MANAGING FARM RISK with AGR-Lite

1
MANAGING FARM RISK with AGR-Lite

• A REVENUE BASED STRATEGY
• FOR MARYLAND FARMS
• Mark Powell
• Marketing, Maryland Department of Agriculture
• Farmers Market Conference
• Bowie, Feb. 29, 2012

2
AGR-Lite in Maryland

• In 2011, there were 2 AGR-Lite policies in Md.
  covering 283,644 in farm revenue
• Largest use of the product is in Washington
  State, where 261 policies are in place, covering
  63 million in farm revenue

3
AGR-Lite Gross Income Protection Example

• 5 year avg. Adj. revenue 100,000
• 75 coverage level 75,000 loss
  trigger
• Revenue produced 30,000
• Revenue ins. loss 45,000
• 90 payment 40,500
  loss payment
• Income With Ins. 70,500
• Income Without Ins. 30,000
• Revenue for guarantee may include intended
  commodities to be purchased for resale, after
  basis adjustment

4
2012 Intended Planting Farm ReportVegetable Crops
Include intended purchases for resale but adjust
your price to reflect subtracting your basis
cost. This form replaces traditional acreage
report.
4
5
AGR-Lite - COVERS

• Insurable Causes of Loss
• Insurance is provided against loss of revenue
  due to any unavoidable natural disasters,
  including but not limited to, adverse weather,
  fire, insects, disease, wildlife, earthquakes,
  volcanic eruption, or failure of irrigation water
  supply, that occurs during the current insurance
  year (including disasters that may have started
  the previous year if policy was already in place)
  and/or market fluctuations that cause a loss in
  revenue during the current insurance year,
• Eligible Commodities Include
• Most Crops
• Animal Production (land walkers to aquiculture)
• Animal Products (milk, honey, wool, etc.)
• Greenhouse Production
• Organic Production (without additional premium
  charge)
• Its individualized, low cost protection based on
  your gross revenue history, not to exceed the
  revenue projections of your farm plan for the
  current year (crop, quantity and projected
  prices).

6
AGR-Lite Coverage Exclusions

• Some exclusions (but not limited to)
• Negligence, mismanagement, abandonment
• Failure to follow recognized farming practices
• Theft, vandalism, mysterious disappearance
• Lack of labor
• Inability to market commodities because of
  quarantines, boycotts, etc.
• Failure of buyer to pay for commodities

7
How is Coverage Established?

• 1. Federal Income Tax Records
• Usually Schedule F Form 1040 and
• 2. Current Years Farm Report
• (commodity, acres and expected income)
• Revenue guarantee is based on the lesser of the
  two.

8
How are Claims Calculated?

1. Federal Income Tax Records reflect sales
2. Beginning and End of year inventories are used to
   determine change in value allocated to current
   year
3. Coverage may be adjusted if current year expenses
   are less then 70 of trend adjusted historical
   expenses

9
Tax Form Income Excluded From AGR-Lite Protection

• Value added activities including the cost and
  value of post production operations (sorting,
  packaging, (deduct packaging and labor costs)
  controlled storage, processed products, etc.) We
  insure on a field run basis before post
  production operations occur.
• Cooperative dividends not directly related to
  commodity production
• Income from custom hire machine work
• Income from timber, forest products, animals for
  sport, pets, or show
• Disaster payments and most other USDA payments
• Note Must have records to reflecting above
  items.

10
Commodity Prices for AGR-Lite

• Local market value - average price offered by
  buyers of the agricultural commodity being valued
  in the area where you normally sell that
  commodity as reported by the Agricultural Market
  News Service/USDA (the most recent publication
  prior to the date of valuation will be used).
• If such a price is not available, the average
  price offered by at least two commercial buyers,
  one nominated by you and one nominated by us. The
  value of any animal will not exceed the local
  market value of the same breed and type being
  valued.

11
Income Tax Records Converted to ADJUSTED
GROSSIncome and Expenses

• Adjustment to reflect
• Local Prices of commodities before post
  production added value activities occurs
• Historical and current year prices both
  adjusted
• Revenue and Expenses are adjusted (expenses used
  to determine the year to year comparison of
  farming operation)
• Revenue and expenses eligible for trend
  adjustments

12
Price Adjustments Un-insured Post Production
Operations (handbook, page 12)
Operations performed after producing an
insured commodity to prepare it for sale to a
wholesale buyer (first line buyer), or directly
to consumers (e.g., sorting, grading, washing,
waxing, and packing of commodities after harvest,
including in-field operations and cold and
controlled atmosphere storage), or activities
such as processing or altering the physical
nature of insurable commodities (making
insurable commodities into products).
13
For example, canned or frozen vegetables,
flour, baby food, wine, and dried fruit, made
from insurable commodities are products. Delivery
to local markets, and warehousing of commodities
other than those requiring cold or controlled
atmosphere storage to preserve marketability are
not considered post-production operations. See
hndbk. Par. 8B(1) and (2) for additional
information. Sorting, grading, washing,
waxing, and packing of commodities after harvest,
including in-field operations, are considered
post-production operations. For some growers,
postproduction in-field operations, are
considered post-production operations. Some
operations will include adding value by freezing
the commodity or altering its physical nature
(e.g., milling grain into flour, processing
apples into baby food or cider, making grapes
into wine, putting fruit into gift baskets,
etc.). Cold and controlled atmosphere storage are
considered post-production added value.
14
If the price received for sold commodities, the
value of accounts receivable, or the local market
value includes the cost of post-production
operations (including the cost of packaging
materials, labor etc.), such cost(s) must be
removed. The cost of post-production operations
are not allowable expenses. The same
adjustments are made to determine the allowable
income for revenue history and claims purposes
when post-production costs are included in the
income.
15
5 Year Income Expense Records 200610 for 2012
adjusted to remove income and costs associated
with post production added value income and
expenses
16
Selected Income Records of Commodity Sales
adjusted to remove costs from post production
added value expenses
17
Selected Direct Commodity Expense Records (used
to determine uniformity of production expenses
from year to year, adjusted to remove costs
associated with post production expenses)
18
Gathering the 5 Year Historical Information Info
from IRS Schedule F. 1040 or related tax
forms2006-10 for 2011 C.Y.
19
Worksheets to Adjust for Un-insured Post
Production Operations
20
Revenue Limit by Coverage Option

• Maximum policy size 1 Mil. (similar AGR up to
  6.5 mil ) of Liability/Protection in Force) by
  coverage option

21
AGR-Lite

• STAND-ALONE POLICY covering the whole farming
  operation or
• UMBRELLA TYPE POLICY selected crops may also be
  protected by Multiple Peril crop policies (except
  AGR or Group Risk policies). Premium decreases
  if MPCI crops are also insured in addition to
  AGR-L policy (MPCI becomes primary coverage).
• Note Loss payments from other insurance count
  towards AGR-Lite revenue guarantee.

22
AGR-Lite Gross Income Protection Example

• 5 year avg. Adj. revenue 100,000
• 75 coverage level 75,000 loss
  trigger
• Revenue produced 30,000
• Revenue ins. loss 45,000
• 90 payment 40,500
  loss payment
• Income With Ins. 70,500
• Income Without Ins. 30,000
• Revenue for guarantee may include intended
  commodities to be purchased for resale, after
  basis adjustment

23
(No Transcript)
24
Calculate illustrations for your farm at
http//ewebapp.rma.usda.gov/apps/costestimator/Est
imates/DetailedEstimate.aspx
25
25
26
C.I. Provides Loan Collateral

• Improves credit worthiness at the bank
• Cash value on growing crops Coverage
• Provides liquid collateral
• Helps assure timely loan repayment
• Loss Proceeds are assignable to creditors

27
Reminders/Suggestions

• 3/15 Enrollment deadline most spring crops
• Meets eligibility requirements for SURE crop
  disaster payment program (if funded for 2012)
  that requires that all crops be enrolled in crop
  insurance or NAP
• Maryland producers have received 398 mil. of
  protection and 26 Mil. of loss payments for
  premium cost of 17 mil. 1.57 for each dollar
  of premium cost in 2011
• Additional Info contact a crop insurance agent
  or Steve Connelly at [phone]

28
AGR-Lite Gross Income Protection Example

• 5 year avg. Adj. revenue 100,000
• 75 coverage level 75,000 loss
  trigger
• Revenue produced 30,000
• Revenue ins. loss 45,000
• 90 payment 40,500
  loss payment
• Income With Ins. 70,500
• Income Without Ins. 30,000
• Revenue for guarantee may include intended
  commodities to be purchased for resale, after
  basis adjustment

28
29
Tips to Avoid Surprises at Claims Time

• Work with your agent to underwrite the policy at
  time of application .
• Use your accounting records to help agent adjust
  income and expense records for prior and current
  years to reflect the Before added Value amounts
  for all commodities. AGR-L does not provide
  protection for added value activities.
• Be certain to include commodities purchased or to
  be purchased for resale (value after adjusted for
  basis ) as income in historical records and for
  the current year on the Farm Commodity Report.
• Report damage to agent immediately and do not
  destroy evidence of such damage until authorized
  to do so before a loss adjuster evaluates such
  damage.

30

• Its a program that can help a producer survive
  a disaster and return to profitability!