adjusted gross revenue (agr) what’s in it for you?

ADJUSTED GROSS REVENUE (AGR)

What’s In It For You?

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

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 year’s expected income is greater than the average

• 3. The income factor is greater than 1.000

Year Revenue

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

Each year is divided by the previous year with a maximum (cap) of 1.2000 and a minimum (cup) of .8000, then averaged.

Year Revenue Factor

1996 $152,000

1997 $143,000 .941

1998 $206,000 1.441 (cap of 1.20)

1999 $205,000 .995

2000 $265,000 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 Trigger Indemnity

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

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 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.

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 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.

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 - $125,000Apples - $76,000

Squash - $25,000Corn - $24,000

• CAT Policy on Peaches, Apples, Corn with total CAT liability of $63,508

Premium For All Level Combinations

Level Total 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

AGR Liability

Level AGR 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

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 Lender’s 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 RisksTree 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%