Cornell Horticultural Business Management and Marketing Program

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

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 Farm’s Five-Year Allowable Income 1 Gross income adjusted for added value received for post-production operations such as processing, packing, packaging, etc.

14. Sample Farm’s 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. Preliminary AGR Indexed AGR Calculation Cornell Horticultural Business Management and Marketing Program

18. Sample Farm’s Approved AGR • Smaller of • Preliminary AGR - $910,106 • Total Expected Income - $1,449,670(from intended commodity report) Sample Farm’s Approved AGR is $910,106

19. Sample Farm’s Approved Allowable Expenses Because Sample Farm’s approved AGR > the average AGR income Sample Farm’s 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 Farm’s approved allowable expenses is $613,315

21. Sample Farm 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 occurredin 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 occurredin 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