Taking Charge of Yield

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Taking Charge ofYield Revenue Risk
Management on Your FarmElliot AlfredsonSpartan
Crop Insurance
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Objective for Todays Workshop

• Frame approaches to managing risk
• Whats new in 2002?
• Review types of crop insurance
• Discuss how crop insurance can be used to
• Limit financial risk exposure
• Substitute for balance sheet liquidly
• Facilitate pre-harvest pricing
• Develop a crop insurance plan

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Whats New In 2002?

• Subsidy level and structure has changed
• Subsidy increased
• More favorable to higher coverage's than
  previously
• Revenue products treated more favorably compared
  to MPCI than previously.
• Authority to facilitate livestock insurance
  (e.g., facilitate options on futures
  equivalent across all months subsidize)

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Alternative Approaches to Managing Risk

• Manage sources of risk you face to reduce risk
  exposure
• Retain risk using your equity / net worth
• Choose farm plans which avoid risk
• Shift risk to someone else
• Insurance
• Options on futures contracts

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What lessons do we take from the financial risk
management module?

• How much equity are you willing to risk?
• Balance management of financial risk through
• Maintenance of equity
• Plans and action that avoid risk
• Tools such as insurance and options that shift
  risk.
• How much revenue do you have to generate to cover
  alternative cost of production targets?

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Revenue Required / Acre
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Revenue Required / Acre
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Managing Revenue Risk Exposure

• Farm plans to avoid risk
• Spread sales across year
• Agronomic practices
• Plans to shift risk
• Options and minimum price contracts
• LDPs
• Crop insurance

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But, Some Approaches to Reducing Risk Create New
Risks

• Suppose I cash forward price corn in late spring
  / early summer
• My objective is to spread sales and take
  advantage of a risk premium in late-spring /
  early summer new crop markets
• But, I also have created a delivery risk if I
  have a short crop

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Some Types of Crop Insurance

• Yield
• Named Peril
• Multiple-Perils
• Trigger on farm / sub-farm parcel yield
• Trigger on county yield index
• Revenue index
• Trigger on farm / sub-farm parcel revenue index
• Trigger on farm / sub-farm parcel revenue index
  with replacement price coverage

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Insurance to Protect Against Production Shortfall
Exposure
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Crop Insurance

• To directly protect against revenue risk exposure

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Crop Insurance

• Tailored to protect against revenue risk exposure
  and reduce delivery risk associated with
  pre-harvest pricing

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Think in Terms of Revenue Risk Management
Portfolios

• CAT MPCI yield coverage and LDPs
• Pure revenue insurance and LDPs
• Yield insurance, pre-harvest price if price moves
  significantly above loan and into pricing
  targets, and LDPs
• Revenue insurance with replacement price
  coverage, pre-harvest price if price moves
  significantly above loan and into pricing
  targets, and LDPs

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Lets Review Some Specific Policies
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Multiple-Peril (MPCI)
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Losses Are Paid As A Result of Shortfalls Due to
Acts Of God, Not Management

• Hail/fire
• Drought
• Disease
• Excess moisture
• Animals
• Insects

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How is Protection Determined?

• Insurance yield (APH) is based on the farmers
  own yield history
• Producer chooses level of coverage from 50 to
  85 of APH yield
• Losses are paid at a pre-determined price set by
  the RMA/USDA

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How is MPCI Coverage Determined?

• Case farms APH yield on corn is 128.5 bu /
  planted acre
• Consider coverage _at_ 70 of APH yield
• Yield guarantee 128.5 x .70 90 bu
• If yield falls below 90 bu, a loss is triggered

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How are losses paid on MPCI?

• Loss is triggered when actual yield goes below
  guarantee.
• Example
• 60 bu. realized yield
• (90 bu guarantee 60 ) 30 bu. Loss
• 30 bu loss x 2.05 61.50

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Units What Farm Breakout is Units to Calculate
Protection, Coverage and Losses?

• Enterprise Units Breakout by Crop, County
  (whole farm within county)
• Basic Units - Breakout by County, Crop, Share
• Optional Units Breakout by Crop, Section, Share

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MPCI Review

• Available on most crops
• Guarantees can be determined at a sub-farm level
  (section) which increases effective coverage
  from a whole farm yield perspective
• Rates Prices are established by the RMA/USDA
  and vary by county and your yield relative to
  peers
• Subsidized by the RMA/USDA

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Catastrophic Yield Coverage

• 50 yield coverage
• Losses are paid at 55 of MPCI indemnity price
• Optional units are not permitted
• 100 / crop / county

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Selected Revenue Insurances

• Pure Revenue Insurance
• RA
• Revenue Insurance With Replacement Price Coverage
• CRC
• RA w/ RPC option

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CROP REVENUE COVERAGE

• CRC is a Revenue index contract with replacement
  price coverage
• CRC is Designed to facilitate pre-harvest pricing
• CRC is an index contract because the futures
  price is used to calculate farm revenue , not
  the local cash price

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How is CRC Protection Determined?

• CRC guarantees revenue based on the farm units
  APH yield x CBOT harvest futures price during a
  base pre-sales closing period.
• Price used in setting the guarantee is the higher
  of CBOT harvest price prior to sales closing and
  the CBOT harvest price at harvest
• CRC gives upside replacement price protection to
  help mitigate delivery risk for users who
  pre-harvest price

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Replacement Price CoverageCase Examples of How
Price is Chosen
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Calculating Replacement Price Coverage Insurance
Revenue Guarantee70 Coverage Example
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Replacement Price CoverageLoss Examples
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How is RA Protection Under the No Replacement
Price Option Determined?

• RA guarantees revenue based on farm units APH
  yield x CBOT harvest futures price prior to sales
  closing.

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Calculating the RA Insurance Revenue Guarantee
70 Coverage Example
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Compare Revenue Insurance Indemnities With and
Without Replacement Price Coverage
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CRC and RA with RPC are HYBRID Policies

• If the harvest futures price is less than the
  pre-sales closing base price, they are pure
  revenue policies
• If the harvest price is greater than the
  pre-sales closing base price they are a MPCI
  policy with losses paid at the harvest price

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CRC Features

• Yield procedures are the same as MPCI including
  units enterprise discounts are available
• Available on only corn, soybeans and wheat
• Rates are based on MPCI rates with an adjustment
  for the price risk component
• Rates vary by historical county experience and
  farms APH yield relative to peers

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RA Features

• Yield procedures are .
• Available on only corn, soybeans and wheat
• Rates are based on MPCI rates with an adjustment
  for the price risk component
• Rates vary by historical county experience and
  farms APH yield relative to peers

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Revenue Insurances Where do They Fit?

• Pure revenue insurance makes sense if farm does
  little pre-harvest pricing.
• Revenue insurance with replacement price coverage
  fits when farm does significant pre-harvest
  pricing.
• If the farm uses pre-harvest pricing, Revenue
  insurance with replacement price coverage
  typically outperforms MPCI and pre-harvest
  pricing particularly, if farm yield and market
  price are correlated.

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STOP!

• Fill out Crop Insurance Decision Worksheets!

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Tasks

• Calculate protection for each policy to help you
  in your decision of whether or not to purchase
  and, if so, which coverage (deductible).
• Start to lay out your objectives and assess
  whether crop insurance plays a potential role in
  meeting those objectives.