1. Cornell Horticultural Business Management and Marketing Program Adjusted Gross Revenue Insurance Case Study A Diversified Vegetable Farm With Direct Marketing Outlet Wen-fei Uva Senior Extension Associate Department of Applied Economics and Management Cornell University Modified by Georgia Agriculture Education Curriculum Office June, 2002

2. A Risk Management Tool; Not an Investment. Not for everyone; But maybe right for you.

3.  A diversified vegetable farm éBegin farming in 1952 éA growing operation éGrowing a wide variety of crops éCurrently, 210 acres under cultivation at three locations é80% wholesale, 20% retail é2 retail markets open May to October éEmploys over 40 people at the peak season Farm Description - Sample Farm Cornell Horticultural Business Management and Marketing Program

4.  Began purchasing crop insurance in 1997 - for apple only  In 2000, purchased crop insurance for sweet corn  Invested in irrigation equipment for watering and frost control  Invested in labor saving machinery - transplanters, cultivation equipment, and sweet corn harvester Insurance History and Risk Management Practices Cornell Horticultural Business Management and Marketing Program

5. Information Required For the Sample Farm to Purchase AGR Insurance Cornell Horticultural Business Management and Marketing Program

6. 5 continuous years of tax information - Schedule 1040 F

7. Application - Form FCIC 18050

8. Crop & livestock history for operation - AGR Form 823

10. Farm plan for upcoming insurance year - Annual Farm Report - AGR Form 821

11. Crop and livestock inventory worksheets - AGR Form 822

12. Cornell Horticultural Business Management and Marketing Program Calculating AGR - Allowable Income & Allowable Expenses History

13. Sample Farm’s Five-Year Allowable Income 1 Gross income adjusted for added value received for post- production operations such as processing, packing, packaging, etc.

14. Sample Farm’s Five-Year Allowable Expenses

15. Allowable Expense Adjustments Cornell Horticultural Business Management and Marketing Program 2 Include only the amount of depreciation allowed for animals. 3 Exclude share holder wages if reported on this line. 4 Exclude those used in post-production value added operations such as processing, packing, packaging, etc.

16. AGR Calculation 1.Average Allowable Income: $477,707 2.Is either 1998 or 1999 allowable income greater than the average? Cornell Horticultural Business Management and Marketing Program  If NO - Average as the Preliminary AGR  YES - Calculate Trend Adjustment or Indexed AGR for Sample Farm

17. Cornell Horticultural Business Management and Marketing Program Indexed AGR Calculation Preliminary AGR

18. Sample Farm’s Approved AGR Smaller of Preliminary AGR - $910,106 Total Expected Income - $1,449,670 (from intended commodity report) Sample Farm’s Approved AGR is $910,106

19. Sample Farm’s Approved Allowable Expenses Because Sample Farm’s approved AGR > the average AGR income Sample Farm’s average allowable expenses for the insurance year (2001) needs to be indexed.

20. Indexed Approved Expenses Calculation * The factor may not exceed 1.200 (20% cap) or be less than 0.800 (20% cup). Sample Farm’s approved allowable expenses is $613,315

21. Coverage Elections Diversification Formula: (1/Number Of Crops * 0.333) * (Total Expected Income) = 1/19 * 0.33 * $1,449,670 = $25,178 Sample Farm

22. Possible Cause of Losses Cornell Horticultural Business Management and Marketing Program Drought and heat Wet and cold summer and early frost Pest the disease problems Additional Scenarios?? Not broken irrigation system, theft and vandalism

23. The Event of Damage or Loss Cornell Horticultural Business Management and Marketing Program Notice of Damage or Loss Cause of loss Insured year farm tax form Inventories changes (beginning and ending) Accounts receivable changes (beginning and ending)

24. Loss Scenario 1 Example Example: Mr. Sample elected 75% coverage rate Approved AGR * 75% = $910,106 * 75% = $682,580 Sample Farm has $455,053 income in 2001 $682,580 - $455,053 = $227,527 75% payment rate: $227,527 * 75% = $170,645 90% payment rate: $227,527 * 90% = $204,774 Allowable expenses occurred in the insurance was HIGHER than 70% of the approved allowable expenses ($613,315)

25. Cornell Horticultural Business Management and Marketing Program

27. Loss Scenario 2 Example Example: 2001 allowable expenses is $398,655 (65% of approved expenses) - 5% less than 70% Approved AGR is reduced by 5% - from $910,106 to $864,610 Mr. Sample elected 75% coverage rate AdjustedAdjusted Approved AGR * 75% = $864,610 * 75% = $648,458 Sample Farm has $455,053 income in 2001 $648,458 - $455,053 = $193,398 75% payment rate: $193,398 * 75% = $145,048 90% payment rate: $193,398 * 90% = $174,058 Allowable expenses occurred in the insurance was LOWER than 70% of the approved expenses ($613,315) Approved AGR needs to be adjusted accordingly

28. Cornell Horticultural Business Management and Marketing Program

30. Premium Calculation Examples

31. Question? www.aec.msu.edu/agecon/blackj/agr.htm www.rma.usda.gov