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Crop Insurance Policies and Their Use of Contracts

USDA Risk Management. Crop Insurance Policies and Their Use of Contracts. WAWGG Annual Meeting & Convention February 4-6, 2009 Mary Stuart, Risk Management Specialist. Vision We serve America's agricultural producers through effective, market-based risk management solutions. *Mission

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Crop Insurance Policies and Their Use of Contracts

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  1. USDA Risk Management Crop Insurance Policies and Their Use of Contracts WAWGG Annual Meeting & Convention February 4-6, 2009 Mary Stuart, Risk Management Specialist

  2. Vision We serve America's agricultural producers through effective, market-based risk management solutions. *Mission RMA promotes, supports and regulates sound risk management solutions to preserve and strengthen the economic stability of America's agricultural producers.

  3. Special Thank You • RMA would like to thank the WAWGG Board of Directors and members for their continuing assistance and direction in developing the “Contract Price” option for the grape crop insurance program and help with crafting the new policy.

  4. Grape Insurance Coverage in Pacific Northwest (in $ Million) Jan 5, 2008

  5. Contract Price Option • 2006 was the first year we offered the option • 2 lines in Oregon and 6 lines in Washington growers reported/used higher contract price • 2007 • 4 lines in Oregon but none in Washington • 2008 • None reported • ????

  6. New Policy Language (2010) • Section 3(d) In addition to the definition of “price election” contained in section 1 of the Basic Provisions, a price election based on the price contained in your grape contract is allowed if provided by the Special Provisions. In the event any contract requires a reduction in the amount of production from any insured acreage, your approved yield will be adjusted in accordance with section 3(e).

  7. Special Provisions Language • In addition to the definition of "price election" contained in Section 1 of the Basic Provisions, the price election for wine grapes may be the contract price (the price that will be paid per ton without premiums or discounts) minus the dollar harvest costs. Further, if more than one contract price exists, then the established price election will be the weighted average for all adjusted contract prices. However, in no case will the price be greater than 1.5 times the published price election for the applicable grape type/variety. Grapes may be insured using the contract price only if: • 1) the grapes are grown under a contract in effect for the current crop year with a winery stating the contract price and the amount of tons or acres contracted; • 2) a copy of the contract(s) is provided to us by the production reporting date; • 3) All production from insurable acreage of the variety must be grown under a grape contract; and • 4) Acreage is insured at additional coverage levels of insurance. The dollar harvest costs are $150 per ton for hand harvested production and The dollar harvest costs are $70 per ton for machine harvested production

  8. How it Works - Guarantee • Simple Example for Benton County – (Merlot) • Standard plan guarantee • 20 acres with approved APH 4.3 tons/acre (86 tons expected yield) • 65% Coverage Level, 2009 Price Election $1,060 (100%) Total Protection

  9. How it Works – Loss Adjustment (65% coverage @ 100% price) • Simple Example for Benton County – (Merlot) • At harvest – production is 40 tons • Indemnity payable $ 16,854.00

  10. How it Works - Guarantee • Simple Example for Benton County – (Merlot) • Optional individual block basis (contract price – harvest cost) • Production from 10 acres (Block A/APH 40 tons) contracted @ $1,625/ton • Production from 5 acres (Block B/APH 20 tons) contracted @ $1,600/ton • Production from 5 acres (Block C/APH 26 tons) contacted @ $1,525/ton • Contract Price Election is weighted average • $1588.95/ton for Merlot Variety • Guarantee = $88,981.00

  11. How it Works – Guarantee(65% coverage @ 100% price) Total Protection

  12. How it Works – Loss Adjustment (65% coverage @ 100% price) • Simple Example for Benton County – (Merlot) • Optional individual block basis • At harvest – production is 40 tons • Block A produces 17.5 tons • Block B produces 12.5 tons • Block C produces 10.0 tons • Indemnity payable $ 25,506.00

  13. Cost Comparison(RMA premium Calculator 1/8/2009)

  14. Another Option • Adjusted Gross Revenue (AGR) or AGR-Lite in conjunction with or instead of Grape Crop Insurance Policy • If weighted average of contracts exceed 1.5 cap • If other crops produced in addition to grapes • Combination of coverage • MPCI coverage pays first (after harvest) • AGR & AGR-Lite pay after taxes have been filed (in the spring)

  15. What is AGR-Lite?Adjusted Gross Revenue Non-traditional whole farm revenue insurance Provides coverage for unavoidable natural occurrences market fluctuation

  16. Non-Traditional Tax Year Crop Year Tons, pounds Revenue

  17. AGR-Lite Availability WA OR ID 4 States 144 counties X X AK X - Excluding the North Slope and Northwest Arctic boroughs

  18. What’s Insured? All agricultural commodities on the regional commodity list What’s Not Insured? Timber, Forestry or Forest Products Animals for sport, show, or pets

  19. AGR-Lite * 3 commodities required for 80% coverage

  20. Who is Eligible? • Individuals • Corporations • Partnerships • Trusts Each entity must have a policy and five years of tax records

  21. Determine 5 - year average farm revenue HowAGR-LiteWorks Loss Example Taxes filed Project 2009 expected revenue Owned by Pennsylvania Dept of Agriculture Actual revenue determined Determine Approved (AGR) Determine Coverage

  22. How AGR-Lite Works Determine 5-year average farm revenue Tax YearAllowable Income 2003 $270,0002004 $265,0002005 $260,0002006 $255,0002007 $250,000Average $260,000

  23. How AGR-Lite Works Project 2009 expected crop revenue CommodityAmount /Value Total Wine Grapes 200 tons / $1,400/ton $ 280,000 Total $ 280,000

  24. How AGR-Lite Works Determine Approved AGR • Compare: • 5 year average farm revenue $260,000 • Intended revenue year $280,000 • Approved AGR is the “lesser” of the two above numbers • $260,000

  25. How AGR-Lite Works Determine Coverage – Coverage Level / Payment Rate $260,000 Approved AGR 75 % Coverage Level $195,000 Trigger Level 90 % Payment Rate $175,500 Asset Protection Producer premium $ 8,717

  26. 2009 AGR-Lite - Total Coverage or Liability Limit Farms with Approved AGR above $1 Million can qualify 80 % coverage requires 3 commodities

  27. How AGR-Lite Works 2009 Revenue Determined CommodityAmountValue Total Wine Grapes 100 tons / $1500 $150,000 Total $150,000 Lost Revenue: production loss and price decline

  28. How AGR-Lite Works Determine Revenue Shortfall $260,000 Approved AGR 75 % Coverage Level $195,000 Trigger Level $150,000 2009 Revenue (Taxes) $45,000 Revenue Shortfall

  29. How AGR-Lite Works Calculate Claim Payment $45,000 Revenue Shortfall 90 % Payment Rate $40,500 Loss Paid

  30. How AGR-Lite Works 3 commodities (80% coverage 90% payment rate) 28 % Deductible CommodityTotal Cherries $100,000 5-year avg. $506,000 = Apples $250,000 Approved AGR Grapes $200,000 Total Expected $550,000 Trigger (80%) $404,800 Total Protection $364,320 Producer Premium $ 13,261

  31. Questions??

  32. USDA Risk Management Agency 11707 E. Sprague Avenue Suite 201 Spokane, WA 99206 509-228-6320 rsowa@rma.usda.gov www.rma.usda.gov

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