Adjusted Gross Revenue Insurance AGR A Risk Management Alternative

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Adjusted Gross Revenue Insurance (AGR) - A
Risk Management Alternative

• Wen-fei Uva, Ph.D.
• Department of Applied Economics and Management
• Cornell University

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Background for AGR Insurance
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BACKGROUND FOR AGR
AGR insurance plan is a non-traditional, whole
farm risk management tool which uses a producers
historic tax information to provide a level of
guaranteed revenue.
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Snapshot of AGR

• Provides a safety net for farm revenue
• Provides insurance coverage for multiple
  commodities under one insurance product
• Cash is a common measurement
• Uses a producers historic Schedule F tax form
  information to provide a revenue base for the
  insurance period
• Uses the AGR farm report to determine coverage

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Who Is Eligible?

• Producing agriculture commodities in a Pilot
  County (may include income from contiguous
  non-pilot counties).
• Have 5 years Schedule F tax forms (or equivalent)
  under the same entity
• No more than 35 of expected allowable income can
  be from animals and animal products.

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• No more than 50 of allowable income may come
  from products purchased for resale. -- is
  available for diversified producers of minor
  crops, as well as direct marketers.
• If more than 50 of expected income is from
  insurable crops, MPCI must be obtained (if
  available.) Note protection, benefits, and
  premiums are coordinated.

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2001/2002 PILOT AREAS
New England States (All Counties) New York (16
Counties) New Jersey (All Counties) Pennsylvania
(6 Counties) Maryland (21 Counties) Delaware (All
Counties) Virginia (26 Counties, 14 Cities)
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In 2001 2002, subsidy and cost-share were
available for Underserved Northeast Producers in
the pilot areas.
Signup deadline was January 31 in 2001 and 2002.
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UNDERWRITING

• Application
• Five Years Schedule F Forms
• Annual Farm Report
• 5 year AGR allowable income and expense history
• Intended Commodity Report - To estimated
  enterprise revenue for the insurance year
• Beginning Inventory

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Application - Form FCIC 18050
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UNDERWRITING

• Application
• Five Years Schedule F Forms
• Annual Farm Report
• 5 year AGR allowable income and expense history
• Intended Commodity Report - To estimated
  enterprise revenue for the insurance year
• Beginning Inventory

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5 continuous years of Schedule 1040 F
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UNDERWRITING

• Application
• Five Years Schedule F Forms
• Annual Farm Report
• 5 year AGR allowable income and expense history
• Intended Commodity Report - To estimated
  enterprise revenue for the insurance year
• Beginning Inventory

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Annual Farm Report - AGR Form 821
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Allowable Income

• Sales of animals and commodity raised and bought
  for resale
• Taxable amount of cooperative distributions
• Commodity Credit Corporation Loans
• Taxable amount of CCC funds forfeited
• Other income (bartering, by-passed acreage,
  diversion payments.

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Excluded AGR Income

• Value from post-production value added operations
  such as processing, packing, packaging, storage,
  etc.
• Basis of commodities purchased for resale
• Cooperative dividends (non-production)
• Custom hire
• Ag program and crop insurance payments
• Net Gain from commodity hedges

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Indexed Allowable Income
Question For a growing operation, will you be
able to insure at a higher level? Answer YES!
You are permitted to index your coverage upward
by a Max of 20 a year based on the five-year
history of schedule F revenue. Maximum
adjustment (1.20)4 2.07 x 5-year Average
Allowable Income
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Calculating Indexed Allowable Income
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• Although the maximum adjustment is 2.07 times of
  the 5-year Average Allowable Income
• You can only insure the LESSER of
• the indexed allowable income, or
• the expected revenue from the intended commodity
  report

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UNDERWRITING

• Application
• Five Years Schedule F Forms
• Annual Farm Report
• 5 year AGR allowable income and expense history
• Intended Commodity Report - To estimated
  enterprise revenue for the insurance year
• Beginning and Ending Inventory

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Inventory Market Value

• Beginning Inventory Will be valued at the local
  market value on January 1 of the insurance year,
  or the first day of the month in which the fiscal
  tax year begins.
• Ending Inventory Will be valued at the local
  market value on December 31 of the insurance
  year, or the last day of the month in which the
  fiscal year ends.

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Coverage Election
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Diversification Formula
(1/Number Of Crops 0.333) (Total Expected
Income) 1/19 0.33 1,449,670 25,178
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Agricultural Commodity Profile

• Insured who select the 75 and 80 percent coverage
  levels are required to complete the Agricultural
  Commodity Profile
• This report required additional information about
  commodity marketing

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Agricultural Commodity Profile - AGR Form 823
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The Event of Damage or Loss

• Coverage
• Covering income from crops other agricultural
  commodities
• Loss of revenue by unavoidable cause occurring
  during the insurance period.
• Abandonment is not permitted.
• Your decision not to harvest due to low market
  prices will not be considered abandonment.

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Will not cover loss due to

• Negligence, mismanagement, wrongdoing
• Failure to follow good management practices
• Water contained by any government, public,
  private dam or reservoir
• Failure of irrigation equipment or facilities
• Theft and vandalism
• Inability to market the crop due to quarantine,
  boycott or refusal of anyone to accept crops
• Lack of labor
• Failure of buyer to pay for commodities

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The Event of Damage or Loss

• Notice of damage or loss
• Cause of loss
• File tax for the insurance year
• Convert to accrual accounting basis
• Finalize other insurance claims covering insured
  commodities
• Report all changes which are different than the
  initial farm report
• Adjust allowable income if expenses fall below
  70 of approved expenses

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Impact of AGR Insurance on Stabilizing Revenue
Approved AGR 720,636
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Producer Premium Elements

• Number (diversity) of crops
• Type and proportion of crops
• MPCI coordination
• Producer subsidy
• 65 Coverage Level - 59
• 75 Coverage Level - 55
• 80 Coverage Level - 48
• Additional 50 cost share for Underserved Areas
  (inc. NY pilot ctys)

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Premium Calculation Example
A diversified vegetable farm in a NY pilot
county Approved AGR 720,636
Less than 1 of Gross Sales
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2001/2002 AGR Program Sales Information for the
NE Under-served Area (As of June 3, 2002)
2001 Policies 2002 Policies CONNECTICUT 24 31
DELAWARE 0 0 MAINE 3 4 MARYLAND 9 19 MASSAC
HUSETTS 36 35 NEW HAMPSHIRE 4 5 NEW
JERSEY 37 28 NEW YORK 79 82 PENNSYLVANIA 5 7
RHODE ISLAND 2 1 VERMONT ___7____ ____
8___ Total Northeast 206 220
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2001/2002 AGR Program Sales Information for New
York Counties (As of June 3, 2002)
2001 Policies 2002 Policies CAYUGA 0 0 CHAUTAU
QUA 3 3 ERIE 1 1 GENESEE 1 0 MONROE 0 0 NIAGARA
4 5 ONONDAGA 3 2 ONTARIO 2 2 ORANGE 3 2 ORLEAN
S 9 9 OSWEGO 3 3 SENECA 3 4 SUFFOLK 2 2 ULSTER
5 4 WAYNE 38 44 YATES 2 __1 Total NYs
Pilot Counties 79 82
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2001/2002 AGR Program Sales Information by
Coverage, NY and NE (As of June 3, 2002)
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Any Concern About Using Schedule F?
Suppose you have been using creative tax
management strategies! -- We assume that anyone
who cheats on his income taxes will do it
consistently!
AGR might not be for everyone Provide producers
of crops without individual crop insurance
programs an insurance alternative to guarantee a
revenue level
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Additional Information

• Adjusted Gross Revenue Pilot Crop Insurance
  Program for Specialty Crops at Michigan State
  University
• www.aec.msu.edu/agecon/blackj/agr.htm
• Risk Management Agency
• www.rma.usda.gov
• Cornell Risk Management Web-site for Specialty
  Crops
• http//hortmgt.aem.cornell.edu/programs2.htm