QUALITY ADJUSTMENT 

REVIEW

Risk Management Agency

Product Development Division

Contracted Study By Milliman, USA
ARPA REQUIREMENTS

“The Corporation shall contract with a 

qualified person to review the quality loss 

adjustment procedures of the Corporation so 

that the procedures more accurately reflect 

local quality discounts that are applied to 

agricultural commodities insured under this 

title. Based on the review, the Corporation shall 

make adjustments in the procedures, taking 

into consideration the actuarial soundness of 

the adjustment and the prevention of fraud, 

waste, and abuse.”
ARPA REQUIREMENTS

“...the Corporation shall offer producers 

the option of purchasing quality loss 

adjustment coverage on a basis that is 

smaller than a unit ...”
CURRENT PROGRAM

The current procedure indemnifies 

producers for covered quality 

deficiencies using predetermined quality 

discount factors (DF). The discount 

factors are based on FSA loan discounts 

for crop years 1997 through 1999.
Local & National Survey

ÿ Individual grain terminals, elevators 

and warehouses.

ÿ Six major national grain buyers.

ÿ Requested current discount schedules.

ÿ Discussed application of these 

schedules.
Discounts at Local Elevators

ÿQuality discounts applied at local 

elevators can be highly influenced by 

supply and demand, and quality of the 

crop stored at the elevator or any 

other factor the local elevator applies.

ÿActual discounts may deviate from 

the elevator's published discount 

schedule.
Survey Results

ÿQuality discount schedules are highly 

correlated within and across elevators 

in different regions.

ÿMost discount schedules are not 

updated frequently.

ÿActual discounts (applied at the local 

level) may not follow the discount 

schedule.
Results of Risk Analysis

ÿ There was sufficient data to construct 

regional discount schedules only for 

the major crops.

ÿ Discount schedules (for specific 

crops) were in no instance provided 

by the elevators.

ÿ Only a handful of elevators had 

discount schedules for given crops.
Cotton Quality Adjustment

ÿAlternative Coverage 

‹(BALE-BY-BALE)

‹Quality deficiencies are paid for each bale, even if there 

is no yield loss for the unit

ÿCurrent Coverage

‹Aggregated across a unit

‹Production to count must be less than unit guarantee
Cotton Risk Analysis

ÿRisk analysis performed to estimate 

the difference in loss frequency and 

severity for coverage by bale instead 

of by unit.

ÿCoverage by bale leads to at least 10% 

higher indemnities.

ÿContractor strongly recommends any 

changes be made on a pilot basis.
Cotton by Bale - Rating Impact

ÿ The study estimated premium rates would 

increase 10% nationwide, if quality adjustment 

was conducted on less than a unit basis.

ÿ Preliminary analysis, along with expert judgment 

of the rates section suggests the actual rating 

impact may be significantly greater by region (i.e. 

Texas High Plains vs. California).
Three Options Evaluated By 

Contractor

ÿDevelop regional quality discount 

schedules.

ÿAllow producers to select a 

rate/factor.

ÿFollow discount schedules of terminal 

elevators.
Study Recommendation

Develop regional discount schedules:

ÿMaintained by Regional Offices.

ÿNational in scope.

ÿUniform for all crops.

ÿHigh maintenance costs.
Study Also Recommends use of 

Olympic Average

ÿLocal transactions may deviate 

substantially from recommended discounts.

ÿIn such cases, determine quality discounts 

based on an Olympic Average (discard the 

high and low bid) of five separate local 

buying points.
RMA’s Goals for QA

The Quality Adjustment procedure must be:

1. Reflective of the local market price.

2. Easy to administer within current staffing 

levels.

3. Not subjected to price manipulation, fraud, 

waste and abuse.
Pre 1995 Quality Adjustment 

Procedure

ÿReflective of market price

‹Actual value of grain ÷ local market price = QA factor

ÿAble to administer within current 

staffing levels

‹Adjuster made determinations on claim by claim basis 

at local level.

ÿSubject to price manipulation, fraud, 

waste, and abuse

‹Elevators could manipulate price based on supply and 

demand, or availability of insurance. 
In 1998–Current Quality 

Adjustment Procedure:

ÿEasy to administer

‹ Predetermined factors published on the Special Provisions.

‹ Factors only updated occasionally.

ÿNot subject to price manipulation, fraud, waste, 

and abuse

‹ QA factor determined from charts (unless amount of damage is off

chart).

ÿNot always reflective of local market price

‹ Factors are based on a five year average. Current years value and 

discounts are not considered (unless amount of damage is off 

chart).

‹ QA factor can come from the SPOI charts even if local elevators 

are rejecting grain at the same level of damage.
RMA Conclusion of Study 

Recommendation

ÿMore closely reflects the local market 

discounts.

ÿNot subject to price manipulation, 

fraud, waste and abuse.

ÿWill be difficult to administer within 

current staffing levels.
Recap

Three recommendations for quality 

adjustment: 

ÿPre-1995; Usually met 2 of 3, 

occasionally 3 of 3.

ÿPost-1995; Usually meets 3 of 3, 

occasionally 2 of 3.

ÿContractor recommendation; would 

meet 2 of 3.
Conclusion

Neither RMA nor the contractor has 

discovered a way to always meet all three 

mandated criteria:

ÿReflective of local market.

ÿEasy to administer within current 

staffing levels.

ÿNot subjected to price manipulation, 

fraud, waste and abuse.
RMA Recommendation

ÿ Send study to producers, producer groups, 

universities, extension offices, and private 

industry.

ÿ Ask for comments on the study and seek 

recommendations and ideas that would meet all 

three criteria.

ÿ Seek recommendations and ideas on how to best 

insure cotton on a less-than-a-unit basis.
Who Do You Contact?

Product Development Division

Dave Bell (816) 926-2397
Thank You

For further information, please visit the 

Risk Management Agency website:

www.rma.usda.gov