FEATURE

Just don't call it a food tax
Nova Scotia ponders grocery levy to give farmers a "last kick at the can"
by David Lindsay

You can't blame the non-farming public for having the impression that Nova Scotia's agriculture industry is continually sliding from one crisis to the next. It's partly a function of how the popular media cover agriculture, i.e., only when there's a disaster of some kind. But it's also partly true. The industry is so small (even Atlantic Canada as a whole) relative to major food producing regions, it is frequently knocked about by market forces exerted outside the province.
The ultimate crisis, as many in the business now acknowledge, is that the ongoing abuse could lead to ever-smaller numbers of farms and farmers, until the industry lacks the critical mass to maintain services and infrastructure. There's also a social side to this slippery slope. Endless bad news about farming will not only prevent young people from getting into the business, it will eventually drain the reserves of public support, until agriculture is seen as a worthy but marginal enterprise comparable to rug hooking or building whirligigs.
Fortunately, we're not there yet. (No offence to rug hookers and whirligig builders.) That's why there is a movement afoot to tap into existing public support and provide a new source of financial assistance to help the agricultural sector evolve into the vibrant and viable industry most Nova Scotians want. One idea that has been plunked weightily onto the table is a levy on all food purchases in the province. The surcharge would be implemented for a fixed period of several years, to provide a temporary income top-up for those agricultural sectors that need it most, allowing farmers to make the transition ­ or, if necessary, the radical transformation ­ to profitable production and marketing systems.
Among people who read tedious ag policy reports ­ including many farmers ­ "the Kelco report" has become a shorthand reference to the food levy idea. That's because the concept was fleshed out in a paper by Kelco Consulting Ltd., based in Kentville, N.S., commissioned by the Nova Scotia Federation of Agriculture with the support of the hog, beef, sheep, horticulture, and fruit sectors.

The first phase, called "Industry Transition Options to Maintain a Competitive Nova Scotia Agriculture Sector," was completed in November 2005, and in May 2006 a follow-up was released with the equally ponderous title, "Primary Value Chain Recovery Project ­ Model Development and Recommendations."
In the autumn of 2006 the Nova Scotia Department of Agriculture called for an analysis of the recommendations by a committee comprising three of its own staff, two representatives from the Federation, one from the agriculture industry, and one from Kelco. This "Competitive Transition Project Working Group" is expected to have a proposal ready to submit to provincial Cabinet by the end of March.
The committee is not likely to question the need for a new approach to agricultural assistance, but the rationale presented in the Kelco report will have to be articulated in a way that is persuasive to the government and the public. The premise behind this whole exercise is that markets currently do not provide Nova Scotia farmers with a reasonable return for their productive activities ­ particularly in light of the "non-market social benefits" provided by the industry, such as food security and land stewardship. The report drives home the point that farmers in the province are often in direct competition with imports from countries where production costs are lower ­ not only because of generous subsidies, economies of scale, and more favorable growing conditions, but also because of less onerous safety and environmental standards.
None of those factors is likely to change anytime soon, which is why the report recommends that Nova Scotia farmers stop trying to compete in global commodity markets where they face major disadvantages, and focus instead on selling differentiated food products ­ "value-added" processed and packaged products, specialty products, organic products, or just emphatically local foodstuffs.
This is where the word "transition" comes in. Such changes cannot be made overnight ­ or even over the course of one or two growing seasons ­ and considerable investments will be required. The Kelco report examines several models for providing the necessary financial assistance.
European countries make direct per-hectare payments to farmers for enhanced environmental farm management or conversion to organic methods, in recognition of public benefits that are not remunerated by private markets. The report says Switzerland's generous program reflects a national commitment to farming made explicit in the constitution, which states that the main functions of Swiss agriculture are "conservation of natural resources, tending to the cultural landscape, decentralized settlement of the country, (and) secure food supply for the population."
Other examples of direct payments include transition programs for Australia's sugar and dairy industries, allowing farmers in those sectors to adapt to major changes in the market, or else exit the industry. The former is financed by the government, and the latter by consumers through a levy of $0.11 (AUS) per liter on fluid milk.
As a means of financing programs, examples of the levy concept can also be found close to home, including the $0.40/bushel remitted to Apple Growers of New Brunswick for all apples sold in the province, and Nova Scotia's own beverage container deposit program run by the provincial Resource Recovery Fund Board.
The committee is examining several funding models and several assistance models. Bruce Roberts, the Kelco representative, says it was important to present the food levy option simply to get the government's attention, because any proposal based entirely on new government funding would likely have been dismissed out of hand.
"Before long our governments are not going to be able to put any money into anything but health care and education," Roberts remarks.
The first phase of the report actually makes a strong case for government funding of farm assistance ­ not just from the Department of Agriculture budget, but from general revenue, reflecting all those non-market benefits that accrue to the province as a whole. (Farmers have always maintained the rural scenery that has become a major asset to today's tourism industry, the report says, and in recent years their compliance with numerous new water quality regulations has provided collective health and environmental protection.)
But the second phase focuses on a consumer-funded model, stating from the outset that a food levy program "will have to be very well defined and have a finite term to be publicly and politically acceptable."
There is an element of tough love in the description of how such a program would work, with assurances that those receiving assistance will not be lulled into a false sense of financial security. The report states:
"The system that is developed must not distort market signals to farmers that influence production. It must also provide incentives for above-average farmers to maintain and improve their efficiency, and for below-average farmers to improve theirs or exit the industry."
According to this model, payments to farmers would not be based on market prices, but on cost of production (COP) studies for each sector, bringing all sectors up to a target return on investment of about 12 percent ­ matching returns in food retailing and processing, as determined by federal studies of those sectors' financial performance in the 1990s. The payment to an individual farmer does not depend on net revenue, gross margin, or acreage; it's just production multiplied by that sector's base payment per unit.
To ensure the system does not reward inefficiency, the payment per unit is based on the average return of the top 50 percent of producer returns in that sector, and it will be updated periodically. The report reiterates the importance of discipline: "Assistance per unit will decrease as a sector becomes more profitable, placing more pressure on inefficient producers to adopt competitiveness enhancements or exit the industry."

PITCH
Frazer Hunter, president of the Nova Scotia Federation of Agriculture, says the levy model could work if it is accompanied by an effective communication strategy to win public acceptance.
"We want to be careful what we call it," he says. "The worst thing would be a 'food tax.' We've got to pitch agriculture in a different way. Agriculture isn't just food anymore. It's the spin-off benefits."
Hunter says the public also needs to understand that farmers incur considerable costs to comply with regulatory requirements. He cites the example of traceability measures, which serve primarily to make the government's job easier.
"We have always produced safe food," he points out. "But now there's a paper trail required that's unbelievable, and it's unique to the agriculture industry. It's a downloading of liability."
If they are to continue carrying such responsibilities, farmers need to plot a course for greater profitability, he says, adding that a one-percent food levy "could generate sufficient funds to make agriculture sustainable until it moves into a new era."
Hunter believes Nova Scotians already have a growing awareness of what's at stake, and they are ready to support a realistic plan. "For a long time nobody cared who grew what where," he says, "but now that's changing."
Roberts acknowledges establishing a 12-percent return across the board is somewhat arbitrary, but he says, "It was a way to set a benchmark. We have commodity groups in this province that are getting more than 12 percent. We said, 'Let's target the commodities that need the help while they make changes.'"
Based on that benchmark, total payments for Nova Scotia farmers have been estimated at $13-15 million per year. That's probably a bit low, says Roberts, but with the annual food bill for the province running around $2 billion, the $20 million generated by a one-percent levy would certainly cover the program.
The timeline would have to be in the range of five to 10 years, he says, so the various sectors can determine what needs to done and make the necessary transitions. Where major investments are required, the payments will help farmers gain access to capital. Some compliance mechanism would have to be developed to ensure the assistance money is not merely supporting the status quo.
Despite rigorous checks and balances built into the system, Roberts says it would be unrealistic to expect a 100-percent success rate. "The program is not going to stop some individual farmers from exiting the industry," he says.
But he expects the more significant trend will be older farmers using the financial assistance for succession planning, investing in changes that will ensure the next generation is taking over a viable operation.
"A lot of farmers know what they want to do, they know what they need to do, but they don't have the bucks to do it," Roberts says, adding that this model is intended to reignite the entrepreneurial spirit that still exists in the farm population.
"We've had a lot of the creativity taken out of us by the programs that have been developed over the past 10 or 20 years. Those income stabilization programs are terrible."
Roberts says the industry as a whole is putting a lot on the line with this proposal, because it pretty much precludes going back to the government and asking for more assistance.
"This may be our last kick at the can," he says. "It may be pie in the sky, but it's the first real agriculture policy discussion we've had in the province outside of the Federation."