Crop Insurance Policies and Their Use of Contracts

WAWGG Annual Meeting & ConventionFebruary 4-6, 2009

Mary Stuart, Risk Management Specialist

Vision We serve America's agricultural producers through effective, market-based risk management solutions.

*Mission RMA promotes, supports and regulates sound risk management solutions to preserve and strengthen the economic stability of America's agricultural producers.

Special Thank You

• RMA would like to thank the WAWGG Board of Directors and members for their continuing assistance and direction in developing the “Contract Price” option for the grape crop insurance program and help with crafting the new policy.

Grape Insurance Coverage in Pacific Northwest

(in $ Million)

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007 2008

Buy-Up

CAT

Jan 5, 2008

Contract Price Option

• 2006 was the first year we offered the option– 2 lines in Oregon and 6 lines in Washington

growers reported/used higher contract price

• 2007– 4 lines in Oregon but none in Washington

• 2008– None reported

• ????

New Policy Language (2010)

• Section 3(d) In addition to the definition of “price election” contained in section 1 of the Basic Provisions, a price election based on the price contained in your grape contract is allowed if provided by the Special Provisions. In the event any contract requires a reduction in the amount of production from any insured acreage, your approved yield will be adjusted in accordance with section 3(e).

Special Provisions Language• In addition to the definition of "price election" contained in Section 1 of the

Basic Provisions, the price election for wine grapes may be the contract price (the price that will be paid per ton without premiums or discounts) minus the dollar harvest costs. Further, if more than one contract price exists, then the established price election will be the weighted average for all adjusted contract prices. However, in no case will the price be greater than 1.5 times the published price election for the applicable grape type/variety. Grapes may be insured using the contract price only if: – 1) the grapes are grown under a contract in effect for the current crop year with

a winery stating the contract price and the amount of tons or acres contracted; – 2) a copy of the contract(s) is provided to us by the production reporting date; – 3) All production from insurable acreage of the variety must be grown under a

grape contract; and– 4) Acreage is insured at additional coverage levels of insurance.

The dollar harvest costs are $150 per ton for hand harvested production and The dollar harvest costs are $70 per ton for machine harvested production

How it Works - Guarantee• Simple Example for Benton County – (Merlot)• Standard plan guarantee

– 20 acres with approved APH 4.3 tons/acre (86 tons expected yield)

– 65% Coverage Level, 2009 Price Election $1,060 (100%)

Total Protection

Acres Production Coverage Guaranteed Production

Price Guarantee

20 86 tons 0.65 56 $1,060 $59,360

How it Works – Loss Adjustment (65% coverage @ 100% price)

• Simple Example for Benton County – (Merlot)– At harvest – production is 40 tons

– Indemnity payable $ 16,854.00

Acres Guaranteed Production

Actual Production

Price Production Value

Guarantee 20 56 $ 1,060/ton $59,254.00

Prod/Count 20 56 40.0 $ 1,060/ton $42,400.00

Indemnity $16,854.00

How it Works - Guarantee• Simple Example for Benton County – (Merlot)

– Optional individual block basis (contract price – harvest cost)• Production from 10 acres (Block A/APH 40 tons) contracted @ $1,625/ton• Production from 5 acres (Block B/APH 20 tons) contracted @ $1,600/ton• Production from 5 acres (Block C/APH 26 tons) contacted @ $1,525/ton

– Contract Price Election is weighted average• $1588.95/ton for Merlot Variety

– Guarantee = $88,981.00

How it Works – Guarantee(65% coverage @ 100% price)

Block Acres Expected Production (Tons)

Coverage Level

Guaranteed Production

Price Guarantee

A 10 40 0.65 26 $ 1625/ton $42,250.00

B 5 20 0.65 13 $ 1600/ton $20,800.00

C 5 26 0.65 17 $ 1525/ton $25,925.00

Total 20 86 0.65 56 $88,981.00

Total Protection

How it Works – Loss Adjustment (65% coverage @ 100% price)

• Simple Example for Benton County – (Merlot)– Optional individual block basis– At harvest – production is 40 tons

• Block A produces 17.5 tons• Block B produces 12.5 tons• Block C produces 10.0 tons

– Indemnity payable $ 25,506.00Block Acres Guaranteed

ProductionActual Production

Price Production Value

Guar 20 56 $1588.95 $88,981.00

A 10 26 17.5 $ 1625/ton $28,437.50

B 5 17 12.5 $ 1600/ton $19,687.50 $63,475.00

C 5 13 10.0 $ 1525/ton $15,350.00

Cost Comparison(RMA premium Calculator 1/8/2009)

65% Coverage / 100% Price With Contract Price Default Price Election

Coverage $ 88,981.00 $ 59,360.00

Production Guarantee 56 tons 56 tons

Total Premium $ 10,412.70 $ 6,947.08

Subsidy $ 6,910.70 $ 4,610.08

Producer Premium $ 3,502 $ 2,337

Administrative Fee $ 30.00 $ 30.00

Total Producer Premium $ 3,532.00 $ 2,367.00

Another Option

• Adjusted Gross Revenue (AGR) or AGR-Lite in conjunction with or instead of Grape Crop Insurance Policy– If weighted average of contracts exceed 1.5 cap – If other crops produced in addition to grapes– Combination of coverage

• MPCI coverage pays first (after harvest)• AGR & AGR-Lite pay after taxes have been filed (in the

spring)

Non-traditional whole farm revenue insurance

Provides coverage forunavoidable natural occurrences

market fluctuation

What is AGR-Lite?Adjusted Gross Revenue

Non-Traditional

Tons, pounds

Crop Year Tax Year

Revenue

AGR-Lite Availability

X - Excluding the North Slope and Northwest Arctic boroughs

ID

WA

OR

AKX

X

4 States 144 counties

What’s Not Insured?

What’s Insured?

All agricultural commodities on the regional commodity list

Timber, Forestry or Forest Products

Animals for sport, show, or pets

AGR-Lite

Criteria AGR-LiteMaximum Coverage $1,000,000

Animal or Animal Product Limit

None

MPCI Required Optional

Coverage Level 65 ,75, 80*

Payment Rate 75, 90

Sales Closing Date March 15 New

Farm Report March 15 NewJan 31 Carryover

* 3 commodities required for 80% coverage

• Individuals

• Corporations

• Partnerships

• Trusts

Who is Eligible?

Each entity must have a policy and five years of tax records

HowHowAGR-LiteAGR-Lite

WorksWorks

Determine 5 - year average farm revenue

Project 2009 expected revenue

Determine Coverage

Taxes filed

Loss Example

Actual revenue determined

Determine Approved (AGR)

Owned by Pennsylvania Dept of Agriculture

Determine 5-year average farm revenue

How AGR-Lite Works

Tax Year Allowable Income

2003 $270,0002004 $265,0002005 $260,0002006 $255,0002007 $250,000

Average $260,000

Project 2009 expected crop revenue

How AGR-Lite Works

Commodity Amount /Value Total

Wine Grapes 200 tons / $1,400/ton $ 280,000

Total $ 280,000

Determine Approved AGR

Compare:

• 5 year average farm revenue $260,000• Intended revenue year $280,000

Approved AGR is the “lesser” of the two above numbers

$260,000

How AGR-Lite Works

How AGR-Lite Works

$260,000 Approved AGR

75 % Coverage Level

$195,000 Trigger Level

90 % Payment Rate

$175,500 Asset Protection

Producer premium $ 8,717

Determine Coverage – Coverage Level / Payment Rate

Coverage Level

Payment Rate

Maximum Coverage

0.65 0.75 $1,000,000

0.65 0.90 $1,000,000

0.75 0.75 $1,000,000

0.75 0.90 $1,000,000

0.80 0.75 $1,000,000

0.80 0.90 $1,000,000

2009 AGR-Lite - Total Coverage or Liability LimitFarms with Approved AGR above $1 Million can qualify

Approved AGR

$2,051,282

$1,709,401

$1,777,777

$1,481,481

$1,666,666

$1,388,88880 % coverage requires 3 commodities

2009 Revenue Determined

Lost Revenue: production loss and price decline

How AGR-Lite Works

Commodity Amount Value Total

Wine Grapes 100 tons / $1500 $150,000

Total $150,000

Determine Revenue Shortfall

$260,000 Approved AGR

75 % Coverage Level

$195,000 Trigger Level

$150,000 2009 Revenue (Taxes)

$45,000 Revenue Shortfall

How AGR-Lite Works

Calculate Claim Payment

$45,000 Revenue Shortfall

90 % Payment Rate

$40,500 Loss Paid

How AGR-Lite Works

3 commodities (80% coverage 90% payment rate)

28 % Deductible

How AGR-Lite Works

Commodity Total

Cherries $100,000 5-year avg. $506,000 =

Apples $250,000 Approved AGR

Grapes $200,000

Total Expected $550,000

Trigger (80%) $404,800

Total Protection $364,320

Producer Premium $ 13,261

QUESTIONS??

11707 E. Sprague Avenue Suite 201Spokane, WA 99206

509-228-6320rsowa@rma.usda.gov

www.rma.usda.gov

USDA Risk Management Agency