1 Adjusted Gross Revenue-Lite (AGR-Lite) Dr. G. A. Art Barnaby, Jr Kansas State University Phone: (785) 532-1515 Email: [email protected]@agecon.ksu.edu.

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Adjusted Gross Revenue-Lite (AGR-Lite)

Dr. G. A. “Art” Barnaby, Jr Kansas State University

Phone: (785) 532-1515 Email: [email protected]

Check out our WEB at: AgManager.info

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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

Adjusted Gross Revenue-Lite (AGR-Lite)

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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.

Adjusted Gross Revenue-Lite (AGR-Lite)

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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.

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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

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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.

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Top Uninsurable Commodities with Acreage 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

Cattle/Calves 6,650,000 (Head)

Hogs & Pigs 1,780,000(Head)

Dairy 111,000(Head)

Sheep 106,000 (Head)

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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

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Coverage Choices & Limits

Gov’t

Subsidy

Coverage

Payment

Minimum # of Commodities*

Maximum Annual Income**

Level Rate

59% 65 75 1 $2,051,282

59% 65 90 1 $1,709,401

55% 75 75 1 $1,777,777

55% 75 90 1 $1,481,481

48% 80 75 3 $1,666,666

48% 80 90 3 $1,388,888*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.

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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

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AGR Pilot vs AGR-Lite

Comparison AGR Pilot AGR-LiteMaximum Liability $6,500,000 $1,000,000

Animal or Animal Product Limit

35 % of Allowable Income

None

MPCI Required Yes Optional

Coverage Level 65 ,75 , 80 65 ,75, 80

Payment Rate 75, 90 75, 90

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How is Coverage Established?

Federal Income Tax Records Usually Schedule F

Current Year’s Farm Plan “Cash Flow Budget”

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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.

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Where AGR-Lite makes sense

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.

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Major Issues with AGR-Lite

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.

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Major Issues with AGR-Lite

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.

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Major Issues with AGR-Lite

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.

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Major Issues with AGR-Lite

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.

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Major Issues with AGR-Lite

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.

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Major Issues with AGR-Lite

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.

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Major Issues with AGR-Lite

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.

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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 – [email protected], or Andrew Saffert [email protected].

2The expected income is generated from the annual “farm plan” similar to a cash flow budget for the upcoming year.

Tax Return 1 Trend

Indexed Revenue

Expected

Income2

YearHistorical Year 1 265,000Historical Year 2 250,000 0.943Historical Year 3 260,000 1.040Historical Year 4 287,000 1.104Historical Year 5 271,330 0.945Historical Year 6

Income Trend Factor 1.0335-year Average, Contract 1 266,666Expected Income for Insurance Year (IACR)

Total 275,478 290,0005-year Average Indexed, Contract 1Lesser of Indexed AGR or Expected Income 275,4785-year Average, Contract 2Coverage Level 75%Payment Rate 90%AGR-Lite Loss Inception Point 206,609AGR-Lite Liability ($ of Coverage) 185,948

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Example AGR-Lite

Livestock and other items bought for resale Count (Line 3) IncludedRaised Crop and Livestock Sales Count (Line 4) IncludedNet Gains from Commodity Hedging Count IncludedAPH, CRC, RA Indemnity Payments (Gross) Count (Line 8b) NoGRP, GRIP Indemnity Payments (Gross) Count (Line 8b) NoLRP and LGM Indemnity Payments (Gross) Count (Line 8b) NoPrivate Hail and Mortality Payments (Gross) Count (Line 8b) NoNoninsured Crop Disaster Assistance Program Payments (NAP) Count (Line 8b) NoAd Hoc Disaster Payments No (Line 8b) NoFSA Loans (Including Emergency Loans) No (Line 8b) NoLoan Deficiency Payment (LDP) No (Line 8b) No

Commodity Loans - Commodity Credit Corporation (CCC) Count Line (7a) IncludedProduction Flexibility Contracts Agricultural Market Transaction Act (AMTA) No (Line 8b) NoMarket Loss Assistance Program (MLA) No (Line 8b) NoDirect Counter-Cyclical Payments (DCP) (Replaces Production Flexibility Contracts and MLA) No (Line 8b) NoConservation Reserve Program (CRP) No (Line 8b) NoConservation Reserve Enhancement Program (CREP) No (Line 8b) NoSale of non-cull cows & other Capital Assets No NoCull Cows, intended for sale Count IncludedCustom Harvest for a paid fee No (Line 9) NoRefund payments for over payments No (Line 10) NoSurgarbeet - Payment in Kind Count IncludedMarketing Orders - Cranberry, Tart, Cherries Count IncludedChange in Accounts Recoverable Count No

Net Change in Crop Inventory3 Count No

Net Change in Livestock Inventory3 Count No

3Beginning inventory is valued at the selling price during the year not the price on January 1. The ending inventory is valued at the selling price if sold before the claim is settled or at the current terminal market price adjusted for transportation at time of claim settlement and not the December 31 value.

Revenue Included in 5 Yr AvgRevenue To Count Against AGR Guarantee

2The expected income is generated from the annual “farm plan” similar to a cash flow budget for the upcoming year.

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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 – [email protected], or Andrew Saffert [email protected].

2The expected income is generated from the annual “farm plan” similar to a cash flow budget for the upcoming year.

Revenue to count 150,000Revenue to used for the next 5 year average 100,000Net Insurable Loss 56,60990% Payment rate 90%AGR-Lite Indemnity Payment 50,948

Revenue Included in 5 Yr AvgRevenue To Count Against AGR Guarantee

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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 – [email protected], or Andrew Saffert [email protected].

2The expected income is generated from the annual “farm plan” similar to a cash flow budget for the upcoming year.

Tax Return 1 Trend

Indexed Revenue

Expected

Income2Tax

Return 2Indexed Revenue

YearHistorical Year 1 265,000Historical Year 2 250,000 0.943 250,000Historical Year 3 260,000 1.040 260,000 1.040Historical Year 4 287,000 1.104 287,000 1.104Historical Year 5 271,330 0.945 271,330 0.945Historical Year 6 100,000 0.369

Income Trend Factor 1.033 1.0005-year Average, Contract 1 266,666Expected Income for Insurance Year (IACR)

Total 275,478 290,0005-year Average Indexed, Contract 1Lesser of Indexed AGR or Expected Income 275,4785-year Average, Contract 2 233,666Coverage Level 75%Payment Rate 90%AGR-Lite Loss Inception Point 206,609 175,250

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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

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KS Counties without a Wheat GRP/GRIP Offer

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Does GRP & GRIP Fit Great Plains Agriculture?

GRP/GRIP Does Provide “Reasonable” Protection for: Drought Freeze Excess Moisture

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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

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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.

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Cheyenne Wheat

Year Volatility

1997 27.4 43.2 7.501998 44.2 43.8 7.501999 51.9 44.4 7.502000 24.8 40.6 6.502001 31.5 40.9 6.50 0.202002 19.6 41.3 6.50 0.182003 30.9 39.1 6.50 0.222004 7.8 39.4 6.50 0.192005 17.6 35.5 6.83 0.192006 23.7 32.0 7.95 0.18 16.23 17.832007 25.2 8.13 0.20 14.57 16.12

44.425.2

43.2%

Maximum Yield from 1997-20072007 Yield

Percent Reduction in Expected Yield from the Maximum

RMA Expected County

GRP RATE GRIP Rate

GRIP-HRO Rate

NASS County Planted Yield

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Rawlins Wheat

Year Volatility

1997 35.2 36.9 8.301998 47.5 37.2 8.301999 47.9 37.5 8.302000 28.8 35.0 7.102001 40.2 35.1 7.10 0.202002 28.7 35.2 7.10 0.182003 40.9 36.8 7.10 0.222004 5.5 37.0 7.10 0.192005 30.0 36.4 7.10 0.192006 18.2 33.3 7.81 0.18 9.19 11.222007 31.0 8.48 0.20 10.45 12.53

37.531.0

17.3%

Maximum Yield from 1997-20072007 Yield

Percent Reduction in Expected Yield from the Maximum

NASS County Planted Yield

RMA Expected County

GRP RATE GRIP Rate

GRIP-HRO Rate

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Ottawa Wheat

Year Volatility

1997 56.8 30.8 6.801998 52.4 30.8 6.801999 44.0 30.8 6.802000 39.4 36.2 6.902001 37.2 36.4 6.90 0.202002 39.9 36.6 6.90 0.182003 58.1 38.8 6.90 0.222004 47.7 39.1 6.90 0.192005 32.3 43.0 6.90 0.192006 43.5 46.7 6.90 0.18 8.55 9.792007 42.4 6.62 0.20 9.75 10.72

46.742.4

9.2%

Maximum Yield from 1997-20072007 Yield

Percent Reduction in Expected Yield from the Maximum

NASS County Planted Yield

RMA Expected County

GRP RATE GRIP Rate

GRIP-HRO Rate

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Compare Cheyenne, Rawlins & Ottawa

RMA Expted County Yield 25.2 31.0 42.4

2004 2004 1989

7.8 5.5 2.1

5.1% 2.0% <1%

33.4 33.2 34.8

11.5 10.7 12.9

34.5% 32.2% 37.2%

33.5 33.3 41.9

9.9 9.8 11.0

29.6% 29.3% 26.1%

GRP Rate 8.1% 8.5% 6.6%GRIP Rate 14.6% 10.5% 9.8%GRIP-HPO Rate 16.1% 12.5% 10.7%

Cheyenne Rawlins

Largest Disaster Year County Yield

NASS 33 Years Simple Average Planted YieldNASS 33 Yr Standard Deviation of Planted YieldNASS 33Yr Coefficient of Variation

Ottawa

Year with Largest Yield loss

5 Year Average Percent of Planted Wheat Acres under IrrigationNASS 20 Years Simple Average Planted YieldNASS 20 Yr Standard Deviation of Planted YieldNASS 20 Yr Coefficient of Variation

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Compare Cheyenne, Rawlins & Ottawa

GRP GRIPGRIP-

HPO GRP GRIPGRIP-

HPO GRP GRIPGRIP-

HPO0.97 0.66 0.65 1.87 1.80 1.97 1.58 1.77 1.82

12% 18% 21% 21% 38% 41% 18% 32% 32%

0.44 0.30 0.29 0.84 0.81 0.88 0.71 0.80 0.82

0.35 0.38 0.35 0.88 0.86 1.08 0.91 1.29 1.30

0.16 0.17 0.16 0.39 0.42 0.48 0.41 0.58 0.58

Cheyenne Rawlins

KSU Estimated Industry Loss Ratio, Assuming 2004 Disaster Yield Replaced with County Average Yield

KSU Estimated Farmer Paid Loss Ratio, Assuming 2004 Disaster Yield Replaced with County Average Yield

KSU Estimated Farmer Paid Loss Ratio

Ottawa

KSU Estimated Frequency of ClaimKSU Estimated Industry Loss Ratio

Warning: NOT a K-State Slide

Year

Pla

nte

d Y

ield

,bu

/a

80 90 100

10

20

30

40

50

72

73

7475

76

77

78

79

80

81

82 83 84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

Wheat Planted Yield for Cheyenne County, KS 1972-2005

Warning: NOT a K-State Slide

Year

Pla

nte

d Y

ield

,bu

/a

80 90 100

10

20

30

40

50

7273

74

75

76

77 78 79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98 99

100

101

102

103

104

105

Wheat Planted Yield for Rawlins County, KS 1972-2005

Warning: NOT a K-State Slide

Year

Pla

nte

d Y

ield

,bu

/a

80 90 100

01

02

03

04

05

06

0

72 73

74 75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91 92

93

94

95

96

97

98

99

100

101

102

103

104

105

Wheat Planted Yield for Ottawa County, KS 1972-2005

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

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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.

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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?

Thank YouDR. G. A. “ART” BARNABY, JR.KANSAS STATE UNIVERSITY

PHONE: 785-532-1515EMAIL: [email protected]

Check out our WEB page athttp://www.AgManager.Info