2. ADJUSTED GROSS REVENUE (AGR) What’s In It For You?

3. What Is AGR? Risk Management Tool Insures against low revenue due to unavoidable natural disasters and market fluctuation Uses a producer’s historical farm revenue as a base to provide a level of guaranteed revenue

4. What Is AGR? Provides insurance coverage for multiple agricultural commodities in one insurance product Reinforces program credibility by using IRS tax forms and regulations to alleviate compliance concerns

5. Why To Consider AGR Preserve Net Worth Maintain Cash Flow Peace of Mind Increase Financing Opportunities Insures against any combination of low yields and low market prices

6. Who Can Purchase AGR? Pilot program in Allegan, Berrien, Kent, Mason, Muskegon, Newaygo, Oceana, Ottawa, VanBuren counties Produce agricultural commodities primarily in pilot counties (may include income from contiguous non-pilot counties)

7. Who Can Purchase AGR? Growers who have had same tax entity for 7 years unless a change in tax entity is reviewed and approved by insurance provider Purchase traditional Federal crop insurance, if available, when more than 50% of expected income is from insurable commodities

8. Who Can Purchase AGR? Earn no more than 35% of expected allowable income from animals and animal products Earn no more than 50% of expected allowable income from commodities purchased for resale.

9. When Can You Purchase AGR? Deadline to purchase AGR for the 2002 calendar year is January 31, 2002 Insurance begins January 1, or 10 days after a completed application is received Insurance year is the calendar year in which the sales closing date occurs and includes both calendar year and fiscal year tax filings

10. What Information Is Needed? Copies of past 5 years IRS Schedule F (For 2002, years 1996 through 2000) Annual farm report listing each commodity to be produced including quantity and expected price Beginning inventories, if applicable Changes that will result in less income than the historic average

11. Income Included in Average Sales of livestock and other items bought for resale, less cost Sales of livestock, produce, grains or other products raised Cooperative distributions directly related to commodity production CCC loans reported under election or forfeited Other commodity related income

12. Income Excluded from Average Additional income from value added items (cost of supplies and labor) Custom hire Agricultural Program payments Crop Insurance Payments Net gain from commodity hedges Commodities not covered (animals for show, timber, forest, forest products)

13. How to Calculate the AGR A simple average of five years of allowable income is used, unless: 1. At least one of the two most recent years in the database are higher than the average 2. The insurance year’s expected income is greater than the average 3. The income factor is greater than 1.000

14. YearRevenue 1996$152,000 1997$143,000 1998$206,000 1999$205,000 2000$230,000 Avg$194,200 At least one of the two most recent years income is greater than the average AND expected revenue exceeds average. Averaging Example with Expected Revenue of $250,000

15. Each year is divided by the previous year with a maximum (cap) of 1.2000 and a minimum (cup) of.8000, then averaged. YearRevenueFactor 1996$152,000 1997$143,000.941 1998$206,0001.441 (cap of 1.20) 1999$205,000.995 2000$265,0001.293 (cap of 1.20) Avg 1.084 Index is greater than 1.000, so AGR qualifies for indexing.

16. Completing the Indexed AGR Index of 1.084 is taken to the 4 th power (multiplied by itself 3 times) 1.084 x 1.084 x 1.084 x 1.084 = 1.381 Average Income is multiplied by factor $194,200 x 1.381 = $268,143

17. Approved AGR Indexed AGR from example = $268,143 Expected Insurance Year Revenue from example = $250,000 Approved AGR is the lesser of the indexed average and expected revenue - $250,000

18. Expenses Included in AGR Average Car & Truck Expense Chemical, Fertilizer, Seeds, Plants Conservation Expense Custom Hire Depreciation (of animals only) Feed Purchased Storage, Warehousing Veterinary, breeding & medicine Freight, Trucking, Gasoline, Oil Supplies Insurance (not health) Labor (less share-holder & credits) Utilities Repairs, Maintenance Others directly related to the production of commodities

19. Expenses Excluded from AGR Average Depreciation for all but animals Employee Benefit Programs Health Insurance Costs Interest Expense Shareholder Wages Pension & Profit Sharing Plans Rent or Lease Expenses Taxes Other Expenses not directly related commodity production

20. Average Allowable Expenses Expenses are averaged over the same 5 year period, and indexed if the average income was also subject to indexing If expenses are less than 70% of the average in a claim year, the approved AGR is reduced by 0.1% for each 0.1% the approved expenses fall below 70%

21. Levels of Coverage Available All producers with 1 or more commodities (meeting other eligibility requirements) are eligible for 65%/75% level. Diversification formulas are applied to determine eligibility for higher levels.

22. Diversification Formula for 65%/90% 75%/75% 75%/90% Must produce at least two commodities Example – Producer has expected income of $250,000 and produces 3 commodities Formula: 1 divided by 3(# of commodities) times.333 times total expected income 1 / 3 x.333 x $250,000 = $27,750 At least 2 of the commodities must be expected to have income of $27,750 or more to be eligible

23. Diversification Formula for 80%/75% or 80%/90% Must produce at least four commodities Example: Producer has expected income of $250,000 and produces five commodities Formula: 1 divided by 5(# of commodities) times.333 times total expected income 1 / 5 x.333 x $250,000 = $16,650 At least 4 of the commodities must be expected to have income of $16,650 or more to be eligible

24. How Is The Level Applied to the AGR Approved AGR multiplied by the elected level is the basis for determining the premium and indemnity. The approved AGR is first multiplied by the coverage level (65%, 75%, or 80%) to determine the trigger level. Trigger level is then multiplied by the payment rate (75% or 90%) to determine the total indemnity.

25. Trigger Level & Indemnity with $250,000 Approved AGR LevelTriggerIndemnity 65%/75%$162,500$121,875 65%/90%$162,500$146,250 75%/75%$187,500$140,625 75%/90%$187,500$168,750 80%/75%$200,000$150,000 80%/90%$200,000$180,000

26. Claims Claims are paid after the insured has filed income tax reports for the insurance year. Income and expenses are adjusted by the differences between beginning and ending accounts receivable, accounts payable, inventories, and pre-paid expenses. Insured is required to report notice of loss with 72 hours or discovery and not later than 15 days after filing farm tax forms for the insurance year.

27. Events Not Covered by AGR Negligence, mismanagement or wrong doing Failure to follow good farming practices Water contained by any govt, public or private dam or reservoir Failure or breakdown of irrigation equipment Vandalism, mysterious disappearance, theft Quarantines, boycott or refusal to accept Lack of labor Failure of any buyer to pay the insured Abandonment Failure to obtain price reflective of local market value

28. Income Adjustments to Accounts Receivable for Claim Purposes Accounts Receivable (Crop sold and delivered for an agreed upon price for which payment has not been received) Beginning balance A/R is compared to A/R balance at end of year. A/R increase results in increase to income A/R decrease results in decrease to income

29. Inventory Adjustments to Income for Claim Purposes Inventory (commodities not yet sold for a specified price) Inventories that increase from beginning to year end balances will result in an increase to allowable income and decrease in inventory will decrease income. Example: January 1 – 10,000 bu corn at $2.00 minus December 31 – 6,000 bu corn at $2.00 = $8,000 decrease to allowable income.

30. Prepaid Expense Adjustments to Allowable Expenses Prepaid expenses – Supplies held on farm or in a suppliers warehouse purchased for production of the next year’s crop. When prepaid farm supply expenses increase (decrease), allowable expenses will be decreased (increased) by the difference. Ex: Beginning prepaid value of $20,000 – Ending prepaid value of $10,000 = $10,000 reduction to allowable expenses.

31. Accounts Payable Adjustments to Allowable Expenses Accounts Payable – Monies owed for expenses related to the production of a commodity Increases (decreases) in accounts payable will result in an increase (decrease) to allowable expenses. Example – Beginning A/P balance of $20,000 - $30,000 ending A/P balance = $10,000 increase to allowable expenses.

32. Other Adjustments to Income for Claim Purposes Fed production will be accounted for through the sales of livestock and in the inventory process. Deferred crop insurance proceeds will be added to the current year’s income Income from livestock sold that was deferred to the following year will be added to the current year Insurance payments (other than AGR) for loss or damage to commodities will be included as income to count for claims purposes.

33. Indemnity Calculation Example: Approved AGR of $250,000 with 75%/90% level of coverage Trigger Level = $187,500 Actual Income = $150,000 Loss in Revenue = $37,500 Loss Payment = $33,750 ($37,500 x 90%)

34. Premium Example Berrien County Expected Revenue Breakdown Peaches - $125,000 Apples - $76,000 Squash - $25,000 Corn - $24,000 CAT Policy on Peaches, Apples, Corn with total CAT liability of $63,508

35. Premium For All Level Combinations LevelTotal Premium Govt Subsidy(%) Producer Premium 65/75$4570$2696 (59%)$1874 65/90$6206$3662 (59%)$2544 75/75$8946$4920 (55%)$4026 75/90$12208$6714 (55%)$5494 80/75$12714$6103 (48%)$6611 80/90$17124$8220 (48%)$8904

36. AGR Liability LevelAGR Liability MPCI CAT Liability Total Liability 65/75$60,937$60,938$121,875 65/90$82,742$63,508$146,250 75/75$77,117$63,508$140,625 75/90$105,242$63,508$168,750 80/75$86,492$63,508$150,000 80/90$116,492$63,508$180,000

37. How Premium is Calculated AGR Liability is reduced up to 50% by Multi-Peril, Crop Revenue, and CAT policies. Premium on AGR is calculated on the AGR liability only. Trigger amounts and total combined liability are not affected by this reduction.

39. A Lender’s Perspective Presented by GreenStone Farm Credit

40. What Are The Risks? Production Risk Marketing Risk Diversity Financial Strength Can AGR Reduce Any Of These Risks – Short-term or Long-Term?

41. Production Risk What can effect the Quantity and Quality of the Product(s) you Produce? How is the product produced? What risks can be reduced or eliminated?

42. Production Risks Vegetable Production System PRACTICES Tunnels Stakes Fumigated Raised beds Rotation w/cover crop Trickle irrigation on spinks sand RISKS Heat Hail Humidity Cold

43. Production Risks Tree Fruit Production System PRACTICES Superior site High Density Stakes Rotation w/cover crop Fumigated Trickle irrigation frost fans Overhead sprinklers RISKS Heat Hail Humidity Frost Freeze Wind Cold

44. Marketing Risks Buyer Reliability Payment History Financial Strength Marketplace Position Appropriate Variety – HoneyCrisp or Golden Delicious Contracts

45. Evaluate Contract Risks Acreage Contract – all you produce at market price – National Grape Co-op Delivery Stock – specific tonnage at market price – AgriLink, Coloma Co-op, Knouse Quantity & Price Contract – specific tonnage at set price – St. Julian Winery

46. Diversity of Your Operation What is your geographic location? How many enterprises do you have? Are there markets available for your commodities?

47. Financial Risks What is your ability to withstand adversity? Do you have a large enough cash reserve to operate at a loss for a long period of time?

48. Three Major Financial Criteria Working Capital = Current assets minus Current Liabilities – Minimum 15% of Adjusted Gross Income Equity = Total assets minus Total debts/Total assets – Minimum 50% Long Term Profitability = Profit, after living expense, available to pay term debt and/or replace equipment – Minimum 115%