Data Limitations and Assumptions

Due to AGR-Lite procedures and filing processes, limitations were encountered and as such are addressed in the following paragraphs. Limitations and assumptions for both income and expenses are addressed separately.

Crop insurance indemnity payments, which may include payments from any of the following: APH, CRC, RA, GRP, GRIP, LGM, LRP, Private Hail and Mortality, or any product offered under the authority of the act in which an individual received proceeds from the contract are included in AGRC but are not in calculating AGRA. Although farm managers would likely enroll in alternative insurance products to

supplement AGR-Lite the KFMA annual farm level data does not provide enough detail necessary to identify product specific purchases. As such it was determined the product would be evaluated as a stand-alone. Since this analysis evaluated AGR-Lite as stand- alone other crop insurance proceeds were not included in the AGR derivation. These

payments and their corresponding premiums were also excluded from the NFI calculations.

Provisions of the AGR-Lite contract specify that certain agricultural program payments will be included for AGRA calculations but not for AGRC and vice versa. Agricultural program payments, which may include Loan Deficiency Payments (LDP), Production Flexibility Contracts (PFC), Direct and Counter-Cyclical Payments (DCP), Conservation Reserve Program (CRP), and Farm Service Agency (FSA) Loans are not included in calculating AGRA or AGRC. Noninsured Crop Disaster Assistance Program payments (NAP) are not included in AGRA calculations but are for AGRC. Finally, Commodity Credit Corporation (CCC) loans are included in both AGRA and AGRC computations. Other payments used to calculate AGRA and AGRC include Surgarbeet – Payment in Kind and Marketing Orders – Cranberry and Tart Cherries. Needing to include specific payments and exclude others, the KFMA data set does not provide the necessary data to report individual program payments. Government payments are recorded in the KFMA data set however all realized payments are compiled into a single variable. It is important to note that the allowable income measure, in the AGR-Lite policy, includes some payments while excluding others. This includes the calculation of AFI in Equation 1 and income for AGRC in Equation 18. Figure D.4 in Appendix D provides a complete listing of these program payments. As Figure D.4 indicates, most government payments are omitted in the derivation of AFI and AGRC. These payments are problematic in that we are unable to isolate NAP payments, Payment in Kind, Marketing orders, and CCC loans when deriving AFI or AGRC using KFMA data. It was decided to exclude government payments from AGRA and AGRC calculations.

Therefore any agricultural program payments made, whether counting towards AGRA or AGRC, have been omitted from AGR-Lite calculations.

When establishing the contract guarantee, it becomes conditional on

circumstances outlined in the contract. As discussed earlier the guarantee will be based on the lesser of AGRA, IAGR, or EI from the annual farm report. Since the analysis uses historical data (1993-2005) we are unable to determine EI for succeeding years. Hence, it was determined EI would equal AGRA. This has potential to overestimate or

underestimate payouts of AGR-Lite.

Limitations also surfaced from an expense perspective. Under the provisions of the contract producers are allowed to deduct depreciation and section 179 expense deductions not claimed elsewhere, however this value will reflect only depreciation realized for animals. It is important to note that livestock depreciation is not recorded in the KFMA database, resulting in the inability to include such depreciation. Therefore depreciation expense was not included in the derivation of AE. Even so, in many cases animal depreciation is believed to be minimal.

Given an individuals eligibility for a claim, precise adjustments occur prior to receipt of a claim. The contract states raised cull cows intended for sale will be

considered in AFI and will count towards AGRA. Alternatively sales of cows and other capital assets (such as breeding livestock) are not included in AFI or AGRA. This is problematic as KFMA data does not allow us to identify or link the corresponding costs associated with livestock sales in any given year. Thus, sales of cows and other capital assets, such as breeding livestock have been excluded from AGR-Lite calculations. Given that, sales of livestock may not truly reflect that which is permitted by the contract.

As part of the indemnity calculation process PEP from Equation 13 is derived. In accordance with contract filing procedures allowable expenses will be adjusted by the change in AP and PE. Within the KFMA data bank, detailed data on AP are not collected and as such have been excluded from the calculation. Therefore PE are the only accrual adjustment made to AE.

Because of data limitations the calculation of total farmer paid premium (TFPP) was not performed. One major limitation in deriving premiums was the inability to identify individual rates by farm. Thus, it was determined AGR-Lite would be analyzed under three scenarios, AFPF, AFAR, and AFARI. Accounting for AGR-Lite being analyzed as a stand-alone product the equation used to determine premiums from AFPF, AFAR, and AFARI do not conform to TFPP, defined in Equation 21, located in

Appendix B. Premiums under AFAR and AFARI were computed by multiplying the computed average rate by the corresponding farms liability. As such liabilities from other insurance products have been eliminated from the equation. This is, in part, due to data limitations, which result in the inability to isolate or identify which insurance products were purchased. Without such information we are unable to extract the corresponding liability from respective contracts. In addition government subsidization and administrative fees ($30) were eliminated to simplify the premium calculation.

CHAPTER 4 - Results