Adjusted Gross Revenue-Lite (AGR-Lite)

1. Adjusted Gross Revenue-Lite (AGR-Lite) • Dr. G. A. “Art” Barnaby, Jr • Kansas State University • Phone: (785) 532-1515 • Email: abarnaby@agecon.ksu.edu • Check out our WEB at: • AgManager.info

2. Adjusted Gross Revenue-Lite (AGR-Lite) • A Whole Farm Revenue Protection Plan • Provides protection against loss of revenue from natural and named disasters and/or market fluctuations • Approved for Producers in States of: • AK, CT, DE, ID, MA, MD, ME, NC, NH, NJ, NY, OR, PA, RI, VA, VT, WA, WV • States approved to proceed with rating: • AZ, CO, HI, KS, MN, MT, NM, NV, UT, WI, WY

3. Adjusted Gross Revenue-Lite (AGR-Lite) • Developed by PA Dept. of Agriculture (under section 508h of the crop insurance law) to make protection available to almost all producers. • Expanded to other states through respective State Depts. of Agriculture. • Kansas is working with Frontier Farm Credit (FFC), KS State Department of Agriculture, Topeka RMA, KFMA, and Kansas State University. • Approved and backed by USDA.

4. Adjusted Gross Revenue-Lite (AGR-Lite) • STAND-ALONE POLICY: covering the whole farming operation • OR • UMBRELLA TYPE POLICY: selected crops can also be protected by Multiple Peril or revenue crop policies. • Note: Loss payments from other insurance count towards AGR-Lite revenue guarantee.

5. What is covered under AGR-Lite • Eligible Commodities Include: • Most Crops • Animal Production (includes aquaculture) • Animal Products (milk, honey, wool, etc.) • Greenhouse Production • Organic Production

6. Kansas Insurance Profile • Kansas produced $8.75 billion in agricultural products in 2002. • 98.8% ($8.65 billion) derived from • Cattle and calves - $5.7 billion • Grains - $2.1 billion • Hogs - $297.5 million • Milk and other dairy - $248.5 million • Hay and other production - $225million • Nursery and greenhouse - $55.5 million • 74 % of agricultural production currently without risk protection.

7. Grass 5,621,672 Alfalfa 908,218 Rye 53,175 Triticale 37,641 Millet 25,512 Clover 23,977 Lespedeza 23,303 Mixed Forage 6,546 Pecans 2,953 Peas 2,597 Top Uninsurable Commodities with Acreage • Cattle/Calves • 6,650,000 (Head) • Hogs & Pigs • 1,780,000(Head) • Dairy • 111,000(Head) • Sheep • 106,000 (Head)

8. What is covered under AGR-Lite • Insurable Causes of Loss: • unavoidable natural disasters, that occurs during the current or previous insurance year • including but not limited to, adverse weather, fire, insects, disease, wildlife, earthquakes, volcanic eruption, or failure of irrigation water supply, if applicable, • market fluctuation (annual price change) that causes a loss in revenue during the current insurance year

9. Coverage Choices & Limits *Must meet minimum income requirements. Commodity Grouping is available for the 80-percent coverage level. **The Maximum Annual Income represents the maximum approved farm revenue at each coverage level and payment rate to be eligible for AGR-Lite due to the $1,000,000 maximum liability allowed.

10. AGR-Lite Protection Example( With 1 or more commodity producing revenue) • * 5 year avg. revenue = $300,000 • * 75% coverage level = $225,000 loss trigger • * Revenue produced = $100,000 • * Revenue loss = $125,000 • * 90% payment = $112,500 loss payment

11. AGR Pilot vs AGR-Lite

12. How is Coverage Established? • Federal Income Tax Records • Usually Schedule F • Current Year’s Farm Plan • “Cash Flow Budget”

13. How are Claims Calculated? • Federal Income Tax Records reflect sales • Beginning and End of year inventories are used to determine change in value allocated to current year.

14. Otherwise uninsurable commodities are covered Organic production is protected at realistic prices Direct Marketed production is protected at realistic prices Umbrella over selected individual crop coverages Bottom line for operation from severe economic loss Individual protection based on personal yield, quality and price history plus low price protection, Provide an alternative for farmers with reduced APH caused by multiple years of drought. Where AGR-Lite makes sense

15. AGR-Lite does not adjust for feed purchased. If it turns dry, and producers purchase hay to cover lost forage this loss may not be covered. This will lower Net Income but not Gross. If producers normally sell excess hay, then it is covered because there will be reduced hay sales. Major Issues with AGR-Lite

16. AGR-Lite does not include indemnity payments when calculating 5 years average Gross Income that will set future guarantees. This has no impact on current year’s indemnity payment but it lowers future guarantees reducing the effectiveness of AGR_Lite as a risk management tool for multiple year droughts. Major Issues with AGR-Lite

17. Currently “cull cows” are counted in the sales to count against the AGR-Lite guarantees and the 5 year average tax return revenue. If the cows are sold as part of a herd reduction then the sales do not count against the guarantee. Major Issues with AGR-Lite

18. Market loan gains count against the AGR-Lite indemnity and are included in the 5 year average tax return revenue. This is a consistent policy. However, LDP payments are not included in the 5 year average nor do they count against the guarantee. Major Issues with AGR-Lite

19. Currently the counter cyclical payment does not count against the AGR-Lite guarantee nor does it count in the 5 year average tax return revenue. This works in the favor of farmers because it does not reduce AGR-Lite payments in a loss year caused by lower prices. Major Issues with AGR-Lite

20. Currently AGR-Lite liability and premium is reduced by the amount of the APH or similar products liability and premium. This is consistent because it reduces AGR-Lite claims. However, GRIP and GRP products do not have the same effect because all of the liability is likely not at risk. Major Issues with AGR-Lite

21. Underwriting Rule. AGR-Lite should require submission of tax returns for all entities that buy, sell, or produce agricultural products that an insured has a financial interest. This would include entities that are not insured under an AGR-Lite policy in addition to the insured entity. Major Issues with AGR-Lite

22. Example AGR-Lite1 1Prepared by Andrew Saffert (Graduate Student), Dr. Jeffery R. Williams, Dr. G. A. (Art) Barnaby, Jr., and Dr. Michael R. Langemeier, Professors, Department of Agricultural Economics, K-State Research and Extension, Kansas State University, Manhattan, KS 66502, Risk & Profit August 17 & 18, 2006, Phone 785-532-1515, e-mail – Barnaby@ksu.edu, or Andrew Saffert asaffert@mail.agecon.ksu.edu. 2The expected income is generated from the annual “farm plan” similar to a cash flow budget for the upcoming year.

23. Example AGR-Lite

24. Example AGR-Lite1 1Prepared by Andrew Saffert (Graduate Student), Dr. Jeffery R. Williams, Dr. G. A. (Art) Barnaby, Jr., and Dr. Michael R. Langemeier, Professors, Department of Agricultural Economics, K-State Research and Extension, Kansas State University, Manhattan, KS 66502, Risk & Profit August 17 & 18, 2006, Phone 785-532-1515, e-mail – Barnaby@ksu.edu, or Andrew Saffert asaffert@mail.agecon.ksu.edu. 2The expected income is generated from the annual “farm plan” similar to a cash flow budget for the upcoming year.

25. Example AGR-Lite1 1Prepared by Andrew Saffert (Graduate Student), Dr. Jeffery R. Williams, Dr. G. A. (Art) Barnaby, Jr., and Dr. Michael R. Langemeier, Professors, Department of Agricultural Economics, K-State Research and Extension, Kansas State University, Manhattan, KS 66502, Risk & Profit August 17 & 18, 2006, Phone 785-532-1515, e-mail – Barnaby@ksu.edu, or Andrew Saffert asaffert@mail.agecon.ksu.edu. 2The expected income is generated from the annual “farm plan” similar to a cash flow budget for the upcoming year.

26. What is GRP & GRIP • GRP is a “put option” on expected county yield • GRIP is a “put option” on county revenue • Farmer has the basis risk, difference between county yield % change and farm yield % change

27. KS Counties without a Wheat GRP/GRIP Offer

28. Does GRP & GRIP Fit Great Plains Agriculture? • GRP/GRIP Does Provide “Reasonable” Protection for: • Drought • Freeze • Excess Moisture

29. Does GRP & GRIP Fit Great Plains Agriculture? • GRP/GRIP Does NOT Provide “Reasonable” Protection for: • Hail • Flood • No Prevented planting • No Re-plant • No Quality Loss adjustment • Any “spot” Loss

30. Does GRP & GRIP Fit Great Plains Agriculture? • If APH is low caused by multiple year crop losses • Low APH causes low guarantees and higher premium costs • If the APH is real low then there is very little protection. GRP is based on at least a 30 year history, so coverage maybe much higher with lower premium. • Trend yields that set expected county yield is the key.

31. Cheyenne Wheat

32. Rawlins Wheat

33. Ottawa Wheat

34. Compare Cheyenne, Rawlins & Ottawa

35. Compare Cheyenne, Rawlins & Ottawa

36. Warning: NOT a K-State Slide

37. Warning: NOT a K-State Slide

38. Warning: NOT a K-State Slide

39. 2007 exp yield as % of 33-year average yield; no practice specified

40. GRP/GRIP Summary • Little/no Protection for Hail, wind, flood or other spot losses • No Prevented Planting or Re-plant Protection • GRP insured growers worried about Rust may want to change to APH • Farmer can suffer a total loss and receive no payment, maybe a lender concern.

41. Policy Issues • The Corn Belt has generated underwriting gains • Those gains allow RMA to hit the targeted loss ratio • If the those farmers shift from APH to GRIP, then RMA may (will ?) lose a major region with consistent underwriting gains • Farm Bill based on a “GRIP” type program?

42. Thank You DR. G. A. “ART” BARNABY, JR. KANSAS STATE UNIVERSITY PHONE: 785-532-1515 EMAIL: abarnaby@agecon.ksu.edu Check out our WEB page at http://www.AgManager.Info