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) • It’s 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. 1. Federal Income Tax Records Usually Schedule F Form 1040 and 2. Current Year’s Farm Report (commodity, acres and expected income) * Revenue guarantee is based on the lesser of the two. How is Coverage Established?

8. Federal Income Tax Records reflect sales Beginning and End of year inventories are used to determine change in value allocated to current year Coverage may be adjusted if current year expenses are less then 70% of trend adjusted historical expenses How are Claims Calculated?

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 2006–10 for 2012adjusted to remove income and costs associated with post production added value income and expenses

16. Selected Income Records of Commodity Salesadjusted 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 InformationInfo 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

24. Calculate illustrations for your farm at: http://ewebapp.rma.usda.gov/apps/costestimator/Estimates/DetailedEstimate.aspx

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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 (410) 841-5770

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. “It’s a program that can help a producer survive a disaster and return to profitability!”