Perils & Risks in Canadian Aquaculture: A Review of Scenarios for Risk Management Programming. D. Stechey, M. Doyon, J. Nolet & E.

Transcription

1 Perils & Risks in Canadian Aquaculture: A Review of Scenarios for Risk Management Programming D. Stechey, M. Doyon, J. Nolet & E. Gilbert April 2006

2 Aquaculture Canadian Contet Canadian aquaculture output approached 177,000 tonnes valued at Cdn $639 million in % of total seafood production and 21% of total value average annual growth >19% for 2 decades economic importance to rural and coastal communities Nevertheless, the Canadian aquaculture sector struggles to remain viable in an increasingly competitive global economy Investment climate for aquaculture is poor most stakeholders perceive the sector to be high risk Slide 2

3 Risk Management Programming - Canadian Contet Agriculture Governments provide public risk management programming Canadian Agriculture Income Stabilization (CAIS) Aquaculture Risk management is provided entirely by private sector Cover is increasingly difficult to obtain Aquaculture industry has requested parity with agriculture Slide 3

4 Project Objectives Industry & governments recognize that business risk management strategies are necessary to build a stronger, more profitable industry Objectives of the F/P Canadian Council of Fisheries and Aquaculture Ministers - Aquaculture Task Group: PHASE 1 Evaluate the requirement for business risk management programming in the Canadian aquaculture industry PHASE 2 Identify the costs, effectiveness and implications of alternative private, public and hybrid implementation structures Slide 4

5 Phase 1 Stakeholder Consultation Slide 5

6 Financial Institution Perspective Aquaculture is high-risk Failures within sector remain too common Prefer to deal with larger, vertically-integrated operations with reputable record Reluctance to deal with smaller, entrepreneurial ventures Income stabilization-type programming to maintain greater certainty to cash flow is preferred Slide 6

7 Government Perspective Increased stability required in industry CCFAM recognizes need to enhance business risk management measures Agriculture Policy Framework has established basic policy for Business Risk Management in farming Reduce need for ad hoc compensation Other jurisdictions have developed or are pursuing BRM programming Spain, Japan, United States Slide 7

8 Producers Perspective Value ($) 900, , , , , , , , ,000 0 Canadian Aquaculture Industry Year Gross Revenue Total Input Costs Gross Value Added Earnings (StatsCan 2005) Costs continue to rise revenues and margins in decline Ecessive risk reducing performance Producers regard themselves as farmers But not treated in accordance with established agricultural business risk management policy Slide 8

9 Producers Perspective Principal Sources of Risk Business Risk Most significant for finfish Biological Risk Very important for shellfish Significant for salmon producers Pure Risk Tends to be least significant to producers Slide 9

10 Benefits of Business Risk Management in Aquaculture Protecting aquaculturists against accidents and natural hazards that are beyond their ability to control; Providing basic compensation for the loss of or damage to equipment and crops, thus helping to stabilize incomes in the sector and the social and economic welfare of communities; Reducing the risk to financial institutions, thus enhancing the ability of aquaculturists to secure credit; Encouraging aquaculturists to further invest in new technologies and practices to reduce risks and improve productivity; Fostering an atmosphere of mutual assistance and co-operation among aquaculturists to further reduce common risk factors; Reducing unpredictable demand on governments for ad hoc compensation payments to offset losses; Enhancing the contribution of the aquaculture sector to regional and national economies. Slide 10

11 Conclusions Phase 1 Loss reduction and prevention strategies are essential to maintain investor confidence in aquaculture and to help stabilize industry Current products are inadequate Comprehensive risk management approach: On-farm risk audit Identification, mitigation, avoidance Effective use of BMPs & SOPs Best Management Plans Standard Operating Procedures Effective and affordable insurance programming Others 44% Data Source: Swiss Re Superchill Equipment failure 1% 6% Diseases 21% Algea Bloom 13% Storm 15% Slide 11

12 Phase 2 Scenario Analysis Slide 12

13 Business Risk Management Objectives To ensure programs are responsive to demand and that government dollars are directed to areas of need To provide equal treatment for farmers across Canada facing similar risk situations To minimize the distortion of farmers production and marketing decisions To focus on management of risks related to the stability of the entire farm and to avoid duplication of payments To be relatively simple and easy to understand, and To facilitate long-term planning by farmers Slide 13

14 Historical Basis for Simulations Insurance data from east coast salmon sector used to develop base models Probability of loss ratio < 112% is ~50% y = r 2 = Loss Ratio () Probability (%) y = r2 = % 1.3% 30% 3.3% 50% 9.6% 65% 16.5% 80% 25.3% 100% 40.0% 112% 50.0% 125% 63.0% 150% 91.0% 155% 97.4% Slide 14

15 Choice of Simulations Agriculture-type Programs 1. CAIS-Type program (public) 2. Crop/Stock Insurance program (public) Public / Private Partnership Programs 1. PPP1 2. PPP2 3. PPP3 Slide 15

16 Potential Simulations by Species and Production Scenario CAIS Production Insurance Public Public PPP1 PPP2 PPP3 Oyster Mussel Salmon (East Coast) Salmon (West Coast) Brook trout Rainbow trout (cage) Rainbow trout (land-based) Slide 16

17 CAIS - Main Characteristics Targets global risks faced by agricultural producers by stabilizing producers income Based on a reference margin Olympic mean of the previous five years margin Compensates the gap between the reference and the current margin CAIS is not crop or production specific Applied historically for 6-year period ( ) Allowable epenses reflect sector average Producers contribute a fee Slide 17

18 Canadian Agricultural Income Stabilization Program How CAIS works Slide 18

19 Public Crop Insurance - Main Characteristics Risk protection against losses from uncontrollable natural perils and disease Premium based on loss history and level of coverage chosen by the producer Premium subsidy: 60% government, 40% producers 70% participation rate Applied historically for 6-year period ( ) No distinction for the causes of loss In absence of private insurer, program administration costs are set to 20% (provincial government) and 10% (federal government) Slide 19

20 Private / Public Partnership Scenarios - Main Hypotheses Same industry conditions as in Public Production Insurance program Premium and loss-ratio reinsurance vary within the 3 scenarios In presence of private insurer, government program administration costs are set to 6% (combined provincial and federal) 10% deductible Slide 20

21 Private / Public Partnership Scenarios PPP1 Cover is offered by private insurers Loss ratios are capped at 70% for private insurance companies Government re-insurance compensates insurers for losses above 70% No government-funded premium subsidies are provided Slide 21

22 Private / Public Partnership Scenarios PPP2 Cover is offered by private insurers Loss ratios are capped at 70% for private insurance companies Government re-insurance compensates insurers for losses above 70% Government-funded premium subsidies are available to cover 60% of total premium costs Slide 22

23 Private / Public Partnership Scenarios PPP3 Cover is offered by private insurers Actuarially-fair premiums are established to maintain loss ratios around 65% No government re-insurance is offered to compensate for loss ratios above 65% Government-funded premium subsidies are available to keep premiums affordable for producers Slide 23

24 Summary - CAIS Program Scenario Advantages Disadvantages CAIS-Type Program Responsive to biological, pure and market-related risks Acknowledges aquaculturists desire to be treated as farmers New CAIS fee formula keeps premiums affordable for producers and delivers high return on industry investment May be difficult to trigger in aquaculture Gov t is wholly responsible for risks and compensation for losses Does not take advantage of private insurance sector eperience and epertise in aquaculture sector Administratively comple May be difficult to assure compliance with comprehensive risk management measures (e.g. BMPs, SOPs, etc.) Slide 24

25 Summary Public Insurance Program Scenario Advantages Disadvantages Public Crop Insurance High return to producers on industry and gov t investment Can be modelled after eisting agriculture programs and delivered via the same infrastructure Responsive to only pure and biological risks Gov t is wholly responsible for risks and compensation for losses Aquaculture opponents may view program as a subsidy to industry May be difficult to assure compliance with comprehensive risk management measures (e.g. BMPs, SOPs, etc.) Slide 25

26 Summary PPP1 Program Scenario Advantages Disadvantages Public/Private Partnership - 1 Low cost scenario for gov ts Takes full advantage of insurance industry eperience and epertise Insurance industry can make compliance with BMPs and SOPs 1 obligatory Gov t risk eposure is considerable open above 70% loss ratio Very low return to producers on industry and gov t investment Will be unattractive to producers Slide 26

27 Summary PPP2 Program Scenario Advantages Disadvantages Public/Private Partnership - 2 High return to producers on industry and gov t investment Takes full advantage of insurance industry eperience and epertise Insurance industry can make BMPs and SOPs 1 obligatory Gov t risk eposure is considerable open above 70% loss ratio Slide 27

28 Summary PPP3 Program Scenario Advantages Disadvantages Public/Private Partnership - 3 Relatively high return to producers on industry and gov t investment Takes full advantage of insurance industry eperience and epertise Gov t risk eposure is defined and finite restricted to premium subsidy and internal administration Insurance industry can make BMPs and SOPs 1 obligatory WTO-friendly Overall cost to gov ts is considerable Slide 28

29 Summary & Conclusions Purpose was to provide quantitative and qualitative information generate broad appreciation of issues involved in risk management identify scope and nature of the costs associated with risk management models not to develop specific programming Assumptions are fundamental to results Analyses provide a reasonable comparative measure between alternative scenarios Slide 29

30 Conclusions Conventional models are based on agricultural eperience and do not necessarily reflect the unique aspects of aquaculture 2+ year production strategy Summer growth, winter inventory management CAIS does not appear to be a practical risk management tool for aquaculture However, income stabilization programming may provide additional sector stability This would require specific program design Public-Private production insurance programs offer interesting alternatives Score high on qualitative criteria; more WTO friendly Slide 30

31 Recommendations Government intervention seems warranted at the business risk management level to insure the survival and growth of the industry Private insurance sector alone cannot offer adequate coverage Before agreeing to underwrite risk, every effort must be made to identify and minimize risk at the farm level Development and implementation of robust BMPs and SOPs - Enforced by 3 rd -party audits Profound supplemental benefits to food safety, environmental sustainability and public confidence enhanced industry productivity, competitiveness, profitability and social licence Slide 31

32 Recommendations Governments and private insurers should jointly fund development of BMPs and SOPs identify, reduce and mitigate risks lowers risk eposure and makes insurance cover more predictable and affordable Industry must share significantly in the costs otherwise little incentive for producers to further identify, manage and mitigate risks Slide 32

33 Thank You PCSGA Naylor