Revenue plans can insure the Perfect Storm?
No one could have predicted this year’s harvest season. It was the “perfect storm.” Many factors seemed to all converge at one time. Florida berries were about three weeks late. Pricing was low in reaction to a possible flooded market. On top of all this, at the height of the harvest, many farms experienced three days of heavy rains. How do you insure against all this?
No matter what kind of season, it all comes down to the money. For this year, the “perfect storm” is telling of the bottom line getting hit twice with the late, damaged crop, and then, low prices. There are two plans available in Florida to insure the revenue from farming operations: Adjusted Gross Revenue (AGR) and Adjusted Gross Revenue-Lite (AGR-Lite). These plans are designed to provide insurance against losses to revenue from any weather related damage and decline in price.
These plans establish a revenue base by using a five-year average of the farm revenue. The grower then decides how much of their average revenue they want to insure. The options available to choose from are 65 percent, 75 percent, and 80 percent. (The 80 percent coverage level requires three different commodities be farmed.) For example, if a grower’s average revenue for the past five years is $500,000 and they selected to insure 75 percent, the revenue guarantee would be $375,000. This can also be thought of as a revenue floor. If the farm revenue were to fall below this amount due to weather event or decline in price it would trigger a payable claim. The amount payable would depend on the selected payment rate of either $.75 or $.90 for every dollar below the revenue guarantee.
There are some key differences to keep in mind with AGR and AGR-Lite. AGR is available in only a few counties in Florida: Alachua, Gilchrist, Levy, Marion, Sumter, and Suwannee counties. The farming operation must be located in one of these approved counties to be eligible for AGR. Additional farms owned by the same company can be insured if they are located in a neighboring county. The limit of insurance available on AGR plans is $6.5 million. This means the average revenue can be no greater than $13,333,333 to be eligible for insurance. On the other hand, AGR-Lite plans are available in all Florida counties. However, it is limited to $1 million of total insurance coverage. Therefore, the average revenue cannot exceed $2,051,282 for the AGR-Lite policy.
There are some important dates to keep in mind with both plans. The first consideration is the Sales Closing Date (SCD). This is the final date to submit an application for a new policy. AGR has a SCD of January 31 and AGR-Lite’s SCD is March 15. On both policies, coverage will start 10 days after the Risk Management Agency (RMA) receives the application. January 31 is the renewal date for both plans. Updated documentation and changes in coverage must be provided by the renewal date. The coverage for renewal policies is continuous. This means losses occurring in the previous year or current year are covered.
Eligibility requirements for AGR and AGR-Lite are unique in relation to other types of crop insurance. For instance, to be eligible for AGR or AGR-Lite, the grower must have operated under the same company name for the last seven years. This would include the current year. Either a calendar year or fiscal-year farm tax return must be filed. In addition, the reported revenue is documented by submitting the last five Schedule F tax forms or similar tax forms included in the farm tax returns.
There are some very important points to consider in comparison to the more traditional crop insurance plans and the AGR plans. First, five years of revenue history is used for the AGR plans to determine the average revenue instead of ten years of production used for traditional crop insurance. Five years of data will allow a quicker recovery from a bad year versus having a lower producing year calculated in the average production of ten years. In addition, the approved AGR of a grower experiencing increased revenues over the last few years will not just be a straight simple average of the revenue. The approved AGR will be increased to reflect the continued trend in growth. This is a significant advantage for a young, expanding farm.
Let’s now take a look at how a loss would be paid. In our previous example we had an approved AGR of $500,000. The selected coverage level was 75 percent resulting in a revenue guarantee of $375,000. A grower encounters a low price year resulting in total revenue of $350,000. The selected payment rate on the policy is 90 percent. First determine the difference between the revenue guarantee and the actual revenue: $375,000 – $350,000 = $25,000. Then, take this result and multiply it by the payment rate: $25,000 x .90 = $22,500. This is the payable indemnity: $22,500. With this help you can keep moving forward.
There are several other important things to consider with regards to AGR, AGR-Lite, and all crop insurance planning. You will want to discuss these with your crop insurance agent. If you do not have a crop insurance agent, a list of agents is available at all USDA Service Centers or see RMA’s online agent locator at http://www3.rma.usda.gov/tools/agents/companies/.
story by FRED SIMONS, III, CLU, ChFC
About the author: Fred Simons is a crop insurance expert with Carden & Associates, Inc. based in Winter Haven, Florida. Fred brings over 22 years of experience to the insurance industry, and has a deep-rooted knowledge in the specific risk management needs that are unique to Florida’s agriculture. For questions or comments, contact Fred at (863) 291-3505 or email him at FSimons@cardeninsurance.com.