Crop Insurance Policies and Their Use of Contracts WAWGG Annual Meeting & Convention February 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) 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 AcresProductionCoverageGuaranteed Production PriceGuarantee 2086 tons0.6556$1,060$59,360

How it Works – Loss Adjustment (65% 100% price) Simple Example for Benton County – (Merlot) – At harvest – production is 40 tons – Indemnity payable $ 16, AcresGuaranteed Production Actual Production PriceProduction Value Guarantee2056$ 1,060/ton$59, Prod/Count $ 1,060/ton$42, 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) $1,625/ton Production from 5 acres (Block B/APH 20 tons) $1,600/ton Production from 5 acres (Block C/APH 26 tons) $1,525/ton – Contract Price Election is weighted average $ /ton for Merlot Variety – Guarantee = $88,981.00

How it Works – Guarantee (65% 100% price) BlockAcresExpected Production (Tons) Coverage Level Guaranteed Production PriceGuarantee A $ 1625/ton$42, B $ 1600/ton$20, C $ 1525/ton$25, Total $88, Total Protection

How it Works – Loss Adjustment (65% 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, BlockAcresGuaranteed Production Actual Production PriceProduction Value Guar2056$ $88, A $ 1625/ton$28, B $ 1600/ton$19,687.50$63, C $ 1525/ton$15,350.00

Cost Comparison (RMA premium Calculator 1/8/2009) 65% Coverage / 100% PriceWith Contract PriceDefault Price Election Coverage$ 88,981.00$ 59, Production Guarantee56 tons Total Premium$ 10,412.70$ 6, Subsidy$ 6,910.70$ 4, Producer Premium$ 3,502$ 2,337 Administrative Fee$ 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 for unavoidable 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 AK X 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 CriteriaAGR-Lite Maximum Coverage$1,000,000 Animal or Animal Product Limit None MPCI RequiredOptional Coverage Level65,75, 80* Payment Rate75, 90 Sales Closing DateMarch 15 New Farm ReportMarch 15 New Jan 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

How AGR-Lite Works 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 YearAllowable Income 2003$270, $265, $260, $255, $250,000 Average$260,000

Project 2009 expected crop revenue How AGR-Lite Works CommodityAmount/ValueTotal Wine Grapes200 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

$260,000Approved AGR 75 %Coverage Level $195,000Trigger Level 90 %Payment Rate $175,500Asset Protection Producer premium$ 8,717 Determine Coverage – Coverage Level / Payment Rate

Coverage Level Payment Rate Maximum Coverage $1,000, $1,000, $1,000, $1,000, $1,000, $1,000, AGR-Lite - Total Coverage or Liability Limit Farms 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, % coverage requires 3 commodities

2009 Revenue Determined Lost Revenue: production loss and price decline How AGR-Lite Works CommodityAmountValueTotal Wine Grapes100 tons / $1500$150,000 Total$150,000

Determine Revenue Shortfall $260,000Approved AGR 75 %Coverage Level $195,000Trigger Level $150, Revenue (Taxes) $45,000Revenue Shortfall How AGR-Lite Works

Calculate Claim Payment $45,000Revenue Shortfall 90 %Payment Rate $40,500Loss Paid How AGR-Lite Works

3 commodities (80% coverage 90% payment rate) 28 % Deductible How AGR-Lite Works CommodityTotal Cherries$100,0005-year avg. $506,000 = Apples$250,000Approved AGR Grapes$200,000 Total Expected$550,000 Trigger (80%) $404,800 Total Protection $364,320 Producer Premium $ 13,261

QUESTIONS??

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