Art Barnaby, Jeff Williams,
Andrew Saffert, and Michael Langemeier
Department of Agricultural Economics
Kansas State University
Presented at the 2009 National Extension Risk
Management Conference
Reno, NV March 31 –April 1, 2009

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Adjusted Gross Revenue-Lite (AGR-Lite)
 A Whole Farm Revenue Protection Plan
 Provides protection against loss of revenue from natural and named disasters and/or market fluctuations
3

Objective
 Examine impact of participation in AGR-
Lite as a stand-alone program for SE
Kansas Beef Farms on farm income variability and risk reduction
4

Motivation

76 % of Kansas’ $8.7 billion in agricultural production is without risk protection
(NASS, 2008)
 Beef largely remains without protection
5

Overview of Analysis
 Generate Net Farm Income (NFI) distributions
 With and without AGR-Lite participation
 Examine change in
 Mean
 Standard Deviation
 Coefficient of Variation (CV)
 Minimum
6

Analysis Methods
 Simulation & Econometrics to Analyze Risk
(SIMETAR©) is used to perform Stochastic
Efficiency with Respect to a Function
(SERF) Analysis. This analysis determines the preferred strategy (AGR-Lite or no
AGR-Lite) at various levels of risk aversion for each farm.
7

How is Coverage Established?
 Federal Income Tax Records
 Usually IRS Schedule F form 1040

Current Year’s Farm Plan
 Annual Farm Report
8

Data
(continued)
 KFMA data
 59 SE Kansas Beef Farms – Most diversified area with little irrigation (20 counties)
 Schedule F not available but reproduced necessary data
 Continuous annual farm level data (1993-2007)

Two data sets
 15 yrs. - 1993-2007 - Need 5 years of previous data excluding the immediate previous year for current insurance year applicant.
 9 yrs. - 1999-2007 - Used for creating NFI distributions and evaluation.
9

Data
(continued)
 Farm Category
 50% or more of average total income 1993 to
2007 from Beef
10

Data
(continued)
NFI Characteristics 1999 - 2007 - Beef
Mean
Standard Deviation
Average Coefficient of Variation 1
$56,100
$51,281
1.43
1 Includes only positive Coefficient of Variations for 54 of
59 farms.
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AGR-Lite Critical Values
 Allowable Farm Income (AFI) - Used for establishing guarantee (liability)
 Schedule F items directly related to production
 Excludes custom work, insurance indemnities and ag program payments.
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AGR-Lite Methodology Overview
 Allowable Farm Income (AFI)
 Calculate 5-year average of AFI - called AGR
 Calculate indexed AGR if necessary for growth or contraction
 Determine expected income (EI) - annual farm report that projects income
 Determine approved AGR - Minimum of AGR or EI
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AGR-Lite Example Claim
Year
Historical Year 1
Historical Year 2
Historical Year 3
Historical Year 4
Historical Year 5
Historical Year 6
Tax Return
Information Trend
265,000
250,000 0.943
Indexed
Revenue
260,000 1.040
287,000 1.104
271,330 0.945
a. Income Trend Factor b. 5-year Average c. Expected Income for Insurance Year Total d. 5-year Average Indexed (a
 b) e. Lesser of Indexed AGR or Expected Income f. Coverage Level g. Payment Rate h. AGR-Lite Loss Inception Point (e
 f) i. AGR-Lite Liability ($ of Coverage) (h
 g)
266,666
275,478
75%
90%
206,609
185,948
1.033
275,478
Expected
Income 1
290,000
1 From the annual “farm plan” for the upcoming year.
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AGR-Lite Critical Values
 Adjusted Gross Revenue to Count (AGRC)
Used for Establishing Claim
 equals AFI generated for current year
+ insurance payments
+ accrual adjustments (accounts receivable, crop, and livestock inventory)
15

AGR-Lite Example Claim
Year
Historical Year 1
Historical Year 2
Historical Year 3
Tax Return
Information Trend
265,000
250,000 0.943
Indexed
Revenue
260,000 1.040
Historical Year 4
Historical Year 5
Historical Year 6
287,000 1.104
271,330 0.945
a. Income Trend Factor b. 5-year Average c. Expected Income for Insurance Year Total d. 5-year Average Indexed (a
 b) e. Lesser of Indexed AGR or Expected Income f. Coverage Level g. Payment Rate h. AGR-Lite Loss Inception Point (e
 f) i. AGR-Lite Liability ($ of Coverage) (h
 g) j. Adjusted Gross Revenue to Count k. Insurable Loss (h - j) l. Indemnity (j
 g)
266,666
275,478
75%
90%
206,609
185,948
150,000
56,609
50,948
1 From the annual “farm plan” for the upcoming year.
1.033
275,478
Expected
Income 1
290,000
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AGR-Lite Methodology Overview
 Allowable Expenses (AE)
 No direct impact in determining initial AGR-
Lite guarantee
 However, effective guarantee reduced in claim filing process if expenses significantly less than
5 year average expenses
 Schedule F items directly related to production excluding some items such as interest, taxes, and rent.
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Assumptions for Analysis
 Every farm insured every year
 75% Coverage Level and 90% Payment
Rate
 Expected Income from "farm report" for insurance year (EI) equals 5-year Average
AFI
 Examine AGR-Lite as stand-alone
 Actuarially fair premiums by farm category
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Premium Calculation
 Actuarially Fair Average % Rate
= Total $ indemnities for farms with claims
/ total $ liability for farms with claims
Applied to all farms
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Premiums Summary
Premium rate 1
All
Farms
With
Claims
Without
Claims
3.78% 3.78% 3.78%
Average Premium $5,009 $5,214 $4,749
Minimum Premium $353 $496 $353
Maximum Premium $26,584 $26,584 $21,544
1 Percent of liability
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Income values for 59 SE Kansas beef farms from
1993 through 2007
$300,000
$275,000
$250,000
$225,000
$200,000
$175,000
$150,000
$125,000
$100,000
$75,000
$50,000
$25,000
$0
-$25,000
AFI NFI VFP AGRC
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Results –Indemnities and Liabilities
Farms with Claims 1
Average Indemnity 1
Average Liability 1
1 Farms with at least one claim.
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$22,702
$137,796
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NFI Characteristics 1999 - 2007
Mean
Standard Deviation
With
Claims
(33)
54,538
47,289
Without
Claims
(26)
58,083
56,347
Coefficient of Variation
Average Minimum
Average Maximum
1.57
(31)
-14,835
127,948
1.23
(23)
-15,659
159,627
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NFI Results
Average Without
Average With
Average Percent
Standard Deviation
Average Without
Average With
Percent Change
Coefficient of Variation
Average Without
Average With
Percent Change
All
Farms
(59)
$56,100
$54,008
-3.73%
51,281
50,655
-1.22%
1.43
1.32
-7.38%
With
Claims
(33)
$54,538
$54,538
0.00%
47,289
46,213
-2.28%
1.57
1.13
-28.21%
Without
Claims
(26)
$58,083
$53,334
-8.14%
56,342
56,294
-0.09%
1.23
1.58
28.51%
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NFI Results
(continued)
All
Farms
(59)
Minimum
Average Without
Average With
Percent Change
Maximum
Average Without
Average With
Percent Change
-15,214
-12,630
16.99%
141,908
141,872
-0.03%
With
Claims
(33)
-14,835
-6,533
55.96%
127,948
131,712
2.94%
Without
Claims
(26)
-15,695
-20,368
-29.77%
159,627
154,768
-3.04%
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SERF Risk Premium Results
AGR-Lite not preferred on 37 farms at all levels of risk aversion. They would need increased returns or a payment to use AGR-Lite.
26 had 0 indemnities.
7 had 1 indemnity.
3 had 2 indemnities.
1 had 3 indemnities.
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SERF Risk Premium Results
(continued)
AGR-Lite preferred on 10 farms at all levels of risk aversion. They would pay an additional amount for AGR-Lite.
1 had 1 indemnity.
1 had 2 indemnities.
2 had 3 indemnities.
4 had 4 indemnities.
1 had 5 indemnities.
1 had 7 indemnities.
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SERF Risk Premium Results
(continued)
AGR-Lite not preferred by 7 risk neutral managers became preferred on 7 farms as risk aversion increased.
All 7 had 1 indemnity.
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SERF Risk Premium Results
(continued)
AGR-Lite preferred by 5 risk neutral managers but became not preferred on 5 farms as risk aversion increased. AGR-Lite actually increased risk because indemnities paid in higher NFI years but not lower NFI years. In these cases AGRC and
NFI did not correlate well.
2 had 1 indemnity.
3 had 2 indemnities.
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Correlation – All Farms
Average
AGRC to
NFI
0.65
Minimum
Maximum
Negative Correlations
-0.30
0.99
2
Average correlations were slightly lower for farms with claims
This leads to indemnities based on AGRC in years when NFI is higher than average or the opposite for some farms.
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Summary & Conclusions
 NFI Results – 33 Farms with claims
 Reduced standard deviations
 Reduced CV
 Increased minimums
 SERF Results
 10 farms preferred AGR-Lite at all levels of risk aversion
 7 farms preferred at higher levels of risk aversion
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Summary & Conclusions
(continued)
 First attempt to evaluate whole-farm product
 Future research
 Provisions of the contract
 Actual premiums
 Analysis by size of farm
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Issues with AGR-Lite

AGRC and NFI not highly correlated for all farms

Could have high cost year when AGRC is not low enough to generate a claim
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Issues with AGR-Lite
(continued)

AGR-Lite does not adjust for feed purchased.

If in a drought, and producers purchase hay to replace lost forage, this loss will not be covered. The loss will lower net income, but not gross income .

If producers normally sell excess hay, then it is covered because there will be reduced hay sales.
34

Issues with AGR-Lite
(continued)

AGR-Lite does not include indemnity payments when calculating 5-year average gross income that will set future guarantees.
 This has no impact on current year’s indemnity payment but it lowers future guarantees reducing the effectiveness of AGR-Lite as a risk management tool for multiple year droughts.
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