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

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


1
Adjusted Gross Revenue Insurance (AGR) - A
Risk Management Alternative
  • Wen-fei Uva, Ph.D.
  • Department of Applied Economics and Management
  • Cornell University

2
Background for AGR Insurance
3
OBJECTIVE
Provide an insurance alternative for producers of
agricultural commodities without individual
insurance programs.
4
Snapshot of AGR
  • Provides a safety net for revenue
  • Provides insurance coverage for multiple
    commodities under one insurance product
  • Cash is a common measurement
  • Uses a producers historic Schedule F tax forms
    to provide a level of guaranteed revenue for the
    insurance period
  • Uses the AGR farm report to determine coverage

5
UNDERWRITING
  • Application
  • Five Years Schedule F Forms
  • Annual Farm Report
  • Historic yearly enterprise revenue (5 years)
  • Estimated enterprise revenue (insurance year)
  • Beginning Inventory

6
Application - Form FCIC 18050
7
5 continuous years of Schedule 1040 F
8
Annual Farm Report - AGR Form 821
9
Crop livestock history for operation - AGR
Form 823
10
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.
11
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)
12
2001 AGR Cost-Share Program Preliminary Sales
Information (As of May 7, 2001)
2001 Policies CONNECTICUT 22 DELAWARE 0
MAINE 4 MARYLAND 8 MASSACHUSETTS 33 NEW
HAMPSHIRE 4 NEW JERSEY 32 NEW
YORK 68 PENNSYLVANIA 2 RHODE
ISLAND 1 VERMONT 7 Total Northeast 181
13
2001 AGR Cost-Share Program Preliminary Sales
Information (As of May 7, 2001)
2001 Policies CAYUGA 0 CHAUTAUQUA 2 ERIE
0 GENESEE 0 MONROE 0 NIAGARA 4 ONONDA
GA 2 ONTARIO 2 ORANGE 2 ORLEANS 9 OSWE
GO 2 SENECA 3 SUFFOLK 2 ULSTER 4 WAYNE 34
YATES 2 Total NYs Pilot Counties 68
14
Who Is Eligible?
  • Producing agriculture commodities in a pilot
    county (may include income from contiguous
    non-pilot counties).
  • Have filed Schedule F (or equivalent) tax forms
    under the same entity for the past 5 years.
  • If more than 50 of expected income is from
    insurable crops, MPCI must be obtained (if
    available.) Note protection, benefits, and
    premiums are coordinated.

15
  • No more than 50 of allowable income may come
    from products purchased for resale.
  • No more than 35 of expected allowable income can
    be from animals and animal products.

It does make an insurance product available for
diversified producers of horticultural
commodities, including direct marketers.
16
Allowable Income Adjustments
Exclude income from post-production value added
operations such as processing, packing,
packaging, etc.
17
Coverage Election
18
Diversification Formula
(1/Number Of Crops 0.333) (Total Expected
Income) 1/19 0.33 1,449,670 25,178
19
Indexed Allowable Income
Question For a growing operation, will you be
able to insure at a high enough level? Answer
YES! You are permitted to index your coverage
upward by a maximum 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
20
Calculating Indexed Allowable Income
21
  • 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

22
The Event of Damage or Loss
  • Coverage
  • 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.

23
The Event of Damage or Loss
  • Notice of damage or loss
  • Cause of loss
  • Insured year farm tax form
  • Inventory changes (beginning and ending)
  • Accounts receivable changes
  • In case expenses fall below 70 of approved
    expenses, allowable income needs to be adjusted
    accordingly, one may need to provide accounts
    payable.

24
Impact of AGR Insurance on Revenue
Approved AGR 720,636
25
PRODUCER PREMIUM ELEMENTS
  • Number 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)

26
Premium Calculation Example
A diversified vegetable farm in a NY pilot
county Approved AGR 720,636
Less than 1 of Gross Sales
27
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!
Why not wait for disaster payments?
  • Your risk management strategy is not under your
    control.
  • With AGR (or other crop insurance) your
    strategy is under your control.

28
Development of the new farm bill this year or
next year
  • A likely major role for the Risk Management
    Agency (RMA) as Congress attempts to get farmers
    to manage their own risks.
  • Continue to develop a range of risk management
    alternatives (some new, some existing) for
    producers.
  • Cost share continued for AGR (so that producers
    pay only about 25 of actuarial costs of the
    program)

29
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//aem.cornell.edu/special_programs/hortmgt/ri
    sk/index.htm
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