Final Agency Determination: FAD-76

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FAD-76

Subject: By request dated January 15, 2007, the Risk Management Agency was asked for a Final Agency Determination for the 2005 and succeeding crop years, regarding the interpretation of sections 7(b) and 10(b)(2) of the Grape Crop Provisions as published at 7 C.F.R. 457.138. This request is pursuant to 7 C.F.R. part 400 subpart X.

Section 7(b) of the Grape Crop Provisions states:
7. Insured Crop
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(b) That are grown for wine, juice, raisins or canning;

Section 10(b)(2) of the Grape Crop Provisions states:
10. Causes of Loss
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(b) In addition to the causes of loss excluded in section 12 (Cause of Loss) of the Basic Provisions, we will not insure against damage or loss of production to:
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(2) Inability to market the grapes for any reason other than actual physical damage from an insurable cause specified in this section. For example, we will not pay you an indemnity if you are unable to market due to quarantine, boycott, or refusal of any person to accept production.

7 C.F.R. 457.138 section 10(b)(2), RMA is requested to clarify the meaning of the &147physical damage”, as employed in section 10(b)(2) and, in particular, whether the degree of Brix is a factor in determining whether a grape has suffered “actual physical damage”.

By way of background, wineries and vineyards enter into contracts under which the former agrees to purchase grapes produced by the latter. As a condition of purchase, the contracts require, inter alia, that the grapes have a minimum and maximum Brix level. 1/ The Brix level specified by the contract varies by variety and frequently from year to year. If the Brix level of the grape does not satisfy the criteria of the contract, the winery will refuse to accept the grape production.

With respect to grape production that is rejected by a winery or other purchaser, we interpret section 10(b)(2) to require that, as a condition of coverage, the subject grapes must have “actual physical damage” to be, for example, broken or discolored flesh, sunburn, mildew, cracking, and similar damage. 2/ If grapes that do not exhibit these types of defects are rejected by winery because of Brix levels below contract specifications, we believe that, as per section 10(b)(2), such grapes are not covered.

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1/ The brix is the measure, in degrees, of the sugar content of the grape. The higher the Brix, the greater the sugar content and the sweeter the wine.

2/ It is noteworthy that according to the grade standards issued by the Agricultural Marketing Service, a grape with Brix of at least 17 degree is a mature grape.

The Federal Crop Insurance Corporation (FCIC) does not agree with the proposed interpretation.

Quality adjustment is applicable only if the reduction in value is due to an insurable cause of loss, such as adverse weather. If low brix levels or other damage are due to an insurable cause of loss, the grapes may be eligible for quality adjustment provided that they qualify under section 12 (e) of the Grape Crop Provisions, which states:

(e) Mature marketable grape production may be adjusted for quality deficiencies as follows:

(1) Production will be eligible for quality adjustment if, due to insurable causes, it has a value of less than 75 percent of the average market price of undamaged grapes of the same or similar variety. The value per ton of the qualifying damaged and the average market price of undamaged grapes will be determined on the earlier of the date the damaged production is sold or the date of final inspection for the unit. The average market price of undamaged production will be calculated by averaging the prices being paid by usual marketing outlets for the area during the week in which the damaged grapes were valued.

(2) Grape production that is eligible for quality adjustment, as specified in subsection 12(e)(1) will be reduced by:

(i) Dividing the value per ton of the damaged grapes by the maximum price election available for such grapes to determine the quality adjustment factor; and

(ii) Multiplying this result (not to exceed 1.000) by the number of tons of the eligible damaged grapes.

This means that grapes that have low brix levels or other damage, due to an insurable cause of loss, may still have value and such value may be more than 75 percent of the value of undamaged grapes for the same or similar variety. Under such circumstance, no quality adjustment would be made. However, if the value of the grapes with the low brix levels or other damage, due to an insurable cause of loss, is less than 75 percent of the value of undamaged grapes in accordance with section 12(e)(1) of the Grape Crop Provisions, the grapes may be eligible for a quality adjustment. In any event, the value would be determined by the prevailing market price for the damaged grapes and not by any standard of acceptance set out by contract. Each claim must be determined on a case-by-case basis when determining the value of the damaged grapes by following policy and loss adjustment procedures.

With respect to the requestor’s footnote?, the 17 degree brix level issued by the Agricultural Marketing Service to determine maturity is the standard for juice grapes. No published standard is available for wine grapes.

In accordance with 7 C.F.R. 400.765 (c), this Final Agency Determination is binding on all participants in the Federal crop insurance program for the 2005 and succeeding crop years. Any appeal of this decision must be in accordance with 7 C.F.R. 400.768(g).

Date of Issue: April 12, 2007