Adjusted Gross Revenue Insurance Case Study A Diversified Vegetable Farm With Direct Marketing Outle

1
Adjusted Gross Revenue Insurance Case StudyA
Diversified Vegetable FarmWith Direct Marketing
Outlet

• Wen-fei Uva
• Senior Extension Associate
• Department of Applied Economics and Management
• Cornell University
• Modified by Georgia Agriculture Education
  Curriculum Office
• June, 2002

Cornell Horticultural Business Management and
Marketing Program
2
A Risk Management Tool Not an Investment. Not
for everyone But maybe right for you.
3
Farm Description - Sample Farm

• A diversified vegetable farm
• Begin farming in 1952
• A growing operation
• Growing a wide variety of crops
• Currently, 210 acres under cultivation at three
  locations
• 80 wholesale, 20 retail
• 2 retail markets open May to October
• Employs over 40 people at the peak season

Cornell Horticultural Business Management and
Marketing Program
4
Insurance History and Risk Management Practices

• Began purchasing crop insurance in 1997 - for
  apple only
• In 2000, purchased crop insurance for sweet corn
• Invested in irrigation equipment for watering and
  frost control
• Invested in labor saving machinery -
  transplanters, cultivation equipment, and sweet
  corn harvester

Cornell Horticultural Business Management and
Marketing Program
5
Information Required For the Sample Farm to
Purchase AGR Insurance
Cornell Horticultural Business Management and
Marketing Program
6
5 continuous years of tax information - Schedule
1040 F
7
Application - Form FCIC 18050
8
Crop livestock history for operation - AGR
Form 823
9
(No Transcript)
10
Farm plan for upcoming insurance year - Annual
Farm Report - AGR Form 821
11
Crop and livestock inventory worksheets - AGR
Form 822
12
Calculating AGR - Allowable Income
Allowable Expenses History
Cornell Horticultural Business Management and
Marketing Program
13
Sample Farms Five-Year Allowable Income
1 Gross income adjusted for added value received
for post-production operations such as
processing, packing, packaging, etc.
14
Sample Farms Five-Year Allowable Expenses
15
Allowable Expense Adjustments
2 Include only the amount of depreciation allowed
for animals. 3 Exclude share holder wages if
reported on this line. 4 Exclude those used in
post-production value added operations such as
processing, packing, packaging, etc.
Cornell Horticultural Business Management and
Marketing Program
16
AGR Calculation
1. Average Allowable Income 477,707 2. Is
either 1998 or 1999 allowable income greater than
the average?

• If NO - Average as the Preliminary AGR

• YES - Calculate Trend Adjustment or Indexed AGR
  for Sample Farm

Cornell Horticultural Business Management and
Marketing Program
17
Indexed AGR Calculation
Cornell Horticultural Business Management and
Marketing Program
18
Sample Farms Approved AGR

• Smaller of
• Preliminary AGR - 910,106
• Total Expected Income - 1,449,670 (from intended
  commodity report)

Sample Farms Approved AGR is 910,106
19
Sample Farms Approved Allowable Expenses
Because Sample Farms approved AGR gt the average
AGR income Sample Farms average allowable
expenses for the insurance year (2001) needs to
be indexed.
20
Indexed Approved Expenses Calculation
The factor may not exceed 1.200 (20 cap) or be
less than 0.800 (20 cup).
Sample Farms approved allowable expenses is
613,315
21
Coverage Elections
Diversification Formula (1/Number Of Crops
0.333) (Total Expected Income) 1/19 0.33
1,449,670 25,178
22
Possible Cause of Losses

• Drought and heat
• Wet and cold summer and early frost
• Pest the disease problems
• Additional Scenarios??
• Not broken irrigation system, theft and vandalism

Cornell Horticultural Business Management and
Marketing Program
23
The Event of Damage or Loss

• Notice of Damage or Loss
• Cause of loss
• Insured year farm tax form
• Inventories changes (beginning and ending)
• Accounts receivable changes (beginning and
  ending)

Cornell Horticultural Business Management and
Marketing Program
24
Loss Scenario 1
Allowable expenses occurred in the insurance was
HIGHER than 70 of the approved allowable
expenses (613,315)

• Example
• Mr. Sample elected 75 coverage rate
• Approved AGR 75 910,106 75 682,580
• Sample Farm has 455,053 income in 2001
• 682,580 - 455,053 227,527
• 75 payment rate 227,527 75 170,645
• 90 payment rate 227,527 90 204,774

25
Cornell Horticultural Business Management and
Marketing Program
26
Cornell Horticultural Business Management and
Marketing Program
27
Loss Scenario 2
Allowable expenses occurred in the insurance was
LOWER than 70 of the approved expenses (613,315)
Approved AGR needs to be adjusted accordingly

• Example
• 2001 allowable expenses is 398,655 (65 of
  approved expenses) - 5 less than 70
• Approved AGR is reduced by 5 - from 910,106 to
  864,610
• Mr. Sample elected 75 coverage rate
• Adjusted Approved AGR 75 864,610 75
  648,458
• Sample Farm has 455,053 income in 2001
• 648,458 - 455,053 193,398
• 75 payment rate 193,398 75 145,048
• 90 payment rate 193,398 90 174,058

28
Cornell Horticultural Business Management and
Marketing Program
29
Cornell Horticultural Business Management and
Marketing Program
30
Premium Calculation Examples
Cornell Horticultural Business Management and
Marketing Program
31
Question?

• www.aec.msu.edu/agecon/blackj/agr.htm
• www.rma.usda.gov