An Introduction to Risk Management for Diversified Producers in Central Appalachia

Jennifer LambFellowAppalachian Sustainable Development MS Agricultural and Applied EconomicsVirginia Tech

Virginia Tech Beginning Farmer and Rancher Coalition Webinar Series, June 5, 2013

Who we are• www.asdevelop.org• Non-profit (501c3) based in Abingdon, VA• Founded in 1996• Four Focus Areas: • Agriculture

• Operate Appalachian Harvest Food Hub based in Duffield, VA

• Coordinate the Appalachian Farmers Market Association

• Produce annual Local Food Guide• Rooted in Appalachia Consumer

education/restaurant delivery service

• General agricultural education• Food Access• Sustainable Forestry • Youth education

Purchasing local produce at the Abingdon Farmers MarketImage: www.asdevelop.org

Why is a non-profit working on Risk Management?

• Appalachian Sustainable Development has received several grants from the Risk Management Agency to work on improving the production environment for producers

• Based upon losses experienced by several of our growers in the Appalachian Harvest network

• In 2012, ASD applied for a grant to look more closely at crop insurance and to develop a web GIS

• ASD has no vested interest in whether farmers purchase policies, want to equip producers with information and tools to make the best decisions they can for their farms

The Risk Management Agency (RMA)

United States Department of Agriculture (USDA)

http://www.rma.usda.gov/

“RMA provides economic protection and risk management tools to America’s farmers and ranchers primarily through federally sponsored crop insurance delivered and serviced by private insurance companies”

RMA also issues grants, like the one that funded this ASD project!

History and Current State of US Farm Programs for Risk Management

• US farm programs came out of the Dust Bowl in the 1930’s, 1938 Federal Crop Insurance Corporation established

• Up to the 1990’s mostly programs for row crops and commodities

• Crop insurance is growing as one of the largest areas of farm spending

• Moving away from disaster assistance and direct payments to crop insurance

• Imperative that beginning producers and specialty crop producers join this conversation to contribute to the design of effective policies

Image source: www.iptv.org

A Brief Introduction to Risk Management

• Different types of risk in operating an agricultural business

• Production Risk-weather, pest, disease

• Marketing Risk-prices, rising input costs

• Financial Risk—ex. farm policy on your buildings/livestock

• Legal Risk—ex. liability insurance

• Human Resource Risk—relationships that affect your business

• Assessing your risk: http://farm-risk-plans.rma.usda.gov/index.aspx?action=riskman.home

• Designing a risk management program adapted for your operation takes all of these factors into account

(Some) Risk Management OptionsFederally Subsidized Crop Insurance• APH (Actual Production History)

• Protects against yield loss • Not available in many SWVA counties• Check here: http://www.rma.usda.gov/tools/ • Go to actuarial information browser, tools,

click current year

• Revenue Insurance • Revenue protection (price and yield)• Whole Farm Revenue Insurance

• Index Insurance• Loss determined by area—hay/forage

• Request for written agreement• Make a special request if a policy is not

available in your county

NAP Non-Insured Crop Disaster Assistance Program• Not crop insurance• $250/crop, up to $750 for an operation

Map source: www.rma.usda.gov/data/cropprograms.html

Managing production risk through AGR Lite Crop Insurance

• Subsidized whole farm revenue crop insurance• Not commodity based• Means that you can be growing different crops, expanding, or experimenting• Can insure both crops and livestock in one policy (only federally subsidized

crop insurance policy which does this)• Allows organic/local producers to incorporate price premiums they receive into

their projected revenue calculation• Purchased through private insurer, underwritten by federal government (USDA

RMA)

• Provides producer with a payment when revenue falls below loss inception point while incurring at least 70% of average costs

• Covers a wide range of risks which would cause low revenue• Weather, low prices, pest, and disease etc.• Not neglect or mismanagement

National AGR Lite Coverage

How AGR Lite works: • Adjusted Gross Revenue (AGR) is

calculated based upon tax records for past 5 years

• Average expenses calculated for past 5 years

• When revenue falls below loss inception point due to causes other than neglect or mismanagement and average expenditures are made, a payment is triggered

Source: AGR Lite Wizard, 2013

Do you qualify? • Must have had the same farm for 7 years, producing 5 years and

able to supply farm income tax records• For 2014 enrollment, need 2008-2012 tax records

• Have less than 2 million in Farm Income (1 million in liability)• Targeted toward organic and mixed/diversified producers • Minimum of 1-3 commodities based on coverage level • Tends to be the ‘best value’ when producers have between 3-10

commodities• Important exemptions:• Does not cover any value-added activities

• Ex: making apple cider from apples• Can still use, but need to adjust revenues down for value added

• No more than 50% income from resale• No more than 83.35% potatoes

Determining whether AGR Lite is right for you! • AGR Lite Wizard

• https://www.agrlitewizard.com

• Developed and tested with farmers (NCAT, 2012)

• Web and CD based tool

• Create a secure, individualized account

• Work through two real farm examples from Southwest Virginia based upon data entered into the AGR Lite Wizard

Steps to work through AGR Lite Wizard

1. Determine eligibility

2. Enter your revenue history (taxes 2008-2012)

3. Enter your planned production---Need help with prices/volume? Try here: http://asdevelop.org/resources/ “Market Income Calculator” includes an organic and conventional farmers market and restaurant price survey

4. Choose your level of coverage and calculate your premium

5. Walk through various loss scenarios

6. Search for an appropriate insurance provider in you area

7. Print necessary forms to take directly to an insurance provider

Market Income Calculatorhttp://asdevelop.org/resources/

*Market Income Calculator was produced as part of another USDA RMA Grant!*

Appalachian Harvest Farm Example 1-AGR Lite Wizard

• Diversified Organic/Sustainable farm

• Lee County, Virginia • Greenhouse crop• 1 acre Organic Tomatoes• 1 acre Organic Squash• 1 acre Organic Turnips • 3 head Grass Fed Cattle

Flood Loss Scenario• Lose about 1/3 of greenhouse crop and all tomatoes• Projected income: $94, 800• Actual income: $69,980• Loss inception point: $75, 840• Loss payment: $5,860 (90% of loss below inception point)• Premium: $2,692

Source: AGR Lite Wizard, 2013

Flood Loss-Comparison to NAP

Policy NAP AGR Lite

Coverage 55% of the loss below 50% of expected production.50 x .55 = 27.5%

90% of loss below 72% of AGR

Loss payment (Tomatoes only)27.5% x $3,400 =$935

$5,860

Less Premium -$750 -$2,692

Net: $185 $2898

Income: $70,065 $72,878

Severe Loss Scenario-Pest Infestation• 50% yield loss on greenhouse, tomatoes, squash, and turnips• Projected income: $94,800• Actual income: $49,500• Loss inception point: $75,840• Loss payment: $23,706 (90% of loss below inception point)• Premium: $2,692

Source: AGR Lite Wizard, 2013

Pest loss-Comparison to NAPPolicy NAP AGR Lite

Coverage 55% of the loss below 50% of expected production.50 x .55 = 27.5%

90% of loss below 72% of AGR

Loss payment $0—no single crop loss exceeds 50%

$23,706

Less Premium $750 $2,692

Net: -$750 $21,014

Income: $48,750 $70,514

0 NAP 50/55

AGR 65/75

AGR 65/90

AGR 75/75

AGR 75/90

AGR 80/75

AGR 80/90

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

0 935 0 0 840 10084395 5274

69,980 70,165 69,230 69,086 69,374 69,259

72,127 72,562

Comparing Revenues Between NAP and AGR Lite at Different Coverage Levels

Flood for AH Grower

Total revenue Loss PaymentProducer Premium

Coverage Options (Percent of Revenue Insured/Payment Rate)

Dolla

rs

Choosing Your Coverage

Choosing Your Coverage

0 NAP 50/55

AGR 65/75

AGR 65/90

AGR 75/75

AGR 75/90

AGR 80/75

AGR 80/90

0

20000

40000

60000

80000

100000

120000

0 750 750 894 1446 1729 2248 26920 0

9090 1090816200

19440 1975523706

49,500 48,750

57,84059,514

64,25467,211 67,007

70,514

Comparing Revenues Between NAP and AGR Lite at Different Coverage Levels

Pest Infestation for AH Grower

Total revenue Loss PaymentProducer Premium

Coverage Options (Percent of Revenue insured/payment rate)

Dolla

rs

Fall Crops and Cattle Producer Example 2-AGR Lite Wizard

• Diversified Conventional Producer of fall crops and cattle• Carroll County, Virginia • 40 acres of pumpkins• 25 acres of pie pumpkins• 15 acres of gourds• 80 head feeder cattle

Moderate Loss Scenario-“Wet Year”• Lose 50% of pumpkins, 33% of gourds and pie pumpkins• Projected income: $248,800• Actual income: $172,800• Loss inception point: $199,040• Loss payment: $23,616 (90% of loss below inception point)• Premium: $8,320

Source: AGR Lite Wizard, 2013

Wet year-Comparison to NAP

Policy NAP AGR Lite

Coverage 55% of the loss below 50% of expected production.50 x .55 = 27.5%

90% of loss below 72% of AGR

Loss payment $0—no single crop loss exceeds 50%

$23,616

Less Premium $750 $8,320

Net: -$750 $15,296

Total income: $172,050 $188,096

Severe Loss Scenario- Hail

• Lose 75% of pumpkins, pie pumpkins, and gourds• Projected income: $248,800• Actual income: $120,800• Loss inception point: $199,040• Loss payment: $70,416 (90% of loss below inception point)• Premium: $8320

Source: AGR Lite Wizard, 2013

Hail loss-Comparison to NAPPolicy NAP AGR Lite

Coverage 55% of the loss below 50% of expected production

90% of loss below 72% of AGR

Loss payment

Pumpkins Cover 25% of loss at 55% level = $15,400Pie PumpkinsCover 25% of loss at 55% level= $5,156GourdsCover 25% of loss at 55% level =$ 3093.75Total = $23,650

$70,416

Less Premium

-$750 $8320

Net $22,900 $62,096

Total Income

$143,700 $182,896

0 NAP 50/55

AGR 65/75

AGR 65/90

AGR 75/75

AGR 75/90

AGR 80/75

AGR 80/90

0

50000

100000

150000

200000

250000

172,800 172,050 170,483 170,025

178,711 179,720185,101

188,096

Comparing Revenues Between NAP and AGR Lite at Different Coverage Levels

"Wet Year" Scenario--Pumpkin Grower

Total revenue Loss PaymentProducer Premium

Coverage Options (percent covered/payment rate)

Dolla

rsChoosing Your Coverage

0 NAP 50/55 AGR 65/75 AGR 65/90 AGR 75/75 AGR 75/90 AGR 80/75 AGR 80/900

50000

100000

150000

200000

250000

300000

120,800

143,700149,173

154,853

165,711

174,700 172,541

182,896

Comparing Revenues Between NAP and AGR Lite at Different Coverage Levels

Hail Scenario--Pumpkin Grower

Total revenue Loss PaymentProducer Premium

Coverage Options (percent covered/payment rate)

Dolla

rs

Choosing Your Coverage

Enrollment Deadlines: AGR Lite and NAPAGR Lite

• Use the Wizard to: • Search for an insurance

agent licensed to sell AGR Lite insurance

• Print out the forms to take directly to your agent

• Sign up for AGR Lite in a given year is typically by March 15

Non-Insured Crop Disaster Assistance Program (NAP)

Virginia FSA Deadlines

Crop

Application Closing Date

Most grasses/forages 15-FebAll sod 1-SepAquaculture 1-SepChristmas Trees 1-SepCorn 15-FebElephant Garlic 1-SepFlowers 1-SepFruits (unless otherwise listed) 15-FebGinseng 1-SepGrapes 20-NovHerbs 15-FebHoney 1-DecMaple Sap 1-DecMushrooms 1-SepSmall grains 30-SepSoybeans 15-FebStrawberry 20-Nov

Trees/bushes (apples, peach, pear, cherry, blueberry, caneberry)

20-Nov

Vegetables 15-Feb

Any date other than a Feb 15 date sign-up is in the calendar year prior to the year of coverage. For example, a policy for 2014 grapes must be purchased by 11/20/2013.

Connecting to your options:

ALL Federally Subsidized Crop Insurance

• Purchased through a private insurer, policies underwritten by the federal government

• Agent locator:http://www.rma.usda.gov/tools/agent.html

Disaster Assistance

• NAP Purchased through the Farm Service Agency

• Sign up in your county office• Locate your county office:http://offices.sc.egov.usda.gov/locator/app?service=page/CountyMap&state=VA2&stateName=Western%20Virginia

Need crop insurance or NAP to qualify for federal farm disaster assistance

Available Additional Resources: RMA Risk Management Check Sheet:

http://farm-risk-plans.rma.usda.gov/index.aspx?action=riskman.home

AGR Lite fact sheet

http://www.rma.usda.gov/pubs/rme/agr-lite.pdf

NAP fact sheet

http://www.fsa.usda.gov/Internet/FSA_File/nap_august_2011.pdf

Encourage you to try the online AGR Lite wizard https://www.agrlitewizard.com

National Center for Appropriate Technology (NCAT) ATTRA Hotline 1-800-346-9140 (English) 7 a.m. to 7 p.m. Central Timehttps://attra.ncat.org/ask.php

Contact ASD: asd@asdevelop.org

Thank you!!!! Appalachian Sustainable Development would sincerely appreciate your feedback about today’s webinar and

experiences with Risk Management

Post Webinar Survey: (will remain open indefinitely) http://stellarsurvey.com/s.aspx?u=D88C87DB-DFFB-4BDD-906B-4A59BD0D82A5

&

Funding for this ASD project is supported by USDA RMA