Report to Congress: 

Perennial Crops, Pecans and the Federal Crop Insurance 

Program 

Submitted by 

Secretary of Agriculture Thomas J. Vilsack 

as required by section 12030 of the Food, Conservation, and Energy Act of 2008 

07/02/2009 

United States Department of Agriculture 

Federal Crop Insurance Corporation 

1400 Independence Avenue, SW 

Stop 0801 

Washington, DC 

20250-0801 

The Risk Management Agency Administers 

And Oversees All Programs Authorized Under 

The Federal Crop Insurance Corporation 

An Equal Opportunity Employer 
i 

Executive Summary 

Section 12030 of the Food, Conservation, and Energy Act of 2008 directed the Secretary of 

Agriculture to deliver to the House Committee on Agriculture and to the Senate Committee on 

Agriculture, Nutrition, and Forestry a report on options for addressing the effects of declining 

and variable yields for perennial crops in the Federal crop insurance program. Specifically, 

section 12030 reads as follows: 

Not later than 180 days after the date of enactment of this Act, the Secretary shall submit to 

the Committee on Agriculture of the House of Representatives and the Committee on 

Agriculture, Nutrition, and Forestry of the Senate a report containing details about activities 

and administrative options of the Federal Crop Insurance Corporation and Risk 

Management Agency that address issues relating to— 

(1) declining yields on the actual production histories of producers; and 

(2) declining and variable yields for perennial crops, including pecans. 

This report is focused on the concerns specific to perennial crop producers, particularly the 

effects of downward trending and alternate bearing. A separate report to Congress will address 

the declining yield concerns of perennial and annual crop producers. 

For most perennial crops productive capability is negligible until a certain stage of growth is 

reached. Once this point is attained production increases rapidly until some maximum 

physiological level is achieved and then remains relatively constant until age, disease, etc. begin 

to reduce the plant’s productivity. Another physiological characteristic of some perennial crops 

is alternate bearing—a phenomenon characterized by alternating periods of high and low yields. 

Adverse environmental conditions are often thought to initiate alternate bearing as the stress may 

leave plants more susceptible to damage from conditions including freeze, high temperatures and 

drought, etc. 

Procedures developed by the Risk Management Agency (RMA) provide adjustments to 

insurance guarantees to address downward trending and alternate bearing. Conceptually, such 

adjustments may be appropriate if the insurance guarantee is to be consistent with production 

expectations—though at the cost of potentially providing the producer with a lower insurance 

guarantee. The practical impact of these adjustments (or of not making adjustments) depends on 

how prevalent and predictable are these phenomena. If downward trending and alternate bearing 

are relatively frequent occurrences, providing guarantees higher than experience suggests is 

warranted will eventually necessitate premium rate increases. However, higher premium rates 

will lead to reduced program participation and/or negatively impact coverage level choices. Yet, 

reducing guarantees to reflect the effects of downward trending and alternate bearing may be 

perceived as decreasing the value of the crop insurance coverage. Therefore, key issues are: (1) 

how prevalent are downward trending and alternate bearing; and (2) how appropriate are the 

current procedural adjustments to address these situations. 

Recognizing these concerns, in 2005, RMA solicited proposals for an evaluation of insurance 

coverage for perennial crops with a particular focus on the alternate bearing and downward 

trending adjustments. The objectives of the evaluation were to: 
ii 

 Provide a comprehensive evaluation of the existing perennial crop actual production history 

(APH) insurance program, underwriting methods, and procedures; 

 Provide an assessment of whether present underwriting methods and procedures are 

appropriate to maintain an actuarially sound insurance program and establish uniformity and 

consistency by crop or crops across RMA regions; and 

 Provide recommendations for program improvements. 

In regards to the frequency of alternate bearing and downward trending, the study noted that 

adjustments for these phenomena are not particularly prevalent, as indicated in the following 

passage: 

Of the 50,191 databases, 1,165 (2.32%) were adjusted for alternate bearing and 851 (1.70%) 

were adjusted for down[ward] trending. In addition, 496 policies (0.99%) had the 

down[ward] trending adjustment waived via RO [RMA regional office]-issued underwriting 

guidelines and 1,848 (3.68%) had RO determined yields. 

Also, the study concluded that the current alternate bearing adjustment introduces significant 

complexity with relatively few offsetting benefits, noting that: 

 

More generally, however, the inability of the CIH formula [ RMA Crop Insurance Handbook 

adjustment procedure] to do a better job than a simple average predicting the next season’s 

yield, coupled with the evidence of low persistence of the up-down pattern, lead us to 

conclude that the test is of little benefit in aggregate.

A similar conclusion was reached with regard to the downward trending adjustment: 

Down[ward] trending yields are a fact of life at some point for most of these crops. None of 

the formula adjustments do a very good job of predicting the coming year’s yield. Only 

about half the time is the next year’s yield actually below 75% of the APH. Nevertheless, our 

tests indicate that the CIH downward trending adjustment more accurately predicts yields 

than the APH yield for crops with a 10-year APH. However, moving to a shorter (four to six) 

year average would do almost as well. 

Based on the findings of the contracted evaluation, as well as its own analysis, RMA provides 

the following recommendations for addressing the effects of variable yields for perennial crops 

in the Federal crop insurance program. 

1. Greater flexibility to establish the base period for determining the approved yield for 

perennial crops, in particular, by adopting a base period shorter than the current 10 years. 

 

2. Replace the current catastrophic yield adjustment based on regional average yields with an 

adjustment based on the actual production history of the producer. 

3. Restrict the use of the alternate bearing and downward trending adjustments when a shorter 

base period is implemented. 
iii 

4. Enhance policy and procedure for adjustments in measured acreage when there is a 

significant reduction in the stand from the previous year. 

5. Modify the Pecan Revenue program to specify a minimum level of revenue that must be 

achieved as a condition of insurability, reduce the minimum age requirement, and add 

percent stand requirements similar to other nut crops such as almonds. A catastrophic 

adjustment based on the producer’s history would also be implemented for pecan growers, 

similar to that of other perennial crops as indicated in recommendation 2. 

Recommendations 1 and 2 above will require legislative changes in order for RMA to 

implement. Recommendation 3 can be accomplished administratively; however, the desired 

impact will not be achieved unless RMA is able to concurrently implement recommendation 1. 

Aside from the catastrophic adjustment for pecan growers, recommendations 4 and 5 require 

only administrative changes, which RMA is implementing. 
1 

1. Background 

Section 12030 of the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill) directed the 

Secretary of Agriculture (Secretary) to provide Congress with a report on options for addressing 

the effects of declining and variable yields for perennial crops in the Federal crop insurance 

program. Specifically, section 12030 reads as follows: 

Not later than 180 days after the date of enactment of this Act, the Secretary shall submit to 

the Committee on Agriculture of the House of Representatives and the Committee on 

Agriculture, Nutrition, and Forestry of the Senate a report containing details about activities 

and administrative options of the Federal Crop Insurance Corporation and Risk 

Management Agency that address issues relating to— 

(1) declining yields on the actual production histories of producers; and 

(2) declining and variable yields for perennial crops, including pecans. 

As stated in the conference report “The Managers recognize risk management challenges faced 

by producers, especially with respect to declining yields in light of increases in premiums. 

Managers also understand that there are unique issues with yield variability for perennial crops, 

such as pecans. The Managers are interested in the Department of Agriculture’s activities to 

address these issues and options that the Department has to address these issues 

administratively.” This report is focused on the concerns specific to perennial crop producers, 

particularly the variable yield adjustments to reflect the effects of downward trending and 

alternate bearing. A separate report to Congress will address the declining yield concerns of 

perennial and annual crop producers. 

A perennial crop, as defined by the Federal Crop Insurance Corporation (FCIC), is a plant, bush, 

tree, or vine crop that has a life span of more than one year.1

 Perennial crops insured under the 

actual production history (APH) plan of insurance include almonds, apples, avocados, citrus, 

blueberries, cranberries, figs, grapes, macadamia nuts, pears, plums, prunes, stonefruit (apricots, 

nectarines and peaches), table grapes, walnuts, and Hawaii Tropical Fruit (bananas, coffee and 

papaya). The APH plan of insurance protects against the loss of production due to natural causes 

such as hail, fire, drought, etc. The insurance guarantee for APH-based policies is based on an 

average of the insured producer’s individual yield history. The producer selects the amount of 

the average yield he or she wishes to insure – from 50 to 75 percent2 – in order to establish the 

insurance guarantee. If the actual yield is less than the insurance guarantee, the producer is paid 

an indemnity based on the difference. The amount of the indemnity is calculated as the product 

of the yield shortfall and the price election chosen by the producer. This price election is 

determined as the product of the expected market price (as determined by the Risk Management 

Agency (RMA)) and the percentage of that price the producer wishes to insure – from 55 to 100 

percent. 

Citrus crops in some areas, particularly in California and Florida, can also be insured under the 

Dollar Revenue plan of insurance. Dollar Revenue plans represent a hybrid between revenue 

 

1

 Perennial plants (e.g., the trees, vines, bushes) are insurable under separate plans of insurance from perennial crops 

(fruits, nuts, etc.). This report focuses on insurance for perennial crops. 

2

 For crops in some areas coverage levels of up to 85 percent are available. 
2 

coverage and yield coverage. The guarantee is based on the cost of growing a crop in a specific 

area, and there is one reference dollar value for a county. Producers choose a coverage level 

ranging from 50 to 85 percent of the reference dollar value, which determines the amount of 

insurance. A loss occurs when the value of the crop is less than the amount of insurance. The 

value of the crop typically is determined by calculating the average price realized from sales, 

minus an amount representing harvest costs and other post-production value-added activities, 

multiplied by the quantity sold. 

Pecans are insurable under the Pecan Revenue plan of insurance, which bases the producer’s 

insurance guarantee on an average of his or her historical cash receipts from pecan production. 

The Pecan Revenue program requires a two year policy as a result of the crop’s inherent 

tendency to alternate bearing. The producer can choose to insure from 50 to 75 percent of the 

historical average revenue to establish the guarantee. An insured loss results when the value of 

pecan production is less than the guarantee, whether due to a production/quality loss, a price 

decline, or some combination thereof. The actual revenue history (ARH) plan of insurance was 

recently introduced on a pilot basis for cherries. As with Pecan Revenue, the ARH insurance 

guarantee is based on an average of the producer’s historical cash receipts, and an indemnity is 

paid when the value of production is less than this guarantee.3

 The ARH program design is 

being evaluated as a basis for providing revenue coverage to other crops that lack a centralized 

price discovery mechanism (for example, a commodity futures exchange), including citrus, 

lentils and sugar beets. 

Objectives of the Federal Crop Insurance Program

There are three general objectives that govern the administration of the Federal crop insurance 

program. The first is to provide effective risk management products to producers. The second is 

to increase program participation by expanding availability into new crops and regions. The 

third is to maintain actuarial soundness. Critical to achieving the first two objectives is that the 

insurance products must provide adequate amounts of protection and the associated premium 

rates must be affordable as perceived by producers. The third objective – actuarial soundness – 

is required by sections 506(n) and 508(d) of the Federal Crop Insurance Act (Act). The usual 

measure of actuarial soundness in the insurance industry is the loss ratio, calculated as incurred 

losses divided by earned premiums. Section 506(n)(2) of the Act, as amended by the 2008 Farm 

Bill, mandates the Federal crop insurance program operate with a projected loss ratio of no 

greater than 1.0, which means that premium collections are sufficient to cover the indemnities 

paid to policyholders.4

 

Yet, there is an inherent tension among the objectives of maintaining actuarial soundness, 

providing affordable premium rates, and providing an adequate amount of protection. Increasing 

the amount of protection or adding new coverage will lead to higher premium rates, given the 

statutory mandate that actuarial soundness be maintained. However, raising premium rates to 

maintain actuarial soundness will likely dissuade some producers from purchasing a Federal crop 

 

3

 While both Pecan Revenue and ARH provide revenue coverage in a similar manner, the underwriting and 

administration of the two programs are somewhat different. 4

 Section 502(b)(6) of the Act, as well as section 508(d)(2), specifies that the premium collections shall be sufficient 

to cover anticipated losses and a reasonable reserve. 
3 

insurance policy and/or negatively impact coverage level choices, thereby reducing program 

participation and program benefits. 

Concerns of Perennial Crop Producers

Although perennial crop producers may have declining yield concerns similar to those of annual 

crop producers, they have relayed specific concerns related to the adjustments to insurance 

guarantees to reflect the effects of downward trending and alternate bearing. Downward 

trending reflects the finite commercial life of perennial crops. The productivity of most 

perennial crops follows a similar pattern, as depicted in Figure 1: (1) establishment – productive 

capability is zero as the plant is established and growth begins; (2) development – once a certain 

stage of growth is reached (maturity of the perennial plant), production begins and productive 

capability increases exponentially until some maximum physiological level is achieved; (3) 

maintenance – maximum productive capability remains relatively constant for a period of years; 

and (4) decline – productivity begins to decline as age, disease, etc. reduce the plant’s productive 

capacity. In commercial situations the plant is often kept in production for some period of time 

after the onset of decline because the cost of replacement (for example, costs of new stock and 

replanting, no production during the establishment stage, etc.) exceeds the value of the lost 

production. However, eventually the decline in production becomes so great that it is more 

profitable to replace the aged tree, vine or bush. The physiological phenomenon whereby 

productivity begins to decline as the plant becomes aged is referred to as downward trending. 

Figure 1: Depiction of Downward Trending for Perennial 

Crops

Another physiological characteristic of some perennial crops is alternate bearing – a pattern of 

alternating years of high and low yields as portrayed in Figure 2. Adverse environmental 

conditions are often thought to initiate alternate bearing, though some perennials may exhibit the 

phenomenon even in the absence of environmental stresses. For example, a period of high 

production may leave plants weakened and stressed and, therefore, more susceptible to damage 

from freeze, high temperatures, drought, etc. Once such damage is incurred, the plant redirects 

its resources to repair and recovery rather than to crop production. Thus, a period of high 

production (“on-years”) is followed by a period of low production (“off-years”). Alternate 

bearing has been documented in certain deciduous fruits, including apple, pear, plums, prunes, 
4 

apricot, cranberry, and blackberry, as well as in various citrus fruits. Other perennial crops, such 

as figs, grapes, and peaches, have demonstrated the ability to produce a full crop every year. 

Figure 2: Depiction of Alternate Bearing for Perennial Crops 

As discussed in section 2 of this report, RMA procedures provide adjustments to the insured’s 

guarantee to address downward trending and alternate bearing situations. Conceptually 

adjustments may be appropriate if the insurance guarantee is to be consistent with production 

expectations – though at the cost of potentially providing the producer with a lower insurance 

guarantee. The practical impacts of such adjustments (or of not making these adjustments) 

depend on how prevalent and demonstrable are these phenomena. If downward trending and 

alternate bearing are relatively prevalent, providing guarantees higher than experience may 

suggest is warranted will eventually necessitate premium rate increases. Of course, higher 

premium rates will reduce program participation and/or negatively impact coverage level 

choices. Yet, reducing guarantees to reflect the effects of downward trending and alternate 

bearing may be perceived as decreasing the value of the crop insurance coverage. A further 

consideration is that proper management practices may mitigate the some of the effects of 

downward trending and alternate bearing, but multiple catastrophic years can erode the 

effectiveness of even the best management practices. Differentiating between yield declines 

attributable to downward trending/alternate bearing and declining yield situations due to multiple 

catastrophic years can be problematic. 

Contracted Perennial Crop Evaluation

Recognizing these concerns and issues, RMA solicited proposals for an evaluation of insurance 

coverage for perennial crops with a particular focus on the alternate bearing and downward 

trending adjustments. The contract was awarded to Promar International (Promar). The 

objectives of the evaluation were to: 

 Provide a comprehensive evaluation of the existing perennial crop APH insurance program, 

underwriting methods, and procedures; 
5 

 Provide an assessment of whether present underwriting methods and procedures are 

appropriate to maintain an actuarially sound insurance program and establish uniformity and 

consistency by crop or crops across RMA regions; and 

 Provide recommendations for program improvements. 

The contract emphasized a review of RMA’s current methods and procedures for adjusting 

insurance guarantees for alternate bearing or downward trending situations. 

To keep the scope of the evaluation manageable, the evaluation was primarily focused on six 

perennial crops in five regions, as depicted in the Table 1. These six crops account for about 75 

percent of total program liabilities for all perennial crops. The five regions account for about 97 

percent of national liability for perennial crops. The contractor engaged crop experts from each 

of the regions to assist in the evaluation, in addition to conducting multiple listening sessions in 

each region to solicit feedback from producers, agents, and other interested parties. The 

contracted study was delivered to RMA in April, 2007. A copy of the study is provided as an 

appendix to this report. 

 

Table 1. Targeted Perennial Crops and Regions 

Crop/Region West Mid-Atlantic PacificNorthwest Midwest Southeast 

Apples X X X X X 

Peaches X X X X X 

Grapes X X X X 

Oranges X 

Almonds X 

Blueberries X 

Subsequent to delivery of the contracted study, RMA established an internal Perennial Crop 

Review Team that was charged with the responsibility of reviewing the final report, considering 

other program improvements identified by the team outside of those contained in the contracted 

evaluation, and providing recommendations on those changes that would enhance the overall 

program for perennial crops. In particular, the review team: 

 Provided recommendations for changes and improvement to the perennial crop underwriting 

procedure and all related functions, including the rationale identifying the pros, cons and 

associated impacts of the recommended actions; 

 Evaluated required changes to regulations, policies or procedures; and 

 Developed implementation timeframes. 

The analysis and evaluations conducted by the Perennial Crop Review Team form the basis of 

the recommendations contained in this report. 
6 

2. Underwriting of Perennial Crops 

FCIC offers multiple peril crop insurance for perennial crops to cover loss of production due to 

natural causes, but not losses due to a failure to follow good farming practices or that are 

inherent to the life-cycle of the plant.5 The productivity of perennial crops is heavily influenced 

by the producer’s production choices. Examples include variables such as location, climate, soil, 

cultural practices (for example, crop, rootstock, planting pattern, density, pruning, which 

includes method and pattern, fertilization, weed control, crop thinning, pest control, insecticide, 

pollinators, use of bees, disease control, fungicide, and frost control), or other management 

practices such as gafting, dehorning/buckhorning/stumping, acreage thinning, and interplanting 

new, similar or different varieties of the same or other crops. These factors are often interrelated, and many are influenced by timing and frequency. This makes the underwriting of 

perennial crops inherently more difficult as these factors must be addressed when determining 

coverage and establishing the policy and procedures for insurance. 

For APH insurance plans for perennial crops, the insurance guarantee is based on a simple 

average of four to ten years of actual historical yields (approved APH yield), multiplied by the 

coverage level chosen by the producer. The assumption behind the simple averaging procedure 

of the APH plan of insurance is that historical yield performance is the best predictor of future 

yield performance. Transitional yields (T-Yields) are available to use in place of actual yields 

when fewer than four years of actual production history are available to determine the guarantee. 

T-Yields are typically based on county average yields as reported by the USDA National 

Agricultural Statistics Service (NASS), for the type, variety, practice, etc. as applicable. 

Establishing T-Yields for perennial crops can be difficult because credible data is often lacking, 

particularly at the level of detail necessary for perennial crop insurance which may vary by age 

and density of the trees. For certain perennial crops, minimum age and/or production 

requirements may also be applicable before insurance attaches. 

Adjustments to Historical Average Yields for Perennial Crops

In some situations the historical average yield may also be a poor predictor of future expected 

yields. Depending on circumstances, there are various potential adjustments to the simple 

average yield. Of note are the following adjustments: 

A. Yield adjustment. 

B. High variability. 

 Alternate bearing. 

 Downward trending. 

C. Determined yield. 

The yield adjustment serves to limit the impact of low actual yields due to insured causes of loss 

on an insured producer’s guarantee. The purpose of the high variability adjustment for 

downward trending is to reduce the guarantee to be consistent with production expectations 

when the perennial plant begins to experience a decline in productivity. The alternate bearing 

 

5

 The Federal Crop Insurance Act authorizes indemnity payments only for loss of production resulting from 

naturally occurring causes of loss such as drought and hail, along with price movements in the case of revenue plans 

of insurance. 
7 

adjustment attempts to adjust the guarantee to reflect the high-low yield pattern present in 

alternate bearing situations to prevent over and underinsurance. Further discussion of these 

adjustments is provided below. 

A. The yield adjustment (YA) is generally available to perennial crop producers to avoid large 

year-to-year declines in the approved APH yield. The YA allows producers to substitute 60 

percent of the applicable T-Yield for actual yields that are less than 60 percent of the T-Yield 

due to insured causes of loss in the determination of the approved APH yield. The yield 

adjustment was introduced by the Agriculture Risk Protection Act of 2000 (ARPA) and 

implemented for the 2001 crop year. 

In order to benefit from the YA, an insured’s actual yield must be less than 60 percent of the 

T-Yield. For those producers who typically realize yields above the county average, this 

may be an infrequent occurrence and the yield adjustment generally has little or no effect on 

their approved APH yield. In contrast, producers with yields below the county average may 

receive substantial benefit from the YA since a higher proportion of their yields are likely to 

fall below 60 percent of the county T-Yield. Furthermore, producers with yields that are 

inherently low may use the YA to increase their approved APH yield even during periods of 

normal yields. For example, consider a producer whose actual yields typically average only 

40 percent of the county T-Yield. The approved APH yield for this producer will 

nevertheless be at least 60 percent of the county T-Yield because of the YA. 

B. RMA’s current underwriting procedures provide for a high variability yield adjustment that 

may be applicable in certain situations to account for the presence of either alternate bearing 

or downward trending. A series of tests are performed to determine the applicability of either 

the alternate bearing or the downward trending adjustment for a block or unit, as well as the 

amount of any applicable adjustment.

C. For situations when the approved insurance provider (AIP) cannot apply the alternate bearing 

or downward trending tests, an RMA Regional Office (RO) review and determined yield is 

required. Also, if the insured producer disputes the alternate bearing or downward trending 

adjustment calculated by the AIP, the insured can request an RO review and determined 

yield. Other situations that may give rise to an RO determined yield include the approval of 

insurability at earlier growth stages than specified in the Crop Provisions, or information 

provided by the producer that indicate reduced productivity, including a change in 

management practices or an inadequate irrigation water supply.

Underwriting and Risk Classification

Most perennial crops are “flat-rated”. This simply means that for a given coverage level the 

premium rate is the same for all producers of the crop in the county. For a few perennial crops, 

the premium rate for a given coverage level varies based on the producer’s risk classification.6

 

RMA’s rating function, as applied to these latter crops, imply that the risk of an payable loss is a 

decreasing function of yield, which means that the frequency and severity of payable losses are 

greater for producers with a below-average yield (relative to the county average) than for 

producers with an above-average yield. The degree to which an insured’s average yield is above 

 

6

 Such a variable rate structure is used for most annual crops insured under an APH-based plan of insurance. 
8 

the county average, the insured’s premium rate is reduced and vice-versa, as illustrated in the 

Figure 3. Thus, the average yield not only determines the insurance guarantee but also affects 

the premium rate paid by the producer. 

Figure 3: Relationship Between an Individual’s Yield and Premium Rate 

0%

1%

2%

3%

4%

5%

6%

0.500.600.700.800.901.001.101.201.301.401.50

Premium Rate

Individual Yield Relative to County Average

The variability of yields that is typical to the growth and production pattern for some perennial 

crops complicates this method of risk classification, especially when dealing with the individual 

blocks that are common to many perennial crops such as trees. For example, recall the typical 

growth pattern of many perennial crops as illustrated above in Figure 1. Yields during the 

development stage are often lower, though rapidly increasing. Even though yields are lower 

during this stage, the block may have high vigor and thus be more resistant to damage than it 

would be at a later stage. In this situation, a lower yield does not necessarily equate to higher 

risk. Conversely, during the decline stage the perennial plant is considerably aged, downward 

trending is present, and vigor may be reduced. In this situation, the lower yield may indeed 

equate to higher risk. As a result, the risk classification for many perennials considers factors 

other than yield, including practice, type, variety, density, and age. 

A further consequence of risk classification based on yield is that when a producer experiences a 

period of low yields, not only does the insurance guarantee decline but the assessed premium rate 

increases. This decline in an insured’s guarantee, and the corresponding increase in the premium 

rate, can reduce the usefulness of crop insurance for some participants. This gives rise to 

pressure on Congress and RMA to do something to mitigate the impact of the low yields on the 

insurance offer to affected producers. The yield adjustment is an attempt to address concerns 

about the impact of low actual yields on insurance guarantees. Because this measure increases 

the guarantee of affected producers and, therefore, generates larger program losses, premium 

rates are necessarily higher given the statutory requirement that the program be actuarially 
9 

sound, as discussed above.7 Similarly, eliminating the downward trending and alternate bearing 

adjustments may lead to larger program losses and higher premium rates – if these two 

phenomena occur with regularity and guarantees are not appropriately adjusted. Producers, 

however, have concerns regarding the appropriateness of the downward trending and alternate 

bearing adjustments and with the consistency of these adjustments between regions. Therefore, 

the key issues are: (1) how prevalent are the downward trending and alternate bearing 

tendencies; and (2) how appropriate are the current procedural adjustments to address these 

situations. The conclusions of the contracted study with regard to these and other issues are 

presented in the following section of the report. 

 

 

7

 Section 506(n)(2) of the Federal Crop Insurance Act, as amended by the 2008 Farm Bill, requires the federal crop 

insurance program to operate with a loss ratio of no greater than 1.0, i.e., premiums collected must approximately 

equal indemnities paid. The immediate implication of this requirement is that as indemnities increase, so too must 

premium rates increase if actuarial soundness is to be maintained. 
10 

3. Summary of Findings from the Contracted Study 

The complete Promar evaluation of the perennial crop APH insurance program, underwriting 

methods, and procedures is provided as an appendix to this report. A summary of the study’s 

key findings is provided below, with a particular focus on issues surrounding downward trending 

and alternate bearing. 

Incidence of alternate bearing and downward trending

The Promar evaluation found that adjustments for alternate bearing and downward trending are 

relatively infrequent based on an analysis of over 50,000 APH databases for the perennial crops 

under study. About 2.3 percent of the APH databases were adjusted for alternate bearing, and 

about 1.7 percent of the databases were adjusted for downward trending. An additional 3.7 

percent of the databases had RO determined yields. The variation among regions regarding the 

incidence of alternate bearing and downward trending was not great, though the frequency of 

adjustments tended to be lowest in the West region. However, the West region accounted for the 

largest number of adjusted databases, primarily because the region accounts for such a large 

share of perennial crop production. 

Length of APH period

The APH program is premised on the idea that an individual’s past production history (actual 

production history) is the best predictor of his/her expected (future) production, and is therefore 

the most appropriate basis for establishing the individual’s insurance guarantee. However, 

perennial crops tend to exhibit much greater yield variability than do annual crops, even in years 

of “normal” weather. In particular, the Promar study found that the average yield deviation for 

the perennial crops under study generally ranged from 25 to 50 percent, expressed relative to the 

average yield of the corresponding APH database. Based on this finding, Promar evaluated the 

predictive ability of alternative (shorter) time periods for constructing an APH database, relative 

to the standard 10-year APH database. The study concluded that a shorter (4-6 year) average is 

at least as accurate as a 10-year average, as indicated in the following excerpt: 

In light of the above, we conducted a set of tests intended to determine whether a shorter 

experience period would predict yields as well as or better than the standard ten years. In 

general, our approach was to calculate successively shorter “APH periods” (nine year 

average, eight-eight year average ... through four-year average), and to compare these to the 

actual yields. We measured the difference between the predicted and average yield, and 

averaged this difference for all usable databases. Our conclusion is that a 4-6 year average 

works as well as or better than longer period averages. 

Alternate bearing

Promar conducted listening sessions at 13 locations across the country in the course of their 

evaluation. The consensus opinion among the participants, which included producers, insurance 

providers and academic researchers, is that alternate bearing is not a major issue or concern 

among perennial crop producers. This is because cultural practices have enabled producers to 

largely mitigate the impact that alternate bearing would otherwise have on production patterns. 

The exception is citrus for which specific cultural practices are not used to manage alternate 

bearing tendencies. 
11 

Promar also evaluated the effectiveness of the alternate bearing adjustments using tests of 

accuracy and persistency. The test of accuracy compared the predictive ability of the current 

alternate bearing adjustments to the predictive ability of various alternatives for determining the 

approved APH yield. The contractor concluded that a four or five year APH database was as 

accurate as the current alternate bearing adjustments. For the test of persistency, Promar 

assessed whether perennial crops continued to exhibit the alternate bearing pattern after the 

alternate bearing adjustment had been triggered. The contractor concluded that, in general, the 

expected pattern was realized less than half of the time. In addition for an approximately equal 

number of cases, the outcome was opposite that which would be expected from alternate bearing. 

Given these results, Promar concluded that the alternate bearing adjustments should be generally 

eliminated in favor of a shorter APH database, though RMA regional offices would retain 

optional authority to adjust APH databases for alternate bearing if warranted. 

We concluded that these two tests provide very strong arguments for eliminating the 

alternate bearing adjustment as a general requirement. The alternate bearing test should 

certainly not be applied to crops like peaches, nectarines, figs and grapes where it is not a 

documented phenomenon. More generally, however, the inability of the CIH formula to do a 

better job than a simple average predicting the next season’s yield, coupled with the evidence 

of low persistence of the up-down pattern, lead us to conclude that the test is of little benefit 

in aggregate. 

Downward trending

As with alternate bearing, downward trending was not identified as a major issue or concern in 

the listening sessions. Producers recognize that most perennial crops have a limited commercial 

lifespan, that yields will eventually begin to decline, and that insurance guarantees should 

appropriately reflect the effects of downward trending. 

Similar to alternate bearing, Promar evaluated the effectiveness of the downward trending 

adjustments using tests of predictive ability and persistency. The test of accuracy compared the 

predictive ability of the current downward bearing adjustments to the predictive ability of 

various alternatives for determining the approved APH yield. The current downward trending 

adjustments perform better than a simple 10-year average. However, the predictive ability of the 

four or five year averages is equal to that of the current downward trending adjustments. The 

persistency test assessed the percentage of APH databases that continue to exhibit the downward 

trending pattern after the downward trending adjustment has been triggered. Similar to alternate 

bearing, less than half of the databases showed a continuation of the downward trending pattern. 

Promar concluded that a shorter (4 or 5 year) APH database would generally perform 

approximately as well as the current downward trending adjustment. 

Down[ward] trending yields are a fact of life at some point for most of these crops. None of 

the formula adjustments do a very good job of predicting the coming year’s yield. Only 

about half the time is the next year’s yield actually below 75% of the APH. Nevertheless, our 

tests indicate that the CIH downward trending adjustment more accurately predicts yields 

than the APH yield for crops with a 10-year APH. However, moving to a shorter (four to six) 

year average would do almost as well. 
12 

4. RMA Recommendations

Section 12030 of the 2008 Farm Bill directed the Secretary deliver to Congress a report on 

options for addressing the effects of declining and variable yields for perennial crops in the 

federal crop insurance program. Congress was particularly interested in the administrative 

options open to RMA for addressing these issues. The RMA Perennial Crop Review Team 

evaluated the findings of the contracted evaluation and conducted additional analysis in 

developing its recommendations for the perennial crop program. These recommendations were 

reviewed within the agency before being formalized as RMA’s recommendations. 

As directed by Congress, below are RMA’s recommendations for addressing the effects of 

declining and variable yields for perennial crops, including a discussion of the changes that can 

be accomplished administratively and those that require enabling legislation. These 

recommendations are an effort to unify the crop insurance program for perennial crops, improve 

underwriting methods and procedures to maintain an actuarially sound insurance program, 

establish uniformity and consistency by crop or crops across RMA regions where appropriate, 

and enhance the overall program for perennial crops. These changes would impact the APHbased perennial crop programs, and other perennial plans of insurance. A brief synopsis of the 

major recommendations for the perennial crop program is provided below: 

1. Greater flexibility to establish the base period and method for determining the approved 

yield, for example, by shortening the base period for establishing the approved yield from 10 

years to a shorter period. The contracted evaluation indicates that an approved yield based 

on a shorter time period can provide a more appropriate guarantee reflective of the current 

growth stage and capabilities. 

2. Use producer history for catastrophic yield adjustments for APH-based perennial crop 

programs in place of the current adjustments based on regional average yields. Basing a 

catastrophic adjustment on T-Yields derived from regional average yields may not be 

equitable, particularly for perennial crops as yields may vary by plant density, age, etc. For 

example, producers with expected yields well above the county average arguably receive 

inadequate benefit from a county-based catastrophic adjustment. Conversely, producers with 

expected yields well below the county average arguably receive excessive benefit. 

3. Restrict the applicability of the alternate bearing and downward trending adjustments as a 

shorter base period is implemented. The shorter base period will generally provide adequate 

responsiveness to changes in the crop’s productive capability, negating much of the need for 

the current high variability adjustments. 

4. Enhance policy and procedure for adjustments in measured acreage when there is a 

significant reduction in the stand from the previous year. Currently all acreage in the block 

may be counted in the acreage determination, even though a significant portion of the 

acreage may be out of production (for example, a storm uproots a large number of trees). By 

including all acreage the approved yield may be greatly reduced and the premium rate much 

higher (for perennial crops with variable rates), but the undamaged acreage remaining in 

production is no less productive than prior to the storm. 
13 

5. Modify the Pecan Revenue program to specify a minimum level of revenue that must be 

achieved as a condition of insurability, reduce the minimum age requirement, and add 

percent stand requirements similar to other nut crops such as almonds. A catastrophic 

adjustment based on the producer’s history would also be implemented for pecan growers, 

similar to that of other perennial crops as indicated in recommendation 2. 

RMA is able to administratively implement certain of the recommendations listed above. These 

changes will help to clarify procedures and increase standardization across the perennial crop 

program. RMA has recently incorporated the recommended changes in the measurement of 

perennial crop acreage with the release of the 2009 and 2010 crop year Special Provision 

statements (recommendation 4 above). RMA is also working to strengthen and clarify current 

underwriting procedures for acreage determinations and adjustments. The recommended 

changes specific to the Pecan Revenue program also can be implemented administratively, 

though some will require changes to policy language (recommendation 5 above). Changes to 

policy language will require publication of the proposed changes in the Federal Register to allow 

the public the opportunity to review and comment. 

 

Restricting the applicability of the high yield variability adjustments can technically be 

accomplished administratively (recommendation 3 above). However, RMA does not believe that 

it would be prudent to implement this recommended change without both the recommended 

change to the base period (recommendation 1 above) and the replacement of the YA with a 

catastrophic adjustment based on the producer’s own production history (recommendation 2 

above). Implementing only the restriction on the high yield variability adjustments may not be 

actuarially appropriate and could result in unacceptable premium rate increases. However, 

recommendations 1 and 2 both require changes in statute in order for RMA to proceed with 

implementation. Current legislation mandates a 10-year base period for all crops, thus 

necessitating a change in statute to allow a shorter base period for perennial crops. The use of 

actual production histories to establish catastrophic yield adjustments is an innovation that RMA 

believes would also benefit its annual crop programs. As a result, the declining yield report will 

provide more specific recommendations to enable RMA to proceed with recommendation 2. 

Budgetary Impact of Recommended Changes 

RMA’s analysis of recommendation 1 indicates adoption of a shorter base period for perennial 

crops will result in a relatively small increase in liability, estimated to be approximately $20 

million annually based on data for the 2006 and 2007 crops. Accordingly, this change would be 

scored as an increase in program costs because premium subsidies, administrative and operating 

(A&O) subsidies and indemnities would increase by a similar amount. Recommendation 2 – a 

catastrophic adjustment based on the producer’s yield history – is also applicable to annual 

crops, which will likely be a far larger determinant of potential costs as compared to perennial 

crops. Analysis of recommendation 2 as applied to both annual and perennial crops is ongoing 

and will be addressed in the forthcoming declining yields report. The legislative changes (and 

associated scoring impacts) to accommodate recommendation 2 would also be applicable to the 

catastrophic adjustment for pecans (part of recommendation 5). 
14 

Implemented in isolation, recommendation 3 would result in an increase in program costs. As 

noted above, RMA does not intend to implement recommendation 3 until it is also able to 

implement recommendations 1 and 2. Thus, implementation of recommendation 3 would have 

only a minimal budgetary impact. Most perennial crops are flat-rated, i.e., the premium rate is 

not a function of yield. Thus, recommendation 4 has no budgetary impacts for these perennial 

crops. For the few perennial crops that are not flat-rated, recommendation 4 would actually 

result in small program savings. This is because the earned premium rate for these crops would 

decline while liability is unchanged, resulting in lower premiums, premium subsidies, A&O 

subsidies, and indemnities. Aside from the catastrophic adjustment, the remaining elements of 

recommendation 5 are largely routine program maintenance to assure program integrity. The 

minimum revenue and percent stand requirements of recommendation 5 are somewhat more 

stringent underwriting standards. Reducing the minimum age requirement recognizes current 

production practices that allow pecan trees to reach full production earlier in their life cycle. 
15 

Appendix 

Contracted Study: 

Evaluation of Perennial Category C APH Crop Insurance Program