On March 17, 2020, the Risk Management Agency (RMA) published Final Agency Determination: FAD-293a, relating to the Hybrid Seed Corn Crop Provisions. https://www.rma.usda.gov/en/Policy-and-Procedure/Final-Agency-Determinations/Hybrid-Seed-Corn-Crop-Provisions-FAD-293a. The interpretation requested involves the definition of “minimum guaranteed payment.” The first requestor states that the minimum guaranteed payment does not encompass payments to the insured if the payments are: 1) not determinable as a fixed or final amount of bushels or dollars as of the time planting is complete; 2) are based upon an amount of imputed, and not actual, bushels of non-seed corn, said amount of bushels being determined formulaically with respect to location-specific average yields of non-seed corn for the crop year; and 3) could ultimately be calculated and fixed at zero dollars, depending on the values of the payment formula input variables resulting from the year’s harvest.
The first requestor also states that minimum guaranteed payments are subtracted from the total revenue guarantee sought by the producer to determine the limit of the indemnity policy sold to fill the gap in desired protected revenue. The first requestor claims that to include as minimum guaranteed payments those payments that are not fixable as an amount certain of dollars or bushels at the time of acreage reporting would inequitably and improperly allow the approved insurance provider (AIP) to claim additional amount of insurance per acre for the purposes of assessing premium by assigning a value of zero dollars to the uncertain payment, and retroactively claim the revenue guarantee provided was less than the full amount determined and reported on the final schedule of insurance, which is the amount used to establish premium.
The second requestor states the meaning of “minimum guaranteed payment” simply means an agreed upon payment or credit to the producer by the processor in instances where the producer did not satisfy the contract by producing the quantity of “seed production” as defined by the policy. The second requestor states that while the definition parenthetically notes that the payment is usually in bushels or in dollars it does not have to be. The second requestor states that the purpose of the defined term is to ensure that producers are properly insuring their “at risk” farm exposure.
The second requestor states that the fact the minimum guaranteed payment may not be immediately quantifiable in bushels or dollars is not determinative under the definition. The second requestor states that the payment could be calculated by a formula outlined in the seed corn contract wherein the payment is based on a percentage of a specific location based average harvested yield for the year to be determined price. The second requestor states that for claim purposes, the minimum guaranteed payment is simply calculated and inputted at the time of harvest when the actual dollar or bushel amount become apparent. The second requestor states that to allow otherwise would result in potentially overstated liability, and indemnity.
The second requestor acknowledges that the minimum guaranteed payment amount, if any, is to be provided at acreage reporting time. The second requestor states that if the amount of the payment is not calculable on that date the formula must be disclosed to the AIP at acreage reporting and then implemented when the information is available to calculate the payment. The second requestor states that in the event a payment is made by the seed corn company based on the formula it must be taken into account to establish the amount of insurance per acre and the corresponding premium. The second requestor states that even if the formula is not disclosed by the insured at acreage reporting, any minimum guaranteed payment made by the seed corn company must be taken into account to determine the amount of insurance per acre when a claim is filed on the policy. The second requestor states that if this happen the amount of insurance per acre and the associated premium will be adjusted prior to payment of an indemnity. The second requestor states that the interpretation is supported by the examples in section 12(c) of the Hybrid Seed Corn Crop Provisions.
RMA disagreed in part and agrees in part with the first requestor’s interpretation. RMA states it agrees that the minimum guaranteed amounts need not be determinable as of the date of execution of the contract but that any minimum guaranteed amounts must be determined by the AIP not later than the acreage reporting date. RMA states it agrees with the second requestor’s interpretation that the minimum guaranteed payment must be reflected in the determination of the amount of insurance per acre. RMA states the amount of insurance per acre is defined as the dollar amount determined by multiplying the adjusted yield by the price election you select and subtracting any minimum guaranteed payment, not to exceed the total compensation specified in the hybrid seed corn processor contract.
RMA states that section 7(a)(2) of the Crop Provisions indicates that the processor contract, containing specifications of such minimum payments, must be executed by the acreage reporting date. RMA states that if the AIP later discovers an omission or miscalculation of the minimum guaranteed payment the AIP must make corrections to the acreage report and any related changes to the amount of insurance per acre, premiums owed, etc. RMA states that any payment made to the insured regardless of the quantity of seed produced would be considered a minimum guaranteed payment. RMA states that if the seed company provides other compensation based on the amount of seed produced such compensation would not qualify as a minimum guaranteed payment as specified in the policy.
ANALYSIS – To encourage producers to plan seed crops, processors will often include a guaranteed payment as incentive. The policy takes into consideration these payments as a way to accurately identify the amount of liability at risk of loss. When a processor makes a payment regardless of whether the crop is produced or the amount of production, the producer has no risk of loss in the amount of production such payment represents. Because there is no risk of loss for the amount covered by the minimum guaranteed payments, under the basic tenets of insurance, the amount of liability must be reduced by the amount of the payment. The amount left after reducing the liability by the minimum guaranteed payment is an accurate measure of the amount of liability at the risk of loss.
RMA has determined that the minimum guaranteed payment must be determined not later than the acreage report. However, RMA also states that any payment made to the insured by the processor regardless of the quantity of seed produced would be considered a minimum guaranteed payment. While not specifically addressing the point, RMA’s determinations would seem to reject the second requestor’s interpretation that the minimum guaranteed payment could be based on a formula in the contract whereby the payment is based on a percentage of a location specific average harvested production for the year at a to be determined price. The second requestor’s formula would seem to be based on the amount of production from at least some of the acreage and would not qualify as a minimum guaranteed payment under RMA’s interpretation.
The question is whether there are other types of formulas that could be contained in the contract that would establish a payment for a guaranteed dollar or bushels amount after the acreage reporting date. If so, it is unclear whether payments made under these formulas would be considered a minimum guaranteed payment provided the formula was not based on the amount of production.
There is also a question of what would happen if a processor contract agreed to cover all or a part of the production costs associated with producing the crop. RMA states that any payment made by the processor to the insured that is regardless of the quantity of seed produced is considered a minimum guaranteed payment. However, the policy treats liability and production costs totally separately so that production costs do not affect liability. Based on the broad interpretation RMA provided, it appears that the payment of production costs would still be considered a minimum guaranteed payment even though all the liability under the policy is at risk. This seems contradictory to the intent of the minimum guaranteed payment.
All statements made are opinions of the author and are not intended to provide legal opinions or legal advice.