ADJUSTED GROSS REVENUE (AGR)

Whats In It For You?

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

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

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

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)

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

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.

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

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

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

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)

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 years expected income is greater than the average 3. The income factor is greater than 1.000

Averaging Example with Expected Revenue of $250,000

Year 1996 1997 1998 1999 2000 Avg Revenue $152,000 $143,000 $206,000 $205,000 $230,000 $194,200

At least one of the two most recent years income is greater than the average AND expected revenue exceeds average.

Each year is divided by the previous year with a maximum (cap) of 1.2000 and a minimum (cup) of .8000, then averaged.
Year 1996 1997 1998 1999 2000 Revenue $152,000 $143,000 $206,000 $205,000 $265,000 Factor .941 1.441 (cap of 1.20) .995 1.293 (cap of 1.20) Avg 1.084

Index is greater than 1.000, so AGR qualifies for indexing.

Completing the Indexed AGR

Index of 1.084 is taken to the 4th 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

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

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

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

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%

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.

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

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

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.

Trigger Level & Indemnity with $250,000 Approved AGR

Level
65%/75% 65%/90% 75%/75% 75%/90% 80%/75% 80%/90%

Trigger
$162,500 $162,500 $187,500 $187,500 $200,000 $200,000

Indemnity
$121,875 $146,250 $140,625 $168,750 $150,000 $180,000

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.

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

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

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.

Prepaid Expense Adjustments to Allowable Expenses

Prepaid expenses Supplies held on farm or in a suppliers warehouse purchased for production of the next years 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.

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.

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 years 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.

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%)

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

Premium For All Level Combinations

Level
65/75 65/90

Total Govt Premium Subsidy(%) $4570 $2696 (59%)

$6206 $3662 (59%)

Producer Premium $1874

$2544

75/75
75/90 80/75 80/90

$8946
$12208 $12714 $17124

$4920 (55%)
$6714 (55%) $6103 (48%) $8220 (48%)

$4026
$5494 $6611 $8904

AGR Liability
Level AGR Liability
$60,937 $82,742 $77,117 $105,242 $86,492 $116,492

MPCI CAT Total Liability Liability

$60,938 $63,508 $63,508 $63,508 $63,508 $63,508 $121,875 $146,250 $140,625 $168,750 $150,000 $180,000

65/75 65/90 75/75 75/90 80/75 80/90

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.

A Lenders Perspective
Presented by GreenStone Farm Credit

What Are The Risks?

Production Risk Marketing Risk Diversity Financial Strength Can AGR Reduce Any Of These Risks Short-term or Long-Term?

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?

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

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

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

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

Diversity of Your Operation

What is your geographic location? How many enterprises do you have? Are there markets available for your commodities?

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?

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%