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. BACKGROUND FOR AGR: AGR insurance plan is a non-traditional, whole farm risk management tool which uses a producer’s historic tax information to provide a level of guaranteed revenue.

4. Snapshot of AGR: • Provides a safety net for farmrevenue • Provides insurance coverage for multiple commodities under one insurance product • Cash is a common measurement • Uses a producer’s historic Schedule F tax form information to provide a revenue base for the insurance period • Uses the AGR farm report to determine coverage

5. Who Is Eligible? • Producing agriculture commodities in a Pilot County (may include income from contiguous non-pilot counties). • Have5 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.

6. 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.

7. 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)

8. 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.

9. 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

10. Application - Form FCIC 18050

11. 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

12. 5 continuous years of Schedule 1040 F

13. 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

14. Annual Farm Report - AGR Form 821

15. 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.

16. 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

17. 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 = 2.07x 5-year Average Allowable Income

18. Calculating Indexed Allowable Income

19. 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

20. 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

21. 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.

22. Coverage Election

23. Diversification Formula • (1/Number Of Crops * 0.333) * (Total Expected Income) • = 1/19 * 0.33 * $1,449,670 = $25,178

24. 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

25. Agricultural Commodity Profile - AGR Form 823

26. 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.”

27. 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

28. 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

29. Impact of AGR Insurance on Stabilizing Revenue Approved AGR = $720,636

30. 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)

31. Premium Calculation Example A diversified vegetable farm in a NY pilot county Approved AGR = $720,636 Less than 1% of Gross Sales

32. 2001/2002 AGR Program Sales Information for the NE Under-served Area (As of June 3, 2002) 2001 Policies2002 Policies CONNECTICUT 24 31 DELAWARE 0 0 MAINE 3 4 MARYLAND 9 19 MASSACHUSETTS 36 35 NEW HAMPSHIRE 4 5 NEW JERSEY 37 28 NEW YORK 7982 PENNSYLVANIA 5 7 RHODE ISLAND 2 1 VERMONT ___7________ 8___ Total Northeast 206 220

33. 2001/2002 AGR Program Sales Information for New York Counties (As of June 3, 2002) 2001 Policies 2002 Policies CAYUGA 0 0 CHAUTAUQUA 3 3 ERIE 1 1 GENESEE 1 0 MONROE 0 0 NIAGARA 4 5 ONONDAGA 3 2 ONTARIO 2 2 ORANGE 3 2 ORLEANS 9 9 OSWEGO 3 3 SENECA 3 4 SUFFOLK 2 2 ULSTER 5 4 WAYNE 38 44 YATES 2 __1 Total NY’s Pilot Counties 79 82

34. 2001/2002 AGR Program Sales Information by Coverage, NY and NE (As of June 3, 2002)

35. 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

36. Additional Information • Adjusted Gross Revenue Pilot Crop Insurance Programfor 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