrued liabilities (2,360) (2,549) $ - $ - f) Accounts payable and accrued liabilities march 31, 2011 april 1, 2010 Accounts payable and accrued liabilities as per previous financial statements $ 20,715 $ 13,043 Add: amounts reclassified from reinsurance premiums payable to accounts payable and accrued liabilities 2,360 2,549 Less: amounts reclassified from accounts payable and accrued liabilities to future employee benefits (8,698) (8,239) Add: amounts reclassified from deferred revenue to accounts payable and accrued liabilities $ 14,609 $ 7,620 g) Future employee benefits march 31, 2011 april 1, 2010 Future employee benefits as per previous financial statements $ - $ - Plus: amounts reclassified from accounts payable to future employee benefits 8,698 8,239 $ 8,698 $ 8,239 h) Deferred revenue march 31, 2011 april 1, 2010 Deferred revenue as per previous financial statements $ 232 $ 267 Less: amounts reclassified from deferred revenue to accounts payable and accrued liabilities (232) (267) $ - $ - Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 39

42 5. WILDLIFE DAMAGE COMPENSATION PROGRAM MASC administers the Wildlife Damage Compensation Program, which pays producers for 90% (80% for 2011) of damage to agricultural crops and related products caused by waterfowl or wildlife (big game animals), as well as for the injury or death of domestic livestock caused by natural predators. The first 80% of compensation and all administrative expenses are shared by the Government of Canada (60%) and the Province of Manitoba (40%). The remaining 10% of compensation for 2012 is paid by the Province of Manitoba. 6. FARMLAND SCHOOL TAX REBATE PROGRAM In April 2005, MASC became responsible for administering the Farmland School Tax Rebate Program. The purpose of the program is to assist Manitoba farmland owners by providing a rebate on the school tax paid on farmland. The rebate of 80% for the 2011 property tax year increased from a rebate of 75% for the 2010 tax year. The program provides a three-year time frame for claiming rebates. Recorded rebate payments for the 2011 tax year of $36,548,000 is comprised of $35,611,000 for the 2011 tax rebates and $937,000 for rebates relating to 2009 and Included in the 2011 tax rebates is a provision of $3,982,000 for rebates that had not been applied for as of March 31, A provision of $1,860,000 remains for prior year rebates that remain unclaimed. The Province of Manitoba pays for the full cost of the Farmland School Tax Rebate Program. 7. OTHER PROGRAMS (A) (B) (C) Inspection Services In support of Manitoba s agricultural sector, MASC provides inspection services at a reasonable cost (i.e. on a breakeven basis). These services include: grain audits for cash advances issued by the Canadian Wheat Board, production loss assessments for windmill construction and maintenance, certificates of local production for vendors at the St. Norbert Farmers Market, third-party loss appraisals for private sector property insurers, and on-farm livestock inspections for the Manitoba Livestock Cash Advance Program. Such services totalled $68,000 ( $44,000). Canada-Manitoba Feed and Transportation Assistance Program In December 2010, MASC became responsible for the administration the Canada-Manitoba Feed and Transportation Assistance Program. The purpose of the program was to provide assistance to Manitoba producers who experienced a shortage of overwinter feed caused by extreme moisture in Funding as an AgriRecovery initiative was provided 60% by the Government of Canada and 40% by the Province of Manitoba. Compensation payments and administrative expenses were $9,767,000 and $444,000, respectively, for a total cost of $10,211,000 ($208,000 in 2012 and $10,003,000 in 2011). Flood Building and Recovery Action Plan In May 2011, MASC became responsible for the administration of the following flood assistance programs announced under the Flood Building and Recovery Action Plan. All funding for these programs was provided to MASC by the Province of Manitoba. a) Lake Manitoba Financial Assistance Program Part A - Lake Manitoba Pasture Flooding Assistance: This program assisted Manitoba livestock producers in managing their feed requirements needs due to the loss of pasture in the designated Lake Manitoba Flood Zone. Part B - Lake Manitoba Agricultural Infrastructure, Transportation and Crop/Forage Loss: This program assisted agricultural producers with flood mitigation measures, lost crop production, damage to agricultural infrastructure and extra costs for feeding and transport of livestock in the Lake Manitoba Flood Zone. Part C - Lake Manitoba Business, Principal and Non-Principal Residence: This program compensated residents and businesses for the cost of uninsurable property damage and flood protection measures taken as a direct result of the elevated water levels in the Lake Manitoba Flood Zone. 40 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

43 Part D - Lake Manitoba Flood Protection for Principal Residences, Non-Principal Residences and Businesses: This program provided financial assistance for flood protection measures undertaken individually or cooperatively for the purpose of protecting principal residences, non-principal residences and business structures in the Lake Manitoba Flood Zone. b) Hoop and Holler Compensation Program This program provided compensation to families, businesses and agricultural producers in the controlled release area of water from the Assiniboine River near the Hoop and Holler Bend on Highway 331 or overflow of water diverted from the Assiniboine River into the Portage Diversion. Compensation covered the cost of property damage, income loss and flood protection measures. c) Dauphin River Flood Assistance Program This program provided compensation to commercial fishers in the Dauphin River area for income losses resulting from the inability to access their fishery and fish processing facilities. d) Lake Dauphin Emergency Flood Protection Program This program provided financial assistance for emergency structural flood protection measures to protect principal residences and non-principal residences in the Lake Dauphin flood zone. e) Shoal Lakes Agricultural Flood Assistance Program This program provided financial support to agricultural producers affected by chronic flooding in the Shoal Lakes complex in the Interlake area of Manitoba. This program consisted of assistance for lost income due to flooded hay and pasture land in 2010 and 2011, transportation assistance for movement of feed and/or animals, voluntary buy-out option for producers with flooded property and transition assistance for producers that participate in the voluntary buy-out program. MASC did not administer the buy-out component of this program. The table below outlines the total costs for each program as of March 31, Compensation actual payments to Provision for Total Program march 31, 2012 payments compensation Administration* Total Lake Manitoba Financial Assistance Program Part A $ 2,653 $ 100 $ 2,753 Part B 19,898 17,700 37,598 Part C 19,876 64,000 83,876 Part D 1, ,652 $ 44,229 $ 82,650 $ 126,879 $ 10,057 $ 136,936 Hoop and Holler Compensation Program 6,214 2,900 9, ,478 Dauphin River Flood Assistance Program 1, , ,974 Lake Dauphin Emergency Flood Protection Program Shoal Lakes Agricultural Flood Assistance Program 3,836 1,500 5, ,343 $ 56,406 $ 87,207 $ 143,613 $ 10,467 $ 154,080 *Includes provision for administration of claims in process and appeal commission expenses and is net of any interest revenue. (D) 2011 Manitoba AgriRecovery Programs In June 2011, MASC became responsible for the administration of the following assistance programs. The purpose of these programs was to provide financial assistance for the restoration, maintenance and the rehabilitation of farms that have been impacted by excess moisture and flooding in a) 2011 Manitoba Excess Moisture Assistance Program This program provided financial assistance to farmers who could not seed a crop by June 20, 2011 or who had an annual or newly seeded crop destroyed by flooding or excess moisture prior to September 15, Producers received $30 per unseeded or drowned out crop acre. This program was partially funded by the Government of Canada under the Canada-Manitoba Agricultural Recovery Program. The Government of Canada provided funding for 60% of the compensation payments (net of a deemed 5% deductible) and 60% Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 41

44 of the program s administrative expenses incurred from August 4, 2011 to March 31, The remaining program cost was paid by the Province of Manitoba. The total program cost of $108,745,000 was funded by the Government of Canada ($61,897,400) and the Province of Manitoba ($46,847,600). b) 2011 Manitoba Transportation Assistance Program This program provided livestock producers with financial assistance to deal with the extraordinary costs of transporting feed and animals due to the flooding and excess moisture conditions in The program covered breeding and market animals and provided for transportation costs for pasture and overwinter feed shortages incurred from May 15, 2011 to March 31, This program was partially funded by the Government of Canada under the Canada-Manitoba Agricultural Recovery Program. The Government of Canada provided 60% of the funding for the cost of transporting feed to breeding animals or transporting breeding animals to feed relating only to producers pasture shortages. The Government of Canada paid 60% of the related administrative expenses. The remaining program cost was paid by the Province of Manitoba. The total program cost of $2,397,000 was funded the Government of Canada ($140,000) and the Province of Manitoba ($2,257,000). c) 2011 Manitoba Forage Shortfall Assistance Program This program provided livestock producers with financial assistance to deal with extraordinary pasture and overwinter feeding costs due to shortfalls in their forage production caused by flooding or excess moisture conditions in The programs covered pasture and overwinter feed shortages. This program was partially funded by the Government of Canada under the Canada-Manitoba Agricultural Recovery Program. The Government of Canada provided 60% of the funding for feeding costs of breeding animals relating to pasture shortages and 60% of the related administrative expenses. The remaining cost was provided by the Province of Manitoba. The total program cost of $16,161,000 was funded the Government of Canada ($3,901,000) and the Province of Manitoba ($12,260,000). d) 2011 Manitoba Forage Restoration Assistance Program This program provided forage producers financial assistance to restore established tame forage and forage seed crops that have been damaged by excess moisture in Producers were eligible for $50 for each acre that is destroyed and reseeded to forage. This program was funded entirely by the Province of Manitoba ($5,053,000). e) 2011 Manitoba Greenfeed Assistance Program This program provided financial assistance to assist producers with seeding greenfeed acres by July 22, 2011 on fields that were left unseeded due to excess moisture. Producers were eligible for $15 per acre based on the number of acres of greenfeed in excess of their normal greenfeed acreage. This program was funded entirely by the Province of Manitoba ($3,084,000). f) 2011 Manitoba Infrastructure and Individual Assessment Program This program provided financial assistance to agricultural crop and livestock producers to recover from flood losses related to mitigation and damage to agricultural property and inventory that are not eligible for assistance under Disaster Financial Assistance or the Flood Building and Recovery Action Plan. This program was funded entirely by the Province of Manitoba ($5,946,000). The table below outlines the cost expended for each program as of March 31, Compensation actual payments to Provision for Total Program march 31, 2012 payments compensation Administration* Total 2011 Manitoba Excess Moisture Assistance Program $ 107,572 $ 710 $ 108,282 $ 463 $ 108, Manitoba Transportation Assistance Program 390 1,910 2, , Manitoba Forage Shortfall Assistance Program 7,361 8,400 15, , Manitoba Forage Restoration Assistance Program - 4,745 4, , Manitoba Greenfeed Assistance Program 2, , , Manitoba Infrastructure and Individual Assessment Program 796 4,810 5, ,946 $ 118,955 $ 20,642 $ 139,597 $ 1,789 $ 141,386 *Includes provision for administration of claims in process and appeal committee expenses and is net of any interest revenue. 42 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

45 8. ACCOUNTS RECEIVABLE Amounts from insured persons AgriInsurance Program $ 2,164 $ 2,677 Hail Insurance Program Other ,285 3,604 Less provision for credit losses (1,369) (1,473) $ 1,916 $ 2,131 The provisions for credit losses of $1,369,000 ( $1,473,000) is for estimated losses on premiums, lease receivables and overpayments, and is subject to measurement uncertainty. The provision estimate is formula based on an assessment of the ability to collect the outstanding balance. A 100% provision is assessed on accounts in arrears over two years, with lower provisions for more recent years based on the programs actual collection experience over the last seven years. 9. RECEIVABLES FROM THE PROVINCE OF MANITOBA AgriInsurance premiums $ 906 $ 1,886 Administration 2, Pension liability 6,439 6,406 Severance liability Vacation pay liability Flood Building and Recovery Action Plan (Note 7 (C)) 82, Manitoba AgriRecovery programs (Note 7 (D)) 13,900 - Other programs $ 107,277 $ 9,684 Pension liability The Province of Manitoba has accepted responsibility for funding MASC s pension liability (for pensionable service earned by employees of the former MACC prior to amalgamation on September 1, 2005) and related expense, which includes an interest component. MASC has therefore recorded a receivable from the Province of Manitoba equal to the estimated value of its actuarially determined pension liability of $6,439,000 as of March 31, 2012 ( $6,406,000), and has recorded an increase under other contributions from the Province of Manitoba for 2011/12 equal to the related pension expense of $33,000 ( $432,000). The Province of Manitoba makes payments on the receivable when it is determined that the cash is required to discharge the related pension obligation. Severance pay liability The amount recorded as a receivable from the Province of Manitoba for severance pay was initially based on the estimated value of the corresponding actuarially determined liability for severance pay as of March 31, Subsequent to that date, the Province of Manitoba has included in its ongoing annual funding to MASC an amount equal to its share of the current year s expense for severance. As a result, the change in the severance liability each year is fully funded. The interest component related to the receivable is reflected in the funding for severance pay expense. The receivable for severance pay will be paid by the Province of Manitoba when it is determined that the cash is required to discharge the related severance pay liabilities. As of March 31, 2012, the receivable for severance pay liability was $429,000 ( $429,000). Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 43

46 Vacation pay liability The amount recorded as a receivable from the Province of Manitoba for vacation pay expenses was initially based on the estimated value of the corresponding liability as of March 31, Subsequent to that date, the Province of Manitoba has included in its ongoing annual funding to MASC, an amount equal to its share of the current year s expense for vacation pay entitlements. As of March 31, 2012, the receivable for vacation pay liability was $169,000 ( $169,000). 10. RECEIVABLES FROM THE GOVERNMENT OF CANADA AgriInsurance Program $ 1,364 $ 4,157 Wildlife Damage Compensation Program Other programs 4,285 2,392 $ 5,659 $ 6, INVESTMENTS MASC s investments as of March 31, 2012 consist of the following: 2012 average agriinsurance Hail Insurance Farmland School other Maturity Terms interest Rate Program Program tax Rebate Program Programs Total 90 days or less 0.893% $ 19,962 $ 29,000 $ 3,594 $ 15,590 $ 68,146 1 year 1.074% 30,021 10,396 1,146 14,682 56,245 2 years 1.738% 40, ,000 3 years 1.413% - 13, ,000 5 years 3.033% - 13, , % 89,983 65,996 4,740 30, ,991 Accrued Interest $ 90,192 $ 66,234 $ 4,743 $ 30,306 $ 191,475 average agriinsurance Hail Insurance Farmland School other Maturity Terms interest Rate Program Program tax Rebate Program Programs total 90 days or less 0.919% $ 49,261 $ 16,046 $ 5,079 $ 3,114 $ 73,500 1 year 1.045% 193,739 24,768-1, ,815 2 years 1.738% 40, ,000 3 years 2.225% - 5, ,000 5 years 3.513% - 11, , % 283,000 56,914 5,079 4, ,415 Accrued Interest $ 283,605 $ 57,109 $ 5,084 $ 4,429 $ 350, Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

47 12. LOANS RECEIVABLE MASC s loans receivable as of March 31, 2012 consist of the following: regular Special regular special Program Loans Assistance Loans* Total Program Loans assistance Loans* total Recorded investment $ 291,273 $ 48,318 $ 339,591 $ 268,268 $ 63,159 $ 331,427 Specific provision (4,017) (15,107) (19,124) (5,782) (10,479) (16,261) General provision (2,879) (6,857) (9,736) (5,238) (7,062) (12,300) 284,377 26, , ,248 45, ,866 Accrued interest 6,432 1,084 7,516 6,578 1,241 7,819 Loan discounts (237) (237) Net carrying value $ 290,809 $ 27,438 $ 318,247 $ 263,826 $ 46,622 $ 310,448 *Includes Manitoba Hog Assistance, BSE Recovery, Producer Recovery, Flood Proofing Assistance and Enterprise Development Loans. Impaired loans included in the preceding schedule: regular Special regular special Program Loans Assistance Loans* Total Program Loans assistance Loans* total Impaired loan balance $ 20,510 $ 18,380 $ 38,890 $ 22,227 $ 14,865 $ 37,092 Specific provision (4,017) (15,107) (19,124) (5,782) (10,479) (16,261) $ 16,493 $ 3,273 $ 19,766 $ 16,445 $ 4,386 $ 20,831 *Includes Manitoba Hog Assistance, BSE Recovery, Producer Recovery, Flood Proofing Assistance and Enterprise Development Loans. A loan becomes impaired as a result of deterioration in credit quality to the extent that MASC no longer has reasonable assurance of timely collection of the full amount of principal and interest. The table above provides the amount of impaired loans and the specific provision for credit losses on these loans as of March 31, A total of $2,241,000 ( $1,889,000) of interest on impaired loans was included in revenue for the year ended March 31, Provisions for impaired loans: regular Special regular special Program Loans Assistance Loans* Total Program Loans assistance Loans* total Beginning provision balance $ 11,020 $ 17,541 $ 28,561 $ 12,280 $ 18,690 $ 30,970 Write-offs, net of recoveries (1,220) (519) (1,739) (510) (438) (948) Provision (recovery) expense (2,904) 4,942 2,038 (750) (711) (1,461) Ending provision balance $ 6,896 $ 21,964 $ 28,860 $ 11,020 $ 17,541 $ 28,561 *Includes Manitoba Hog Assistance, BSE Recovery, Producer Recovery, Flood Proofing Assistance and Enterprise Development Loans. Included in loans receivable is a specific provision of $19,124,000 ( $16,261,000) and a general provision of $9,736,000 ( $12,300,000) that are subject to measurement uncertainty. The amount established for specific and general provisions of $28,860,000 (see Note 2 (G)) could change substantially in the future, if factors considered by management in establishing these estimates were to change significantly. Loans receivable are secured by tangible assets consisting predominantly of land followed by buildings, livestock and other assets. The estimated values of such tangible securities are $733,756,000 ( $ 734,757,000). Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 45

48 Remaining terms to maturities are as follows: regular Special regular special Program Loans Assistance Loans* Total Program Loans assistance Loans* total Less than 5 years $ 41,880 $ 39,867 $ 81,747 $ 39,266 $ 20,249 $ 59,515 5 years to up to 10 years 56,978 4,966 61,944 54,068 38,906 92, years to up to 15 years 78,418 3,485 81,903 78,140 4,004 82, years to up to 20 years 75,134-75,134 67,967-67,967 More than 20 years 38,863-38,863 28,827-28,827 Recorded investment $ 291,273 $ 48,318 $ 339, ,268 63,159 $ 331,427 *Includes Manitoba Hog Assistance, BSE Recovery, Producer Recovery, Flood Proofing Assistance and Enterprise Development Loans. 13. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2012 hail Wildlife Damage lending agriinsurance insurance compensation other Programs Program Program Program Programs Total Accounts payable - general $ 385 $ 5,191 $ - $ 383 $ 5,160 $ 11,119 Salaries and benefits ,128 3,506 Accrued vacation pay - 1, ,183 Other 283 5, ,550 20,058 $ 707 $ 11,934 $ - $ 387 $ 22,838 $ 35, hail Wildlife Damage lending agriinsurance insurance compensation other Programs Program Program Program Programs total Accounts payable - general $ 502 $ 3,704 $ - $ 44 $ 334 $ 4,584 Salaries and benefits Accrued vacation pay - 1, ,110 Other 385 2, ,660 8,651 $ 916 $ 7,652 $ 3 $ 44 $ 5,994 $ 14, CLAIMS PAYABLE AgriInsurance Program $ 10,492 $ 12,825 Wildlife Damage Compensation Program Farmland School Tax Rebate Program 5,835 5,308 Flood Building and Recovery Action Plan (Note 7 (C))* 87,509 - Manitoba AgriRecovery Programs (Note 7 (D))* 20,697 - Other Programs - 2,405 $ 124,650 $ 21,164 *Includes claims approved but not paid and provisions for claims as outlined in the note references. 46 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

49 15. LOANS FROM THE PROVINCE OF MANITOBA Following practices established by the Province of Manitoba, MASC must repay advances according to the amortization schedule or be subject to a prepayment penalty. The prepayment penalty is calculated as the net present value of the future cash flows of the loan being prepaid minus the net present value of a loan with the same terms, except for the interest rate, which is equal to the rate for a semi-annual non-callable Province of Manitoba bond with the same term to maturity. Advances are repayable in equal annual blended instalments of principal and interest, with interest rates ranging from 1.425% to 7.625%. Maturities of principal over the following terms year $ 75,851 $ 71,899 2 years 40,819 48,110 3 years 37,355 36,940 4 years 33,847 33,237 5 years 27,030 29,322 More than 5 years 130, ,240 $ 345,109 $ 334, LOAN GUARANTEES AND CONTINGENCIES (A) Contingent liabilities and the corresponding provisions for MASC s loan guarantee programs as of March 31, 2012 are shown below: Contingent Provision Net Contingent contingent Provision net Contingent liability for losses Liability liability for losses liability Operating Credit Guarantees for Agriculture $ 9,633 $ (963) $ 8,670 $ 10,613 $ (1,066) $ 9,547 Operating Credit Guarantees for Rural Small Business 184 (19) (5) 48 Manitoba Livestock Associations Loan Guarantees 4,857 (971) 3,886 5,537 (1,108) 4,429 Diversification Loan Guarantees 2,907 (436) 2,471 4,069 (610) 3,459 Enhanced Diversification Loan Guarantees 53,099 (11,592) 41,507 58,831 (12,417) 46,414 Rural Entrepreneur Assistance Program 11,262 (1,848) 9, The change in the provision for guaranteed loan losses is as follows: $ 81,942 $ (15,829) $ 66,113 $ 79,103 $ (15,206) $ 63, Beginning provision balance $ 15,206 $ 15,323 Write-offs, net of recoveries (1,295) - Provision expense (recovery) 1,918 (117) Ending provision balance $ 15,829 $ 15,206 The Operating Credit Guarantee for Agriculture Program was introduced in 2003, replacing the Guaranteed Operating Loan Program. Participating lending institutions are provided a guarantee of 25% of the maximum authorized amount of each individual loan made under the program. The maximum allowable loan is $700,000 for individuals and $1,000,000 for partnerships, corporations and co-operatives. Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 47

50 The Operating Credit Guarantee for Rural Small Business Program was introduced in June Participating lending institutions are provided a guarantee of 25% of the maximum authorized amount of each individual loan made under the program. To be eligible for the program, annual sales have to be less than $2.0 million. The maximum allowable loan is $200,000. The Manitoba Livestock Associations Loan Guarantee Program was introduced in For each livestock association, MASC provides a 25% guarantee to the association s lending institution, based on a maximum loan of $5,000,000 per association. The Diversification Loan Guarantee Program was introduced in 1995 to provide guarantees on loans made by participating lenders for diversification or farm value-added activities. Under this program, 25% of the lender s total associated loan portfolio was guaranteed. The maximum allowable individual loan was $3.0 million. The Enhanced Diversification Loan Guarantee Program replaced the Diversification Loan Guarantee Program in Under the new program, guarantees are based on 25% of the original principal amount of each individual loan, with no maximum loan amount. The Rural Entrepreneur Assistance (REA) Program provides a guarantee of up to 80% on loans made by participating lenders to small rural non-agricultural businesses. REA guarantees loans up to a maximum of $200,000. The administration of this program was transferred to MASC from the Province of Manitoba in 2005 but the Province maintained the associated contingent liability until March 31, As of April 1, 2011, MASC assumed full responsibility for the REA Program including the contingent liability of $11,489,000 and the associated provision of $2,048,000. Upon the transfer to MASC, the provision was expensed to MASC s provision for guaranteed loan losses. (B) Various legal actions for additional indemnity payments have been commenced by insured producers against MASC. The outcome of these claims cannot be determined at this time. 17. FUTURE EMPLOYEE BENEFITS Severance Liability MASC s employees are eligible for severance based on their years of service. Commencing March 31, 1999, MASC began recording the accumulated severance pay benefits. The amount of recorded severance pay obligation is based on actuarial calculations, which are carried out every three years. An actuarial valuation of the severance obligations as of March 31, 2011 was conducted by Ellement & Ellement. The key actuarial assumptions include an interest rate credited to obligations of return of 6.5% ( %), severance rate of 0.72% of average salary of $59,978 for administration staff and 0.39% of average salary of $38,454 for adjusting staff ( % of average salary of $54,020 for administration staff and 0.43% of average salary of $36,294 for adjusting staff), and salary inflation rate increases of 2.75% ( %). The accrued benefit cost method with salary projection was used and the liabilities have been extrapolated to March 31, 2012 using the formula provided by the actuary. The following table provides the calculation of the liability for severance benefits of $2,273,000 ( $2,226,000): Accrued severance liability beginning of year $ 2,226 $ 2,228 Experience loss (gain) - (165) Benefits accrued Interest on obligation Benefits paid (171) (80) Accrued severance liability end of year $ 2,273 $ 2, Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

51 Pension Liability MASC s employees are eligible for defined benefit pensions under The Civil Service Superannuation Act. MASC contributes 50% of the pension disbursements made to retired employees of the former MACC for service up to September 1, In addition, MASC has a pension liability for employees whose earnings are out of the scope of the Civil Service Superannuation Fund plan. Effective April 1, 1998, the former MCIC became a fully funded matching employer. Upon the formation of MASC, the current pension obligations to the Civil Service Superannuation Board (CSSB) for former MCIC employees continued to be matched by MASC. Prior to amalgamation, MACC did not match employees current service contributions, and instead contributed 50% of the pension disbursements made to retired employees. Starting September 1, 2005, the current pension contributions for former MACC employees have been matched. MASC accrues a provision for its liability for the pensionable service that was earned by former MACC employees prior to the amalgamation on September 1, 2005, which includes future cost of living adjustments based on an actuarial valuation. The actuarial valuation was based on the projected method prorated on services to be used. The Province of Manitoba provides funding for this liability (Note 9). Actuarial gains (losses) are amortized over the expected average remaining service life of the related employee group ( six years). As a matching employer, MASC discharges its pension liability on a current basis and, therefore, has no additional pension obligation. Actuarial valuations are carried out every year to provide an estimate of the accrued liability for unfunded pension benefits. An actuarial valuation of the pension obligations as of December 31, 2010 was conducted by Ellement & Ellement. The key actuarial assumptions include a rate of return of 6.50% ( %), inflation of 2.0% ( %), salary inflation rate increases of 3.75% ( %) and post-retirement indexing at two-thirds of the inflation rate. The projected benefit method prorated on services was used and the liabilities have been extrapolated to March 31, 2012 using a formula provided by the actuary. The following table provides the calculation of the liability for pension benefits of $6,502,000 ( $6,472,000) Accrued pension liability beginning of year $ 6,472 $ 6,011 Experience (gain) loss (80) 288 Benefits accrued 3 14 Interest on obligation Benefits paid (288) (261) Accrued pension liability end of year $ 6,502 $ 6,472 Unamortized actuarial gains and losses (377) - Net liability 6,125 6, COMMITMENTS Approved, undisbursed loans $ 26,359 $ 14,408 Estimated farm loan incentives 5,854 5,194 Operating leases $ 32,371 $ 19,721 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 49

52 The estimated farm loan incentives are for the estimated future payments for the Young Farmer Rebate and Management Training Credit programs. The Young Farmer Rebate is based on rebates of equal payments, which clients earn in equal payments for the first five years of the loan, with the rebate being applied to the client s loan balance. The Management Training Credit is credited to the loan once the eligible training has been completed. The operating lease commitments are for equipment and vehicles. 19. TANGIBLE CAPITAL ASSETS 2012 Computer leasehold Furniture major Software hardware improvements and Equipment development and Software Total Cost Beginning of year $ 344 $ 419 $ 2,907 $ 426 $ 4,096 Additions Disposals and write-downs - (4) (2,907) (9) (2,920) ,217 Accumulated amortization Beginning of year , ,864 Amortization expense Disposals and write-downs - (4) (2,907) (9) (2,920) ,019 Net book value at March 31, 2012 $ 14 $ 125 $ - $ 59 $ Computer leasehold Furniture major Software hardware improvements and Equipment development and Software total Cost Beginning of year $ 344 $ 399 $ 2,907 $ 439 $ 4,089 Additions Disposals and write-downs (46) (46) , ,096 Accumulated amortization Beginning of year , ,820 Amortization expense Disposals and write-downs (46) (46) , ,864 Net book value at March 31, 2011 $ 23 $ 140 $ - $ 69 $ Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

53 20. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT Financial instruments comprise the majority of MASC s assets and liabilities. For its lending operations, MASC borrows from the Province of Manitoba at fixed interest rates and then provides fixed term loans to its clients at interest rates that generally earn a reasonable interest rate margin. For its insurance operations, MASC places the retained funds mainly in short-term investments, in order to have sufficient capital available to make insurance payments when losses exceed available funds in the current year (premium income plus interest revenue less reinsurance premiums). MASC s risk management policies are designed to: identify and analyze risk, set appropriate risk limits and controls, and monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Board of Directors approves these policies and management is responsible for ensuring that the policies are properly carried out. The Board of Directors receives confirmation that the risks are being appropriately managed through regular reporting, third-party compliance reporting and by reviews conducted by MASC s internal auditors. MASC is exposed to credit, liquidity and market risks in respect of its use of financial instruments. Credit Risk Credit risk is the risk that one party to a financial instrument fails to discharge an obligation and causes financial loss to the counter party. The financial instruments that potentially subject MASC to credit risk consist principally of accounts receivable, loans receivable and guarantees on loans. MASC s investments are held by the Province of Manitoba, which guarantees the associated payments of principal and interest. MASC s maximum possible exposure to credit risk is as follows: Investments $ 191,475 $ 350,227 Accounts receivable 1,916 2,131 Receivables from the Province of Manitoba 107,277 9,684 Receivables from the Government of Canada 5,659 6,938 Loans receivable 318, ,448 Loan guarantees 81,942 79,103 $ 706,516 $ 758,531 Investments - MASC is not exposed to significant credit risk as its investments are held by the Province of Manitoba, with the Province of Manitoba guaranteeing the associated payments of principal and interest. Accounts Receivable - MASC s accounts receivable consist largely of insurance premiums due from participating producers. The insurance programs offer credit for producer premiums, which are due and payable at the time of billing. Interest is charged on premiums that are not paid by October 31 of that crop year, with March 31 being the final payment deadline. MASC terminates insurance contracts of producers who do not make acceptable payment arrangements prior to the upcoming crop year. The importance of insurance programs to the financial well being of an ongoing farming operation serves to mitigate the credit risk associated with insurance premiums. Receivables from the Province of Manitoba and the Government of Canada - MASC is not exposed to significant credit risk as payment in full is typically collected when due. Loans Receivable - Impairment provisions are provided for losses that have been incurred as of the balance sheet date. Significant changes in the economic well being of Manitoba s agricultural industry or deterioration in specific sectors of the industry, which represent a concentration within MASC s overall loan portfolio, may result in losses that differ from those provided for at the balance sheet date. Management of credit risk is an integral part of MASC s activities, with careful monitoring and appropriate remedial actions. Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 51

54 The Board of Directors is responsible for approving and monitoring MASC s tolerance of credit exposures, which it does through review and approval of the lending and guarantee program guidelines and setting limits on credit exposures to individual clients. MASC has comprehensive policy and procedures manuals in place for all lending programs. In general, MASC emphasizes responsible lending, which is comprised of a combination of adequate loan security and a client s ability to pay. MASC is also mandated to deliver higher risk special assistance loan programs on behalf of the Government of Manitoba, which fall outside the normal limits set out in regular loan policies. These special assistance loans have provisions for credit losses that are established by the Provincial Treasury Board. In addition, an increased level of monitoring is carried out in an effort to mitigate losses. Special assistance loans make up 14% of the MASC s overall lending portfolio. Summarized below are loans that are past due but not impaired regular special regular special Program Loans Assistance Loans* Total Program Loans assistance Loans* total Less than 1 year in arrears $ 3,620 $ 602 $ 4,222 $ 3,527 $ 1,044 $ 4,571 1 to 2 years in arrears 1, ,789 2, ,619 Over 2 years in arrears $ 4,729 $ 1,299 $ 6,028 $ 6,469 $ 1,798 $ 8,267 *Includes Manitoba Hog Assistance, BSE Recovery, Producer Recovery, Flood Proofing Assistance and Enterprise Development Loans. Loans that are past due but not impaired are generally loans for which it is thought that the client has sufficient cash flow to meet their payment obligations and the loan is adequately secured. The majority of MASC s term loans have semi-annual payments and therefore a loan that is in the Less than 1 year category is generally only one payment in arrears. Two payments in arrears puts the loan in the 1 to 2 years category. In addition, Stocker Loans, which provide short-term financing for the purchase or retention of feeder cattle, are due at the end of the term, which is generally one year. Any delay in the sale of the cattle at the end of the term may put the loan in arrears; however, these loans are normally paid in full once the associated cattle are sold. MASC s lending exposure to the various agricultural sectors, as provided in Note 12, is summarized as follows: Loans Receivable by Economic Sector regular special regular special Program Loans Assistance Loans* Total Program Loans assistance Loans* total Grains and oilseeds $ 169,943 $ 4,003 $ 173,946 $ 153,458 6,692 $ 160,150 Potatoes Other crops 6, ,428 6, ,860 Cattle 98,253 11, ,673 94,744 18, ,085 Hogs 4,673 29,643 34,316 5,680 34,180 39,860 Poultry 2,860-2,860 1, ,700 Dairy 7, ,471 5, ,448 Other 7,487 4,178 11,665 6,457 4,894 11,351 Provisions and concessions (6,896) (21,964) (28,860) (11,020) (17,778) (28,798) $ 290,809 $ 27,438 $ 318, ,826 46,622 $ 310,448 *Includes Manitoba Hog Assistance, BSE Recovery, Producer Recovery, Flood Proofing Assistance and Enterprise Development Loans. 52 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

55 The Province of Manitoba provides funding for the full amount of loans that are written off; therefore, the loans receivable risk to MASC is minimal. Loans Guarantees - MASC provides loan guarantees to financial institutions, which encourage the provision of credit that the financial institutions consider to be higher risk. Each guarantee request is reviewed to assess its viability and to ensure a fit within the established program parameters. Loan guarantees are approved based on a delegated approval authority. MASC s loan guarantee activity involves five separate programs: Operating Credit Guarantees for Rural Small Business and Rural Entrepreneur Assistance (REA), which are directed at non-agricultural businesses; Manitoba Livestock Associations Loan Guarantees, which are directed at the cattle industry; and Operating Credit Guarantees for Agriculture and Diversification Loan Guarantees, which are generally available to Manitoba s agricultural industry. MASC s loan guarantee exposure by agricultural sector is summarized below: Diversification Loan operating Credit guarantees guarantees Grains and oilseeds % 56% Potatoes 3% 5% 16% 12% Other crops 1% - 4% - Cattle - - 8% 12% Hogs 44% 43% 13% 11% Poultry 8% 8% 1% 1% Dairy 42% 33% 1% 1% Other 2% 11% 3% 7% 100% 100% 100% 100% The Province of Manitoba provides funding for all claims on loan guarantees resulting in minimal associated risk to MASC. Interest Rate Risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. The interest rate exposure relates to investments, loans receivable, and advances from the Province of Manitoba. Investments - MASC s investment portfolio is mainly in short-term interest bearing investments. These investments are normally held to maturity so changes in interest rates do not affect the value of the investments. All of MASC s investments are placed through Manitoba Finance. Loans Receivable/Loans from the Province of Manitoba - MASC borrows funds for lending operations from the Province of Manitoba at fixed rates and normally lends those funds to clients at 1.5 percentage points above the associated borrowing rate. All loans from the Province of Manitoba have fixed interest rates for the full term of the advance and MASC only offers fixed interest rate loans to its clients. Due to this corresponding arrangement, MASC does not incur significant interest rate risk. However, some interest rate risk is imparted due to MASC s lending policy of allowing prepayment of loans without penalty, given that MASC does not have the offsetting ability to prepay the associated advances from the Province of Manitoba without penalty. MASC mitigates this risk by closely matching the cash flow from client loan payments, including estimated annual prepayments, to the cash flow required to repay advances from the Province of Manitoba. Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 53

56 2012 Scheduled Repayments not Interest Within 1 Year 1 to 5 Years 6 to 10 years over 10 Years rate Sensitive* Total Loans receivable $ 49, ,813 82,630 95,241 (21,344) $ 318,247 Yield 5.69% 5.80% 5.86% 5.90% 5.83% Due to the Province of Manitoba $ 75, ,051 86,006 44,201 - $ 345,109 Yield 4.38% 4.58% 4.50% 4.12% 4.46% *Includes provisions for impaired loans and accrued interest. $ (25,944) (27,238) (3,376) 51,040 (21,344) $ (26,862) 2011 Scheduled Repayments not Interest Within 1 Year 1 to 5 Years 6 to 10 years over 10 Years rate Sensitive* total Loans receivable $ 43, ,303 86,602 84,791 (20,979) $ 310,448 Yield 5.81% 5.87% 5.93% 5.96% 5.89% Due to the Province of Manitoba $ 71, ,609 85,286 29,954 - $ 334,748 Yield 4.70% 4.90% 4.99% 4.97% 4.89% *Includes provisions for impaired loans and accrued interest. $ (28,168) (31,306) 1,316 54,837 (20,979) $ (24,300) Liquidity Risk Liquidity risk relates to MASC s ability to access sufficient funds to meet its financial commitments. Advances from the Province of Manitoba have a direct correlation to the loans receivable as the funds borrowed are directly lent to MASC clients. Funding is provided by the Province of Manitoba for the full amount of loans that are written off. Subsequently, MASC has minimal liquidity risk on its lending portfolio in respect of advances from the Province of Manitoba. MASC s primary liquidity risk relates to its liability for insurance claims. MASC does not have material liabilities that can be called unexpectedly at the demand of a lender or client, and has no material commitments for capital expenditures, or need for same, in the normal course of business. Insurance claims payments are funded firstly out of current revenue, which normally exceeds cash requirements. In addition, insurance program funds are retained and placed in short-term investments, making such funds available to pay claims in excess of current revenue. Private sector reinsurance is in place for AgriInsurance and Hail Insurance, providing significant protection against catastrophic losses. If all of the above are exhausted, the AgriInsurance Program has a reinsurance agreement with the Government of Canada and the Province of Manitoba, which provides for unlimited additional funding for claim payments (Note 23). MASC also has the ability to borrow funds from the Province of Manitoba for AgriInsurance and Hail Insurance, if required. 54 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

57 21. ACTUARIAL REVIEW An actuarial certification of MASC s AgriInsurance Program was completed by Tillinghast - Towers Perrin, consulting actuaries, in March The actuarial review concluded that: the methodologies used to establish the probable yields for insured crops do not exceed productive capabilities; the premium rate methodologies are actuarially sound and therefore sufficient to meet expected claim costs over time; and that the program meets the financial selfsustaining criteria as defined by the Government of Canada. Any program changes require actuarial review prior to implementation. 22. RELATED PARTY TRANSACTIONS MASC is related in terms of common ownership to all Province of Manitoba departments, agencies and Crown corporations. MASC enters into transactions with these entities in the normal course of business. These transactions are recorded at the exchange amount. Information is provided throughout these statements to disclose significant related party transactions MASC entered into, except for the following: Interest earned Province of Manitoba $ 3,594 $ 3,265 Interest paid on loans from the Province of Manitoba $ 15,857 $ 16, REINSURANCE FUNDS AgriInsurance In accordance with the terms of the reinsurance agreement between the Government of Canada and the Province of Manitoba, the two levels of government maintain separate reinsurance accounts. MASC pays reinsurance premiums to the Crop Reinsurance Fund of Canada for Manitoba and to the Crop Reinsurance Fund of Manitoba, based on the amount of premiums collected and the cumulative financial balance of the AgriInsurance Program. When indemnities paid to insured producers exceed the funds retained by MASC, after accounting for private sector reinsurance recoveries, transfers are made from the reinsurance funds to MASC. Interest is not credited or charged to the respective reinsurance funds by the Government of Canada or the Province of Manitoba. Surpluses in the Crop Reinsurance Fund of Canada for Manitoba and the Crop Reinsurance Fund of Manitoba are held by the Government of Canada and the Province of Manitoba, respectively. Federal-provincial reinsurance is essentially an agreement on how to share any deficits in the AgriInsurance Program. Crop Reinsurance Fund of Canada for Manitoba crop Reinsurance Fund of Manitoba Opening surplus (deficit) $ 4,939 $ 4,057 $ 26,958 $ 26,076 Current year premium contributions (net)* Net book value $ 5,783 $ 4,939 $ 27,802 $ 26,958 *Current year reinsurance premium contributions are shown net of an allowance for uncollectible accounts, which is a recovery of $5,000 ( $11,000 recovery). Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 55

58 In addition to the financial protection provided by federal-provincial reinsurance as noted above, MASC entered into a one-year agreement with private sector reinsurers for 2011/12. The agreement involves 28 reinsuring companies assuming 100% of losses (including a deemed loss adjustment expense) from 15.0% to 27.5% of AgriInsurance liability (coverage). Reinsurance premiums were $38,380,000 ( $28,716,000). There was a $9,000 private sector reinsurance claim reversal reimbursement ( $14,000 claim reversal reimbursement) for outstanding prior year claims. Hail Insurance For 2011/12, MASC entered into a one-year agreement with private sector reinsurers for the Hail Insurance Program. The agreement involves 15 reinsuring companies assuming 90% of hail insurance losses (including actual loss adjustment expenses) from 4.25% to 7.00% of hail insurance liability (coverage). Reinsurance premiums were $1,047,000 ( $1,273,000) with no reinsurance recoveries ( nil). 24. COMPARATIVE FIGURES The 2011 figures have been reclassified where necessary to conform to 2012 presentation as outlined in Note SUBSEQUENT EVENTS In May 2012, the Government of Canada and the Province of Manitoba entered into the 2011 Canada-Manitoba Forage Shortfall and Restoration Assistance Initiative. This agreement provided for increased Government of Canada funding for three of the 2011 Manitoba AgriRecovery Programs described in Note 7 (D). Increased federal funding was provided for the 2011 Manitoba Transportation Assistance Program and the 2011 Manitoba Forage Shortfall Assistance Program, as well as new federal funding for a portion of the 2011 Manitoba Forage Restoration Assistance Program. The additional federal contribution to these programs is estimated to be $6.2 million. No amounts have been accrued as of March 31, 2012, therefore funding for this program will be reflected in the March 31, 2013 financial statements. 56 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

59 Schedule 1: Schedule of ADMINISTRATIVE Expenses For the year ended March 31, 2012 (in thousands of dollars) Adjustors wages, benefits and expenses $ 7,690 $ 5,302 Advertising Amortization expense Appeal Tribunal 2, Audit fees and legal Directors remuneration and expense Furniture and equipment Information technology Office rental and utilities 1,212 1,089 Other administrative expenses 2, Other administrative recoveries (575) (514) Postage Printing and office supplies Salaries and employee benefits 14,544 11,687 Telephone Travel and vehicle expenses Total administrative expenses $ 30,661 $ 20,728 Administrative expenses allocation: Lending Programs 4,230 5,106 AgriInsurance Program 10,940 11,054 Hail Insurance Program 2,230 2,716 Wildlife Damage Compensation Program Farmland School Tax Rebate Program Other Programs 12,520 1,064 Total administrative expenses $ 30,661 $ 20,728 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 57

60 Schedule 2: Schedule Of OPERATIONS And Accumulated Surplus For the year ended March 31, 2012 (in thousands of dollars) Revenue Insurance Premiums lending Programs AgriInsurance Program Hail Insurance Program Insured producers $ - $ - $ 71,060 $ 71,180 $ 16,215 $ 20,268 Province of Manitoba ,914 41, Government of Canada ,375 62, , ,381 16,215 20,268 Interest from loans 19,523 19, Other contributions - Province of Manitoba 5,188 5,071 4,274 4, Other contributions - Government of Canada - - 6,633 6, Investment income ,366 2, Other income (14) - - Expense 25,019 25, , ,967 17,208 21,036 Insurance indemnities and compensation payments , ,975 4,838 10,523 Reinsurance premiums (Note 23) ,064 30,470 1,047 1,273 Interest on borrowed funds 15,857 16, Provision (recoveries) for credit losses 2,038 (1,461) 28 (542) (18) (4) Provision for guaranteed loan losses (Note 16) 1, Young farmer incentives 1,660 1, Farmland school tax rebates (Note 6) Other program payments (Note 7) Administrative expenses (Schedule 1) 4,230 5,106 10,940 11,054 2,230 2,716 Total expenses 25,703 22, , ,976 8,097 14,508 Surplus (deficit) for the year (684) 2,896 (196,288) (64,009) 9,111 6,528 Accumulated surplus (deficit), beginning of year (41,311) (44,207) 271, ,685 57,867 51,339 Surplus (deficit), end of year $ (41,995) $ (41,311) $ 75,388 $ 271,676 $ 66,978 $ 57, Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report

61 Wildlife Damage Farmland School Tax compensation Program Rebate Program other Programs Total Total $ - $ - $ - $ - $ - $ - $ 87,275 $ 91, ,914 41, ,375 62, , , ,523 19,751 1,097 1,138 36,905 33, ,517 22, ,981 66,400 1,300 1, ,043 32,769 73,976 41, ,701 3, ,397 2,845 36,935 33, ,861 55, , ,521 2,043 2, , , ,111 31, ,857 16, ,048 (2,003) , ,679 1, ,548 33, ,548 33, ,341 54, ,341 54, ,520 1,064 30,661 20,728 2,397 2,845 36,935 33, ,861 55, , , (187,861) (54,585) , ,817 $ - $ - $ - $ - $ - $ - $ 100,371 $ 288,232 Manitoba Agricultural SeRVICes Corporation 2011/12 Annual Report 59

62 LENDING CORPORATE OFFICE Unit First St S Brandon MB R7A 7A1 INSURANCE CORPORATE OFFICE th St NW Portage la Prairie MB R1N 3V9 60 Manitoba Agricultural Services Corporation 2011/12 Annual Report

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