Crop InsuranceCrop InsuranceWhat it is What it is

What it’s notWhat it’s notWhen it’s WorthwhileWhen it’s Worthwhile

Paul D. Mitchell Assistant ProfessorPaul D. Mitchell Assistant Professor

Agricultural and Applied EconomicsAgricultural and Applied Economics

University of Wisconsin-MadisonUniversity of Wisconsin-Madison

Managing Risks in the Produce MarketManaging Risks in the Produce Market

Richland Center, WI March 11, 2008Richland Center, WI March 11, 2008

Goal TodayGoal Today

What is Risk? What is Risk What is Risk? What is Risk Management?Management?

Where crop insurance fits into risk Where crop insurance fits into risk management for vegetable growersmanagement for vegetable growers

Specifics of AGR-LiteSpecifics of AGR-Lite New crop insurance policy (partly) New crop insurance policy (partly)

intended for vegetable growersintended for vegetable growers

Agriculture is RiskyAgriculture is Risky

What is Risk?What is Risk?

Risk is a four-letter word!!!Risk is a four-letter word!!! Most people think of risk as something Most people think of risk as something

likelike ““Possibility of a loss”Possibility of a loss” ““Chance of a bad outcome”Chance of a bad outcome”

Usually seen as something badUsually seen as something bad

What is Risk? Economic What is Risk? Economic definitiondefinition

When you take an action and do not know When you take an action and do not know for sure what the exact outcome will befor sure what the exact outcome will be

Your actions have variable or random Your actions have variable or random outcomesoutcomes Can be Can be good or badgood or bad, just unknown when act, just unknown when act

Plant a crop: do not know what yield and Plant a crop: do not know what yield and price will be—Could make a lot of moneyprice will be—Could make a lot of money

Rent space at a farmer’s market: do not Rent space at a farmer’s market: do not know how much will sell at what priceknow how much will sell at what price

Major Categories of Agricultural Major Categories of Agricultural RiskRisk

1.1. Production and Technical RiskProduction and Technical Risk

2.2. Market and Price RiskMarket and Price Risk

3.3. Financial RiskFinancial Risk

4.4. Human Resource RiskHuman Resource Risk

5.5. Legal and Institutional RiskLegal and Institutional Risk

Go over each and provide examplesGo over each and provide examples

Production and Technical Production and Technical RiskRisk

Uncertainty in crop yields or livestock Uncertainty in crop yields or livestock gains due to numerous factorsgains due to numerous factors WeatherWeather: flood, drought, hail, frost, etc.: flood, drought, hail, frost, etc. Pests and DiseasesPests and Diseases: ECB, CRW, Soybean : ECB, CRW, Soybean

Aphid, Soybean Rust, BSE, brucellosis, etc.Aphid, Soybean Rust, BSE, brucellosis, etc. New TechnologiesNew Technologies: new herbicides, hybrids : new herbicides, hybrids

(transgenics), tillage, planter, harvest (transgenics), tillage, planter, harvest machines, milking facilities, organic, machines, milking facilities, organic, intensive grazing methods, IPM, soil testing, intensive grazing methods, IPM, soil testing, etc.etc.

Input ShortagesInput Shortages: custom machinery or : custom machinery or application, trucking, pesticides/fertilizersapplication, trucking, pesticides/fertilizers

Market and Price RiskMarket and Price RiskUncertainty in prices or ability to market Uncertainty in prices or ability to market

productionproduction Input price changes: fuel, fertilizer, Input price changes: fuel, fertilizer,

fungicide, feed/grain, seed, etc.fungicide, feed/grain, seed, etc. Crop and livestock prices vary continuously Crop and livestock prices vary continuously

with world conditions (CBOT, CME)with world conditions (CBOT, CME) Market Access: Hurricane Katrina shut down Market Access: Hurricane Katrina shut down

barge traffic fall 2004barge traffic fall 2004 Farmers market closes or a new one opensFarmers market closes or a new one opens Processor/Contractor/Buyer goes out of Processor/Contractor/Buyer goes out of

business or changes quality requirementsbusiness or changes quality requirements

Financial RiskFinancial Risk

Money borrowed or external equity Money borrowed or external equity provided creates riskprovided creates risk Interest rate changes for operating loansInterest rate changes for operating loans Change in value of assets used as collateralChange in value of assets used as collateral Ability to generate income to meet debt Ability to generate income to meet debt

obligations (liquidity and solvency)obligations (liquidity and solvency) Lender’s/investor’s willingness to continue Lender’s/investor’s willingness to continue

lending/providing capital changeslending/providing capital changes

Human Resource RiskHuman Resource RiskSeveral people are key to a farm business and Several people are key to a farm business and

potential for changes creates riskpotential for changes creates risk Employee management problems: availability, Employee management problems: availability,

retention, turnover, criminal activity, disputes, retention, turnover, criminal activity, disputes, etc.etc.

Injury, illness, death of manager/key employeeInjury, illness, death of manager/key employee Key employee, spouse, child: retires, career Key employee, spouse, child: retires, career

change, relocates, etc. change, relocates, etc. Family disputes, divorces, etc.: personal stress, Family disputes, divorces, etc.: personal stress,

plus losses from legal settlements, property plus losses from legal settlements, property diversions, financial reallocations, etc.diversions, financial reallocations, etc.

Estate Planning: how are farm assets going to be Estate Planning: how are farm assets going to be transferred between generations?transferred between generations?

Legal and Institutional RiskLegal and Institutional Risk

Created by regulations and legal liabilities Created by regulations and legal liabilities Regulations for manure, chemicals, facility siting, Regulations for manure, chemicals, facility siting,

antibiotic use, carcass disposal, burning, food antibiotic use, carcass disposal, burning, food safetysafety

Liability for accidents: machinery and livestock, Liability for accidents: machinery and livestock, visitors to farm operation, food safetyvisitors to farm operation, food safety

Labor laws: taxes, worker health and safety, Labor laws: taxes, worker health and safety, residency requirementsresidency requirements

Contractual obligations: contracts with processors, Contractual obligations: contracts with processors, food safety and GAP/GHP requirements for selling food safety and GAP/GHP requirements for selling to wholesalers, farmers markets, CSA’sto wholesalers, farmers markets, CSA’s

Tax liability: properly file all required formsTax liability: properly file all required forms Ignorance of law is not a legal excuseIgnorance of law is not a legal excuse

Tools to Manage RisksTools to Manage Risks

Numerous risk management tools exist, but Numerous risk management tools exist, but they generally fall into these 3 categoriesthey generally fall into these 3 categories

1) Reduce variability of outcomes1) Reduce variability of outcomes2) Maintain decision making flexibility2) Maintain decision making flexibility3) Improve risk bearing capability3) Improve risk bearing capability

I’ll overview some tools to manage these I’ll overview some tools to manage these risks and how they fit into these risks and how they fit into these categories to give you the ideacategories to give you the idea

Example Tools to Example Tools to Reduce Income VariabilityReduce Income Variability

InsuranceInsurance Crop insurance (more on this later)Crop insurance (more on this later) Business liability insuranceBusiness liability insurance

InputsInputs Productive and protective inputsProductive and protective inputs Legal adviceLegal advice

DiversificationDiversification

Crop InsuranceCrop Insurance Yield or Revenue InsuranceYield or Revenue Insurance

If yield is less than your yield guarantee, receive an If yield is less than your yield guarantee, receive an indemnity for lost yieldindemnity for lost yield

If revenue is less than your revenue guarantee, If revenue is less than your revenue guarantee, receive an indemnity for lost revenuereceive an indemnity for lost revenue

It’s all in the detailsIt’s all in the details What triggers indemnities, how establish What triggers indemnities, how establish

guarantees, how much paid for losses, how much guarantees, how much paid for losses, how much are premiums?are premiums?

Reduces both the mean and variability of Reduces both the mean and variability of income: Pay premiums (lower mean), but get income: Pay premiums (lower mean), but get indemnities when have losses (lower indemnities when have losses (lower variability)variability)

Business Liability InsuranceBusiness Liability Insurance

Provides coverage for your business Provides coverage for your business liability risksliability risks Mud on highway causes accidentMud on highway causes accident Food poisoning from your produceFood poisoning from your produce Visitors on your farm injuredVisitors on your farm injured

Part of your farm/home insurance?Part of your farm/home insurance? Tornado/flood damage to property/buildingsTornado/flood damage to property/buildings Fire burns down your storage/cleaning Fire burns down your storage/cleaning

facilityfacility

Inputs to Reduce Income Inputs to Reduce Income VariabilityVariability

Some inputs are not productive, but Some inputs are not productive, but protectiveprotective, i.e., , i.e., solely for reducing the probability and/or size of solely for reducing the probability and/or size of losses losses Fire alarm and sprinkler system, Anti-theft inputs (locks, Fire alarm and sprinkler system, Anti-theft inputs (locks,

security system, etc.), Pest control, Flood control, security system, etc.), Pest control, Flood control, Lightening rodsLightening rods

Legal advice: organize farm as LLC to protect your assets, Legal advice: organize farm as LLC to protect your assets, marketing contracts in your best interest, labor contracts marketing contracts in your best interest, labor contracts and practices legal and limit your liability for fines, tax and practices legal and limit your liability for fines, tax liabilityliability

Most productive inputs not only change mean Most productive inputs not only change mean returns, but also affect the variability of returnsreturns, but also affect the variability of returns Fertilizer, New/Improved machinery and equipment, Fertilizer, New/Improved machinery and equipment,

IrrigationIrrigation Information: soil test, pest scoutingInformation: soil test, pest scouting

Inputs to Reduce Income Inputs to Reduce Income VariabilityVariability

Some inputs aren’t productive, but Some inputs aren’t productive, but protectiveprotective, , solely for reducing the probability and/or size of solely for reducing the probability and/or size of losses losses Fire alarms, sprinkler system, anti-theft devices, Fire alarms, sprinkler system, anti-theft devices,

pest control, flood control, deer/hog fencepest control, flood control, deer/hog fence Legal advice: organize farm as LLC to protect Legal advice: organize farm as LLC to protect

your assets, marketing contracts in your best your assets, marketing contracts in your best interest, labor contracts and practices legal and interest, labor contracts and practices legal and limit your liability for fines, minimize tax liabilitylimit your liability for fines, minimize tax liability

Most productive inputs change mean returns and Most productive inputs change mean returns and the variability of returnsthe variability of returns Fertilizer, New machinery/equipment, IrrigationFertilizer, New machinery/equipment, Irrigation Information: soil test, pest scoutingInformation: soil test, pest scouting

DiversificationDiversification Main idea: don’t rely on one enterprise, but Main idea: don’t rely on one enterprise, but

spread your assets (time, money) among severalspread your assets (time, money) among several Find uncorrelated enterprises, so when one is Find uncorrelated enterprises, so when one is

down, the others are not likely notdown, the others are not likely not Grain & Livestock: Low grain prices usually mean Grain & Livestock: Low grain prices usually mean

higher livestock income and vice versahigher livestock income and vice versa Farm and non-farm enterprisesFarm and non-farm enterprises

Mix a stable enterprise and a risky oneMix a stable enterprise and a risky one Conventional & organic; oats & tomatoes, grain & dairyConventional & organic; oats & tomatoes, grain & dairy

Geographically diversify production and Geographically diversify production and marketingmarketing Ridge and valley farms, Minneapolis and ChicagoRidge and valley farms, Minneapolis and Chicago

Net Farm IncomeNet Farm Income

Farm TypeFarm Type AverageAverage St. Dev.St. Dev. CVCV

HogHog $78,285$78,285 $59,855$59,855 76%76%

Beef CowBeef Cow $16,737$16,737 $20,670$20,670 123%123%

Beef BackgroundingBeef Backgrounding $19,795$19,795 $28,037$28,037 142%142%

Crop & LivestockCrop & Livestock $36,907$36,907 $24,243$24,243 66%66%

Comparison of Specialized and Comparison of Specialized and Diversified Farms in Kansas, 1992-Diversified Farms in Kansas, 1992-

20012001

Source: Kansas Farm Management Association (2001) in KED, Source: Kansas Farm Management Association (2001) in KED, ch. 15ch. 15

Main point:Main point: If you are going to specialize (be non- If you are going to specialize (be non-diversified) be very good at what you do and plan to diversified) be very good at what you do and plan to weather hard times, your income may be higher, but weather hard times, your income may be higher, but also more volatilealso more volatile

Tools to Manage RisksTools to Manage Risks

Three categories of tool to manage riskThree categories of tool to manage risk

1) Reduce variability of outcomes1) Reduce variability of outcomes

(just did this one)(just did this one)

2) Maintain decision making flexibility2) Maintain decision making flexibility

3) Improve risk bearing capability3) Improve risk bearing capability

Maintain decision making Maintain decision making flexibilityflexibility

Don’t lock in activities for a long time, rather Don’t lock in activities for a long time, rather maintain flexibility in case situations changemaintain flexibility in case situations change

Annual crops instead of perennial cropsAnnual crops instead of perennial crops Invest in buildings and equipment with Invest in buildings and equipment with

multiple uses, so can change with multiple uses, so can change with opportunitiesopportunities

Build storage facilities to spread out salesBuild storage facilities to spread out sales Use hoop houses and similar to extend seasonUse hoop houses and similar to extend season Sell or finish out feeder livestockSell or finish out feeder livestock Rent assets (land, machinery) for flexibility, so Rent assets (land, machinery) for flexibility, so

can drop contract if opportunities changecan drop contract if opportunities change

Improve risk bearing Improve risk bearing capabilitycapability

Main idea: leave a safety margin or have a Main idea: leave a safety margin or have a reserve so you can weather “bad luck”reserve so you can weather “bad luck”

Extra Production Capacity:Extra Production Capacity: Bigger/newer/extra machinery and extra labor than Bigger/newer/extra machinery and extra labor than

needed so can “catch up” if rainy spring or harvestneeded so can “catch up” if rainy spring or harvest Liquid Reserve: maintain cash or liquid assets Liquid Reserve: maintain cash or liquid assets

to meet sudden short fallsto meet sudden short falls Credit Reserve: don’t borrow up to your credit Credit Reserve: don’t borrow up to your credit

limit so can make it through a bad yearlimit so can make it through a bad year Make crops more resilient to stresses Make crops more resilient to stresses

(drought, pests, water) by longer-term soil (drought, pests, water) by longer-term soil management (?)management (?)

SummarySummary Risk: when actions have variable Risk: when actions have variable

outcomesoutcomes 5 types in Agriculture5 types in Agriculture

Production and Technical RiskProduction and Technical Risk Market and Price RiskMarket and Price Risk Financial RiskFinancial Risk Human Resource RiskHuman Resource Risk Legal and Institutional RiskLegal and Institutional Risk

3 main categories of risk management 3 main categories of risk management toolstools

Reduce variability of outcomesReduce variability of outcomes Maintain decision making flexibilityMaintain decision making flexibility Improve risk bearing capabilityImprove risk bearing capability

Where does crop insurance fit Where does crop insurance fit in?in?

One type of risk management tool to One type of risk management tool to reduce income variability due toreduce income variability due to Production/Technical (yield) risk and/orProduction/Technical (yield) risk and/or Market/Price riskMarket/Price risk Usually reduces financial risk as a resultUsually reduces financial risk as a result

Are other tools to deal with these and Are other tools to deal with these and other risks in agricultureother risks in agriculture

Questions?Questions?

What is AGR-Lite?What is AGR-Lite?Adjusted Gross Revenue-LiteAdjusted Gross Revenue-Lite

Traditional crop insurance programs not Traditional crop insurance programs not useful for many small specialty farmersuseful for many small specialty farmers Crop not covered: fresh tomatoes, sweet cornCrop not covered: fresh tomatoes, sweet corn Organic crops valued at conventional pricesOrganic crops valued at conventional prices NAP coverage insufficient too: need > 50% NAP coverage insufficient too: need > 50%

yield loss, paid at 55% of conventional priceyield loss, paid at 55% of conventional price Penn. Dept. Ag. developed AGR-Lite for its Penn. Dept. Ag. developed AGR-Lite for its

small specialty crop growerssmall specialty crop growers RMA provides premium subsidies for RMA provides premium subsidies for

farmers, now available in many statesfarmers, now available in many states

What is AGR-Lite?What is AGR-Lite?Adjusted Gross Revenue-LiteAdjusted Gross Revenue-Lite

First available in Wisconsin in 2007First available in Wisconsin in 2007 Whole farm revenue insuranceWhole farm revenue insurance

Gross revenueGross revenue, not net revenue, not net revenue Gross Revenue guarantee based on 5 Gross Revenue guarantee based on 5

year average of Schedule F or similar year average of Schedule F or similar tax records reported to IRStax records reported to IRS Some adjustments (Some adjustments (AdjustedAdjusted Gross Gross

Revenue)Revenue) LiteLite: $1,000,000 liability (indemnity) limit: $1,000,000 liability (indemnity) limit

AGR-Lite: Main IdeaAGR-Lite: Main Idea Use your past tax records to determine your Use your past tax records to determine your

expected gross revenue for 2008expected gross revenue for 2008 Farmer chooses percentage of this expected Farmer chooses percentage of this expected

gross as their revenue guaranteegross as their revenue guarantee 65%, 75%, 80% coverage level, implying 35%, 65%, 75%, 80% coverage level, implying 35%,

25%, or 20% deductible25%, or 20% deductible Farmer chooses payment rate (90% or 75%)Farmer chooses payment rate (90% or 75%)

For every dollar below guarantee, paid 90¢ or 75¢For every dollar below guarantee, paid 90¢ or 75¢ After file taxes for 2008, if actual gross After file taxes for 2008, if actual gross

revenue is less than chosen guarantee, revenue is less than chosen guarantee, farmer receives an indemnity based on farmer receives an indemnity based on chosen payment ratechosen payment rate

What is Excluded?What is Excluded? The “Adjusted” in AGR-Lite The “Adjusted” in AGR-Lite

Value added activities: (e.g., cost & value Value added activities: (e.g., cost & value of post-production sorting, packaging, of post-production sorting, packaging, etc.)etc.)

Cooperative dividends not directly related Cooperative dividends not directly related to commodities producedto commodities produced

Income from custom hire machine workIncome from custom hire machine work MostMost other USDA payments (e.g., disaster) other USDA payments (e.g., disaster) Crop insurance indemnity paymentsCrop insurance indemnity payments

Covered CropsCovered Crops Grains:Grains: corn, soybeans, wheat, small grains corn, soybeans, wheat, small grains Forage:Forage: alfalfa, corn silage, silage, … alfalfa, corn silage, silage, … Fruit:Fruit: apples, pears, peaches, plums, apples, pears, peaches, plums,

cherries, cranberries, numerous berries, …cherries, cranberries, numerous berries, … Livestock:Livestock: cattle, hogs, sheep, goats, cattle, hogs, sheep, goats,

poultry, dairy, fish, fur, …poultry, dairy, fish, fur, … Miscellaneous:Miscellaneous: mint, ginseng, popcorn, mint, ginseng, popcorn,

herbs, maple syrup, honey, X-mas trees herbs, maple syrup, honey, X-mas trees nursery crops, cut flowers, potted plants, …nursery crops, cut flowers, potted plants, …

Covered Vegetable CropsCovered Vegetable Crops

Potatoes, sweet corn, snap beans, peasPotatoes, sweet corn, snap beans, peas Carrots, onion, beets, garlic, celery, …Carrots, onion, beets, garlic, celery, … Cabbage, broccoli, cauliflower, …Cabbage, broccoli, cauliflower, … Melons, squash, pumpkins, …Melons, squash, pumpkins, … Tomatoes, peppers, eggplant, … Tomatoes, peppers, eggplant, … Greens, asparagus, horseradish, …Greens, asparagus, horseradish, … Even moreEven more

Crops Not CoveredCrops Not Covered

Covered crop/livestock must generate Covered crop/livestock must generate income to report on tax forms, so crops income to report on tax forms, so crops marketed through livestock are not coveredmarketed through livestock are not covered Forage if sold it is covered, but not if fed Forage if sold it is covered, but not if fed

to dairy cows (but the milk is covered)to dairy cows (but the milk is covered) Coverage based on Coverage based on Gross IncomeGross Income, not net , not net

incomeincome No indemnity for higher costs, such as No indemnity for higher costs, such as

dry year when have to run irrigation more dry year when have to run irrigation more or buy forage for livestock/dairyor buy forage for livestock/dairy

Insured & Excluded Causes of Insured & Excluded Causes of LossLoss

Revenue losses from natural causes Revenue losses from natural causes (yield) or from market fluctuations (yield) or from market fluctuations (price)(price) Must still follow good farming practicesMust still follow good farming practices

Excluded causes of lossExcluded causes of loss Theft, vandalism, “mysterious Theft, vandalism, “mysterious

disappearance”disappearance” Lack of labor (e.g., to harvest ripe crop)Lack of labor (e.g., to harvest ripe crop) Inability to market commodities due to Inability to market commodities due to

quarantine, boycottquarantine, boycott Failure of buyer to pay for commodityFailure of buyer to pay for commodity

How does AGR-Lite work?How does AGR-Lite work? Calculate average gross revenue from 5 Calculate average gross revenue from 5

continuouscontinuous years of tax forms years of tax forms A crop generates at least 11.1% of gross A crop generates at least 11.1% of gross

revenuerevenue Each crop has a risk category (1-5)Each crop has a risk category (1-5)

Higher risk crop, higher premiumHigher risk crop, higher premium Premium is average of premiums for each crop, Premium is average of premiums for each crop,

weighted by % gross revenue from each cropweighted by % gross revenue from each crop Can combine AGR-Lite with APH/CRC policiesCan combine AGR-Lite with APH/CRC policies

Gives a premium break for APH/CRCGives a premium break for APH/CRC Give specific coverage for those cropsGive specific coverage for those crops

Available AGR-Lite OptionsAvailable AGR-Lite Options

CoveragCoverage Levele Level

PaymenPayment Ratet Rate

MinimuMinimum # m #

CropsCrops

Max Annual Max Annual IncomeIncome

Premium Premium SubsidySubsidy

65%65% 75%75% 11 $2,051,282$2,051,282 59%59%

65%65% 90%90% 11 $1,709,402$1,709,402 59%59%

75%75% 75%75% 11 $1,777,778$1,777,778 55%55%

75%75% 90%90% 11 $1,481,481$1,481,481 55%55%

80%80% 75%75% 33 $1,666,667$1,666,667 48%48%

80%80% 90%90% 33 $1,388,889$1,388,889 48%48%

Hypothetical ExampleHypothetical ExampleYearYear AGR IncomeAGR Income

20022002 $85,000$85,000

20032003 $95,000$95,000

20042004 $115,000$115,000

20052005 $95,000$95,000

20062006 $110,000$110,000

5-year 5-year avgavg

$100,000$100,000

20072007 skip yearskip year

20082008 coverage yearcoverage year

These all These all “adjusted” gross “adjusted” gross revenuesrevenues

2007 tax forms 2007 tax forms not field yetnot field yet

Choose coverage Choose coverage level for revenue level for revenue guarantee based guarantee based on this amounton this amount

Hypothetical ExampleHypothetical Example

Suppose chose 75% coverage level and Suppose chose 75% coverage level and 90% payment rate90% payment rate

Guarantee = 75% x $100,000 = Guarantee = 75% x $100,000 = $75,000$75,000

Actual Adj. Gross Rev = $50,000Actual Adj. Gross Rev = $50,000 Loss = $75,000 – $50,000 = $25,000Loss = $75,000 – $50,000 = $25,000 Indemnity = 90% x $25,000 = $22,500Indemnity = 90% x $25,000 = $22,500

Max Indemnity = 90% x $75,000 = $67,500Max Indemnity = 90% x $75,000 = $67,500

Random CommentsRandom Comments

Adjusts slowly for income growth/declineAdjusts slowly for income growth/decline Guarantees too low if income rapidly growingGuarantees too low if income rapidly growing Guarantees too high if income rapidly fallingGuarantees too high if income rapidly falling

Combine with specific crop policies when Combine with specific crop policies when available (overall premium savings)available (overall premium savings)

Five consecutive years Schedule F/1040 Five consecutive years Schedule F/1040 tax records neededtax records needed

No more than 50% income from ag No more than 50% income from ag commodities purchased for resalecommodities purchased for resale

QuestionsQuestions(other than premiums)(other than premiums)

How AGR-Lite does How AGR-Lite does premiumspremiums

Crops categorized from low to high risk, plus Crops categorized from low to high risk, plus one “other” category (very high risk)one “other” category (very high risk)

Each crop risk category has base premium rate Each crop risk category has base premium rate = premium as % total liability (max indemnity)= premium as % total liability (max indemnity)

Calculate % revenue for each cropCalculate % revenue for each crop Your premium rate is the average of the Your premium rate is the average of the

premium rates for each crop, weighted by the premium rates for each crop, weighted by the % of your revenue from that crop% of your revenue from that crop

Diversity Factor: as have more crops, lower rateDiversity Factor: as have more crops, lower rate Premium subsidy: farmer pays 41%, 45%, 52% Premium subsidy: farmer pays 41%, 45%, 52%

of premium, with lower % for lower coverageof premium, with lower % for lower coverage

Hypothetical ExampleHypothetical Example $100,000 avg revenue with 75% coverage $100,000 avg revenue with 75% coverage

level and 90% payment rate gives $75,000 level and 90% payment rate gives $75,000 guarantee and liability of $67,500guarantee and liability of $67,500

75% revenue from crop 1, 25% from crop 275% revenue from crop 1, 25% from crop 2 Crop 1 premium rate = 0.10, Crop 2 rate = 0.05Crop 1 premium rate = 0.10, Crop 2 rate = 0.05

Revenue Weighted Average rateRevenue Weighted Average rate 0.75 x 0.10 + 0.25 x 0.05 = 0.0875 0.75 x 0.10 + 0.25 x 0.05 = 0.0875

Diversity factor = 0.0875 x Diversity factor = 0.0875 x 0.6670.667 = 0.0584 = 0.0584 Premium is 0.0584 x $67,500 = $3,942Premium is 0.0584 x $67,500 = $3,942 Premium subsidy rate is 55%, so farmer Premium subsidy rate is 55%, so farmer

pays (100 – 55) = 44%, or 0.45 x $3,942 = pays (100 – 55) = 44%, or 0.45 x $3,942 = $1,774$1,774

How to get lower premium How to get lower premium ratesrates

Derive more revenue from low risk Derive more revenue from low risk cropscrops See next slides for crop listsSee next slides for crop lists

Have as many crops as you canHave as many crops as you can Diversity factor reduces premium rate Diversity factor reduces premium rate

moremore Choose lower coverage levelChoose lower coverage level

Implies higher premium subsidy rateImplies higher premium subsidy rate

Crop Risk CategoriesCrop Risk Categories Category 1: lowest riskCategory 1: lowest risk

Oats, RyeOats, Rye Category 2: moderately low riskCategory 2: moderately low risk

Cabbage, Cucumbers, Flowers (Other), Processing Sweet Cabbage, Cucumbers, Flowers (Other), Processing Sweet Corn, BarleyCorn, Barley

Category 3: moderate riskCategory 3: moderate risk Asparagus, Beets, Broccoli, Brussel Sprouts, Carrots, Asparagus, Beets, Broccoli, Brussel Sprouts, Carrots,

Cauliflower, Garlic, Herbs, Horseradish, Popcorn Cauliflower, Garlic, Herbs, Horseradish, Popcorn Strawberries, Cranberries, Potted Flowers, Seasonal Strawberries, Cranberries, Potted Flowers, Seasonal Potted Plants, Flower Seed, Maple Syrup, Pumpkins, Potted Plants, Flower Seed, Maple Syrup, Pumpkins, Processing Summer Squash, Winter SquashProcessing Summer Squash, Winter Squash

Corn, Soybeans, Wheat, Alfalfa, Clover, Hybrid Corn Corn, Soybeans, Wheat, Alfalfa, Clover, Hybrid Corn Seed, Forage Production, Other Forage Seeds Seed, Forage Production, Other Forage Seeds

Crop Risk CategoriesCrop Risk Categories Category 4: moderately high riskCategory 4: moderately high risk

Green Peas, Greens, Green Peas, Greens, Mixed Vegetables,Mixed Vegetables, Fresh Market Snap Fresh Market Snap Beans, Fresh Market Sweet Corn, Fresh Market Tomatoes, Beans, Fresh Market Sweet Corn, Fresh Market Tomatoes, Onions, Peppers (Other), Eggplant, Dry Beans, Grapes, Onions, Peppers (Other), Eggplant, Dry Beans, Grapes, Vegetable SeedVegetable Seed

Apples, Plums, Blueberries, Raspberries, Other Berries, Apples, Plums, Blueberries, Raspberries, Other Berries, Christmas Trees, Mint, Cut Flowers, Dried Flowers, Flower Christmas Trees, Mint, Cut Flowers, Dried Flowers, Flower Bulbs, Bedding Plants, Ginseng, Other Small GrainsBulbs, Bedding Plants, Ginseng, Other Small Grains

Category 5: high riskCategory 5: high risk Potatoes, Tart Cherries, Apricots, Peaches, Pears, Melons Potatoes, Tart Cherries, Apricots, Peaches, Pears, Melons

(All Other), Celery, (All Other), Celery, Other VegetablesOther Vegetables, Other Crops, Other , Other Crops, Other Fruits, Fruits,

Main PointMain Point

Get as many low risk crops and as much of Get as many low risk crops and as much of your revenue from them as you canyour revenue from them as you can See if you can get 11.1% of revenue from a See if you can get 11.1% of revenue from a

category 2 or 3 crop, will reduce your premiumscategory 2 or 3 crop, will reduce your premiums Choose general categories with care and Choose general categories with care and

group crops carefullygroup crops carefully Mixed Vegetables (4) vs Other Vegetables (5)Mixed Vegetables (4) vs Other Vegetables (5) Flowers (Other) (2) vs Potted Flowers (3) vs Cut Flowers (Other) (2) vs Potted Flowers (3) vs Cut

Flowers or Dried Flowers (4)Flowers or Dried Flowers (4) If you can, insure the crop under a If you can, insure the crop under a

standard crop insurance policy, then add standard crop insurance policy, then add AGR-Lite, will save on overall premium rateAGR-Lite, will save on overall premium rate

Diversity FactorDiversity FactorRanges 67% to about 40%Ranges 67% to about 40%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1 2 3 4 5 6 7

crops

prem

ium

rat

e

65%

75%

80%

These are all These are all Risk Risk Category 4 Category 4 cropscrops

See effect of See effect of coverage coverage level on level on premium premium rates as wellrates as well

How do AGR-Lite premiums How do AGR-Lite premiums compare to other policies?compare to other policies?

Risk CategoryRisk Category 65% Covg Lvl*65% Covg Lvl* 75% Covg Lvl*75% Covg Lvl*

11 2.2%2.2% 3.4%3.4%

22 3.0%3.0% 4.5%4.5%

33 3.8%3.8% 5.6%5.6%

44 5.4%5.4% 7.6%7.6%

55 6.4%6.4% 8.6%8.6%

Avg Rate for WI in 2007Avg Rate for WI in 2007

Corn CRCCorn CRC 5.9%5.9%

Soybeans CRCSoybeans CRC 5.0%5.0%

Wheat CRCWheat CRC 5.7%5.7%*Rates do not include diversity factors.*Rates do not include diversity factors.

Main PointMain Point

AGR-Lite premiums are about the AGR-Lite premiums are about the same as for corn, soybeans, wheat same as for corn, soybeans, wheat CRCCRC Can be a little higher if no diversity Can be a little higher if no diversity

factorfactor A little lower once include diversity A little lower once include diversity

factorsfactors

Is AGR-Lite Worth the Cost?Is AGR-Lite Worth the Cost?

If $100,000 revenue, 75% coverage level and If $100,000 revenue, 75% coverage level and 90% payment rate90% payment rate Trigger is $75,000 with $67,500 max payment Trigger is $75,000 with $67,500 max payment About 4.5% premium rate for $67,500 liability costs About 4.5% premium rate for $67,500 liability costs

$3,038, or about 3% of expected $100,000 income$3,038, or about 3% of expected $100,000 income Insurance increases your costs about 3%Insurance increases your costs about 3%

Is 3% lower income worth an income Is 3% lower income worth an income guarantee of 67.5%?guarantee of 67.5%?

Do you need a guarantee? Can you survive Do you need a guarantee? Can you survive without one? What about peace of mind?without one? What about peace of mind?

Can you pass the cost along in your prices?Can you pass the cost along in your prices?

Questions?Questions?

Paul D. MitchellPaul D. Mitchell

UW-Madison Ag & Applied EconomicsUW-Madison Ag & Applied Economics

Office: (608) 265-6514Office: (608) 265-6514

Cell: (608) 320-1162Cell: (608) 320-1162

Email: pdmitchell@wisc.eduEmail: pdmitchell@wisc.edu

Extension Web Page:Extension Web Page:

www.aae.wisc.edu/mitchell/extension.htmwww.aae.wisc.edu/mitchell/extension.htm