A Risk Analysis of Adjusted Gross Revenue-Lite on Beef
Farms
Art Barnaby, Jeff Williams, Andrew Saffert, and Michael Langemeier
Department of Agricultural EconomicsKansas 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
Examine impact of participation in AGR-Lite as a stand-alone program for SE Kansas Beef Farms on farm income variability and risk reduction
Objective
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Motivation
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76 % of Kansas’ $8.7 billion in agricultural production is without risk protection (NASS, 2008)
Beef largely remains without protection
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Overview of Analysis
Generate Net Farm Income (NFI) distributionsWith and without AGR-Lite participation
Examine change inMean Standard DeviationCoefficient of Variation (CV)Minimum
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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.
Analysis Methods
How is Coverage Established?
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Federal Income Tax RecordsUsually IRS Schedule F form 1040
Current Year’s Farm PlanAnnual Farm Report
Data (continued)
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KFMA data59 SE Kansas Beef Farms – Most diversified
area with little irrigation (20 counties)Schedule F not available but reproduced
necessary dataContinuous 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.
Farm Category50% or more of average total income 1993 to
2007 from Beef
Data (continued)
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NFI Characteristics 1999 - 2007 - Beef
Mean $56,100
$51,281
1.43
Standard Deviation
Average Coefficient of Variation1 1 Includes only positive Coefficient of Variations for 54 of 59 farms.
Data (continued)
AGR-Lite Critical Values
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Allowable Farm Income (AFI) - Used for establishing guarantee (liability)Schedule F items directly related to production Excludes custom work, insurance indemnities
and ag program payments.
AGR-Lite Methodology Overview
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Allowable Farm Income (AFI)Calculate 5-year average of AFI - called AGRCalculate indexed AGR if necessary for growth
or contractionDetermine expected income (EI) - annual farm
report that projects incomeDetermine approved AGR - Minimum of AGR
or EI
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AGR-Lite Example Claim
1From the annual “farm plan” for the upcoming year.
YearTax ReturnInformation Trend
IndexedRevenue
Expected Income1
Historical Year 1 265,000Historical Year 2 250,000 0.943
Historical Year 3 260,000 1.040
Historical Year 4 287,000 1.104Historical Year 5 271,330 0.945Historical Year 6
a. Income Trend Factor 1.033b. 5-year Average 266,666c. Expected Income for Insurance Year Total 290,000d. 5-year Average Indexed (a b) 275,478e. Lesser of Indexed AGR or Expected Income 275,478f. Coverage Level 75%g. Payment Rate 90%h. AGR-Lite Loss Inception Point (e f) 206,609i. AGR-Lite Liability ($ of Coverage) (h g) 185,948
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)
AGR-Lite Critical Values
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AGR-Lite Example Claim
1From the annual “farm plan” for the upcoming year.
YearTax ReturnInformation Trend
IndexedRevenue
Expected Income1
Historical Year 1 265,000Historical Year 2 250,000 0.943
Historical Year 3 260,000 1.040
Historical Year 4 287,000 1.104Historical Year 5 271,330 0.945Historical Year 6
a. Income Trend Factor 1.033b. 5-year Average 266,666c. Expected Income for Insurance Year Total 290,000d. 5-year Average Indexed (a b) 275,478e. Lesser of Indexed AGR or Expected Income 275,478f. Coverage Level 75%g. Payment Rate 90%h. AGR-Lite Loss Inception Point (e f) 206,609i. AGR-Lite Liability ($ of Coverage) (h g) 185,948j. Adjusted Gross Revenue to Count 150,000k. Insurable Loss (h - j) 56,609l. Indemnity (j g) 50,948
AGR-Lite Methodology Overview
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Allowable Expenses (AE)No direct impact in determining initial AGR-
Lite guaranteeHowever, 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
Actuarially Fair Average % Rate
= Total $ indemnities for farms with claims / total $ liability for farms with claims
Applied to all farms
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Premium Calculation
Premiums Summary
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All
FarmsWith
ClaimsWithoutClaims
Premium rate1 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 $21,5441Percent of liability
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Income values for 59 SE Kansas beef farms from 1993 through 2007
-$25,000$0
$25,000$50,000$75,000$100,000$125,000$150,000$175,000$200,000$225,000$250,000$275,000$300,000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
AFI NFI VFP AGRC
Results –Indemnities and Liabilities
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Farms with Claims1 33
Average Indemnity1 $22,702
Average Liability1 $137,7961Farms with at least one claim.
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NFI Characteristics 1999 - 2007With
Claims
(33)
Without Claims
(26)
Mean 54,538 58,083
Standard Deviation 47,289 56,347
Coefficient of Variation 1.57
(31)
1.23
(23)
Average Minimum -14,835 -15,659
Average Maximum 127,948 159,627
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NFI Results
All
FarmsWith
ClaimsWithoutClaims
(59) (33) (26)
Average Without $56,100 $54,538 $58,083
Average With $54,008 $54,538 $53,334
Average Percent -3.73% 0.00% -8.14%
Standard Deviation
Average Without 51,281 47,289 56,342
Average With 50,655 46,213 56,294
Percent Change -1.22% -2.28% -0.09%
Coefficient of Variation
Average Without 1.43 1.57 1.23
Average With 1.32 1.13 1.58
Percent Change -7.38% -28.21% 28.51%
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NFI Results (continued)
All
FarmsWith
ClaimsWithoutClaims
(59) (33) (26)
Minimum
Average Without -15,214 -14,835 -15,695
Average With -12,630 -6,533 -20,368
Percent Change 16.99% 55.96% -29.77%
Maximum
Average Without 141,908 127,948 159,627
Average With 141,872 131,712 154,768
Percent Change -0.03% 2.94% -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 FarmsAGRC
toNFI
Average 0.65
Minimum -0.30
Maximum 0.99
Negative Correlations 2Average 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.
Summary & Conclusions
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NFI Results – 33 Farms with claimsReduced standard deviationsReduced CVIncreased minimums
SERF Results10 farms preferred AGR-Lite at all levels of
risk aversion 7 farms preferred at higher levels of risk
aversion
Summary & Conclusions (continued)
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First attempt to evaluate whole-farm product
Future research Provisions of the contract Actual premiumsAnalysis by size of farm
Issues with AGR-Lite
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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.
Issues with AGR-Lite (continued)
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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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Questions ?