RMA explains falling number policy
Editor’s note: Wheat Life reached out to the Risk Management Agency (RMA) to help clarify questions regarding RMA’s falling number policy. The questions and RMA’s answers are below.
Will you explain RMA’s falling number policy, when it was instituted and how it works.
In 2011, RMA first offered coverage for falling numbers with pre-established discount factors between 0-299. In 2013, insureds experienced falling numbers between 0-199 and felt the discount factor associated with this range was insufficient. As a result of a contracted study, in 2016, RMA instituted a Reduction in Value for all classes of wheat with a falling number score of 200 or less. If the falling number is below 200, then a Reduction in Value (RIV) procedure is used.
The RIV is a monetary discount a buyer applies for a falling number below 200. For a falling number between 299 and 200, an insured’s production that will be counted is adjusted by the pre-established discount factor in the applicable Special Provisions (part of the policy).
For example, a policyholder harvested 50 bushels of wheat per acre on 1,000 acres for a total of 50,000 bushels. The production had a falling number test result of 220 and would qualify for a quality adjustment discount factor (DF) of .157.
- 0.157 discount factor = 0.843 (1.00 - 0.157) quality adjustment factor (QAF).
50,000 bushels times the QAF of .843 results in production to count of 42,150 bushels. This amount will be used for determining a payable loss and for that year’s actual production history (APH) production report that will then be part of the APH average yield.
If the falling number was 198, then an RIV is calculated. For example, if the local market price for wheat on the day the loss is being settled is $5.60 and the value of the damaged wheat on that day is $4.60, the RIV is calculated as follows:
$5.60 - $4.60 = $1.00
$1.00 divided by $5.60 = 0.179 DF
1.000 - 0.179 DF = 0.821 QAF multiplied times the 50,000 bushels resulting in 41,050 bushels to count.
Why is a quality discount (falling numbers) used as a yield adjustment? Is this common in other commodities? Are there other quality discounts in wheat that are used as a yield adjustment?
Per the wheat policy, the guarantee is based on U.S. Grade #2 wheat. When figuring production to count, quality adjustments are made to gross production as a means to determine the equivalent of good quality wheat. In other words, this recognizes that a high yielding crop may have a value equal to a lower yielding crop if there are quality issues.
Coverage for quality discounts is common in numerous commodities insured under the federal crop insurance program for both determining a loss and APH. The Special Provisions for Wheat (part of the wheat policy) lists the covered quality adjustments and the associated discount factors. Besides falling number discounts, there are also quality discount factors for wheat graded at U.S. #5 or worse, such as low test weight and damaged kernels.
How does RMA come up with the discount chart?
RMA develops quality discount charts based on information gathered by the U.S. Department of Agriculture’s Farm Service Agency (FSA). FSA uses this information to develop loan discount schedules used under commodity loan programs. RMA uses this same information to develop quality discount charts for crop insurance purposes.
The federal crop insurance policies and associated procedures related to falling number discounts are standard for all approved insurance providers (AIPs). RMA procedure instructs the AIPs on how to adjust the production if there is a qualifying quality loss for falling numbers. AIPs must follow consistent, standardized procedures, not only for wheat, but for all crops eligible for a quality adjustment as stated in the Special Provisions.
Does RMA have any plans to modify the falling number policy, and is there anything wheat farmers/WAWG can do to address this issue in the future?
RMA will work in conjunction with any interested party’s proposals for future modifications to current quality adjustment procedures.