# AgriStability: Structural Change and Benchmark Per Unit Margins (BPUs)

## What is the structural change adjustment?

AgriStability payments are based on a comparison of a producer's margin for the program year and the producer's reference margin. If there is a significant change in the size or type of an operation, the comparison may not be accurate.

The structural change adjustment ensures an apples to apples comparison between the reference margin and the program year by increasing reference year production margins for farms that have expanded, and decreasing reference year production margins for farms that have downsized.

## Structural Change Adjustment Calculation for AgriStability

AgriStability uses a ratio method to calculate structural change adjustments, which is based on your own farm's performance, rather than only industry averages. This method ensures a more accurate reflection of what your margin would have been, had the operation been the same size or type in the reference years as in the Program Year. Only those experiencing a significant structural change (at least a 10% and \$5,000 change to their margin) are subject to the structural change adjustment.

When using the ratio method, the structural change is calculated as follows:

1. For each year in the reference period, the number of productive units (for each commodity or for commodity groups established by the Administration) in that year will be multiplied by the BPU in that reference year for that commodity or commodity group. A benchmark production margin for each reference year will be established in this manner.
2. For each year in the reference period, the number of productive units (for each commodity or commodity group) in the current Program Year will be multiplied by the BPU in that reference year for that commodity or commodity group. A benchmark production margin for each reference year will be established in this manner.
3. The benchmark production margin calculated in (2) will be divided by the benchmark production margin calculated in (1).
4. The ratio calculated in (3) will be multiplied by the actual production margin for that reference year.

The ratio method increases or decreases the production margins in the reference period by the same percentage that units have changed (e.g. if a producer's acres increase by 50%, the reference year production margin is multiplied by 1.5).

## Benchmark Per Unit Margins (BPUs)

A BPU is an average production margin for a given commodity in a given year. It represents the difference between the allowable income and expenses for AgriStability related to one productive unit of a commodity in a given area, based on the industry averages for the area.

For example:

• The BPU applied to a grains and oilseeds operation would be the average margin related to producing one acre of those crops in that producer's region.
• A BPU applied to a cow-calf operation would be the average margin related to one productive cow.

## Production Units & Regions

The basis for each BPU is the productive unit for a commodity. The definition of a productive unit for each commodity depends on the common production practices of that particular sector.

In general, BPUs are calculated on a per acre basis for field crops, a per head basis for feeder livestock, and a bred female basis for breeding operations.

Most livestock BPUs represent a specific commodity and production practice, while some field crop BPUs are representative of a general category or basket to reflect common rotation practices. This is true for grains, oilseeds, and special crops, which are grouped together in the crops basket, or different forages which are included in the forage basket. Baskets prevent structural changes from being calculated where a producer is simply using normal crop rotation, or is producing crops with similar production practices and margin values. Common productive units include:

Planted CommoditiesProductive Unit
Crop Production (grains, oilseeds, special crops) Acre
Forage Basket Production (alfalfa, hay, green-feed) Acre

Livestock CommoditiesProductive Unit
Cow-Calf or Farrowing and Farrow to Finish Hogs female that birthed
Feeder Cattle or Feeder Hogs animal fed
Custom Fed Cattle or Custom Fed Hogs animal feed day
Egg Production producing hens
Broiler Chicken Production kilograms produced
Dairy kilograms produced

The region represented by a BPU varies from commodity to commodity. Livestock BPUs are normally calculated at the provincial level. Many field crops are calculated at the crop district or rural municipality level.

These differences relate to the information available - more detailed information is available for crops through Production Insurance agencies - and whether a commodity's market value or cost of production varies significantly from one area to another.

## Benchmark Per Unit Research & Design

Each year approximately 1800 unique BPU values are developed for the provinces where the federal government delivers AgriStability. Individual BPUs are calculated by economic analysts through the collection and evaluation of background market research, and discussions with provincial government experts, industry sources, and within Agriculture and Agri-Food Canada.

A basic BPU formula is used for all commodities, which establishes revenue by multiplying average yields (production) by market prices, and then subtracts the cost of production items considered allowable under AgriStability. However, there are differences from region to region and commodity to commodity in the precise data collected, and in the different types of revenues and expenses involved, especially between livestock operations and crop operations. Depending on the commodity, information sources include:

• Statistics Canada acres, yield and price data as well as cost indices.
• Agricultural industry sources for various information (Canadian Wheat Board, Canfax, Winnipeg Commodity Exchange, provincial forage sale listings, etc.).
• Area, yield, indemnity and premium records from provincial crop insurance corporations.
• Commodity budget information from provincial departments of agriculture.
• Producer associations when price and/or production information is available to their members.
• Provincial agronomists who are specialists in various areas of crop or livestock production.
• Program application data where farms produce a single commodity used for prices, yields, costs on occasion.
• Consultation with producers who are recognized as experts in areas of production for which there are no public sources.

Once the data has been collected to calculate averages for production, price, and input costs for a commodity, the BPU can be compiled.

BPUs are grouped into BPU sets based on reference years. A BPU set is the series of BPU values for a commodity for the five reference margin years relevant to a given program year.

For example:

• Where a producer applies for the 2015 program year, the BPU set for each commodity he farms will include BPU values for the years 2010-2014.
• Where a producer applies for the 2016 program year, each BPU set will include BPU values for the years 2011-2015.

## Negative value Benchmark Per Units

Negative value BPUs can result where production costs exceed revenue for a commodity in a given year. The Administration sets all negative value BPUs to \$0.01, except those for establishment-stage crops that have no sale potential in a given year. Changing the value of negative BPUs ensures that producers expanding into an affected commodity are given the benefit of the doubt, and don't face reduced support, while those leaving production of a commodity are not given a higher support level.

## Changes to Benchmark Per Units

The composition of BPU sets changes for two reasons. All BPU sets change annually, as the oldest year is dropped and the most recent year added with each passing year. Changes in the methodology used to calculate BPUs may also result in changing BPU sets from year to year. In that event, the BPU set will differ from one year to the next, even for the same year within each set. For example, where the methodology used to calculate the BPUs changed between 2012 and 2013, the BPUs for 2008-2012 used in 2013 differed from the BPUs for 2007-2011 used in 2012.

It is not unusual for BPU sets to change from one year to another based on new data, discussions with provincial governments and other factors. From time to time, changes in BPU calculations for a commodity may be identified, discussed, and implemented, if those changes will result in a more accurate measure of farm income.

Changes are implemented between program years on a go-forward basis, and do not affect previous years' calculations. For example, if a change took place for the 2013 program year, the BPUs used for the 2008-2012 reference years will differ from the BPUs used for the same reference years with respect to the 2012 program year.

## Benchmark Per Units and Beginning Farmers

BPUs are also used to create margins for beginning farmers. AgriStability requires that a producer have at least three years of history to form a reference margin. If a producer did not farm in each of the most recent three years, the missing years are created using BPU values. This is done by multiplying the number of productive units on hand in the program year by the BPUs for each of the missing reference years.

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