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
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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
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
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 - $125,000
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
Total
Govt
Premium Subsidy(%)
$4570
$2696 (59%)
Producer
Premium
$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 Total
Liability
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?
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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
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PRACTICES
Tunnels
Stakes
Fumigated
Raised beds
Rotation w/cover crop
Trickle irrigation on
spinks sand
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RISKS
Heat
Hail
Humidity
Cold
Production Risks
Tree Fruit Production System
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PRACTICES
Superior site
High Density
Stakes
Rotation w/cover crop
Fumigated
Trickle irrigation frost
fans
• Overhead sprinklers
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RISKS
Heat
Hail
Humidity
Frost
Freeze
Wind
Cold
Marketing Risks
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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%