Transcript Managing Production Risks

DISCLAIMER
The purpose of the following
material is to promote the
awareness of risk management
concepts and to highlight USDA’s
risk management products, features,
benefits and availability. This
material does not change the
content or the meaning of current
policy provisions, filed actuarial
documents or approved procedures.
Today’s Objectives
 Sources of Production Risk
when Alternative Actions/Plans
are Taken
 Various Production Risks
Management Strategies
 Specific Focus: Crop Insurance
Programs
Review and Answer the
‘Questions to Consider’
Blocks at the end of
each section.
Sources of Production Risk
 Technology & Crop Production Practices
 Sustainable Agriculture
 Elements of Sustainability
 Integrated Pest Management
 Soil & Water Conservation
 Field/Landscape Diversity
 Seed Selection
 Precision Agriculture
 Biotechnology
 Organically Grown Crops
Sources of Production Risk
 Enterprise Diversification
 Capital Investments
 Irrigation
 Drainage
 Machinery
 Landlord / Tenant Relationship
 Contract Production
Production Risk Strategy
Programs
 CROP INSURANCE
 USDA subsidized insurance
programs provide farm producers
and owners various methods to
lower production yield and revenue
risks.
USDA's RISK MANAGEMENT
PROGRAMS/PRODUCTS
Risk M gt. TO O LS
Traditional
M P CI
CAT
Limited
Add’l
Revenue
IP
RA
CRC
O ther
G RP
Dollar
AG R
DO PP
Uninsured
NAP
Insurance Availability by State
IDAHO
Apples, Barley, Canola, Corn, Dry Beans, Dry
Peas, Grapes, Green Peas, Nursery, Oats,
Onions, Potatoes, Safflower, Sugar Beets,
Processing Beans, Processing Sweet Corn and
Wheat
(Program availability varies by county and is subject to change)
Insurance Availability by State
OREGON
Apples, Barley, Cabbage, Canola, Cherries,
Corn, Cranberries, Dry Beans, Dry Peas,
Forage, Grapes, Green Peas, Nursery, Oats,
Onions, Pears, Potatoes, Sugar Beets,
Processing Beans, Processing Sweet Corn and
Wheat
(Program availability varies by county and is subject to change)
Insurance Availability by State
WASHINGTON
Apples, Barley, Cabbage, Canola, Cherries,
Corn, Cranberries, Dry Beans, Dry Peas,
Grapes, Green Peas, Mint, Nursery, Oats,
Onions, Pears, Potatoes, Sugar Beets,
Processing Beans, Processing Sweet Corn and
Wheat
(Program availability varies by county and is subject to change)
YIELD / PRODUCTION RISK
CROP INSURANCE
COVERAGE PROGRAMS
Multi-Peril Crop Insurance (MPCI)
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Yield Guarantee
Units
Contract Changes
Reporting of Insured Acreage
Reporting Crop Damage
Reporting of Production Records
Proving Yields
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Actual Production History (APH) is a simple
average of 4-10 years of actual yields, based
on a producer’s records.
If a producer does not have records for four
(4) years:
 A transition yield is used to complete the four (4)
year minimum base.
 ‘T’ yields are based on a county’s average yield
determined by USDA’s National Agricultural
Statistics Service (NASS).
The Reason to Prove Yields
When using ‘T’ yields, a significant loss
would have to occur before an indemnity
would be paid.
R eco rd s
R eco rd s
R eco rd s
R eco rd s
NO
RECORDS
1 YEAR
2 YEARS
3 YEARS
65% of T
80% of T
90% of T
100% of T
Providing Production Evidence
YEAR
90
91
92
93
94
95
96
97
98
YIELD
No records
No records
No records
No records
No records
48 Bu. T Yld
48 Bu. T Yld
48 Bu. T Yld
80 Bu. Actual Yld
224 Total Bu. Divided by 4 years = 56 Bu.
467 Total Bu. Divided by 6 years = 78 Bu.
YIELD
No records
No records
No records
80 Bu. Actual Yld
72 Bu. Actual Yld
81 Bu. Actual Yld
76 Bu. Actual Yld
78 Bu. Actual Yld
80 Bu. Actual Yld
Benefits of Actual/Certified Yields
Assume:
80 BU Average Wheat Yield
60 BU 'T' Yield
3.30 Expected Market Price (MPCI PE)
Yields Not Provided/Certified: 65% 'T' = 39 BU
75% LEVEL: 75% X 39 BU = 29 BU
29 BU X $3.30 = $96.53/ac
Yields Provided/Certified:
75% LEVEL: 75 % X 80 BU = 60 BU
60 BU X $3.30 = $198/ac
Proving Your Yields PAYS DIVIDENDS !!
Multi-Peril Crop Insurance (MPCI)
 COVERAGE LEVEL & PRICES
 Coverage Options - Choice of variable
percentages of the APH, from 50% up
to 75%, in 5% increments (85% for
Wheat and IP Barley in some areas).
 Price Elections - Price at which you are
compensated in the event of a loss.
Choice of 60 to 100% of the expected
market price or market price election.
Multi-Peril Crop Insurance (MPCI)
 CATASTROPHIC CROP INSURANCE
(CAT)
CAT Coverage is available at the 50%
coverage level and 55% maximum
price election (this is a change from
previous year’s 60%).
Multi-Peril Crop Insurance (MPCI)
 Insurance Coverage Endorsements
 Wheat Insurance Policy
Endorsements
 Winter Wheat Option A
 Winter Wheat Option B
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Malting Barley Price and Quality
Endorsements
 Option A
 Option B
Additional Production Risk Tools
 Group Risk Plan (GRP)
 Named-Peril Protection Program (Hail,
Fire, Flood)
 Non-Insured Assistance Program (NAP)
YIELD / PRODUCTION and
REVENUE RISK CROP
INSURANCE COVERAGE
PROGRAMS
INCOME PROTECTION (IP)
 Enterprise Unit (County)
 CAT is Available
 Projected / Harvest Price derived from
Portland Grain Exchange
 Late Planting/Replant Payment
 IP Barley with Malt Barley Option (Price
derived from Corn Futures)
INCOME PROTECTION (IP)
IP protects against reductions in
gross income when yields or
prices fall.
Crop Revenue Coverage (CRC)
 Guarantees a stated amount of revenue
- final guarantee.
 Covers revenue losses due to low price,
low yield, or any combination of the two.
Crop Revenue Coverage (CRC)
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Basic / Optional / Enterprise
Enterprise - Premium Discount
CAT Not Available
Base / Harvest Price derived from
Portland Grain Exchange
 Late Planting/Replant Payment
 Winter Coverage Endorsement
 Replacement Coverage Level
CROP INSURANCE
COMPARISON CHART
Side-by-Side WHEAT Insurance Program
Comparisons:
 MPCI
 Income Protection
 Crop Revenue Coverage
ADMINISTRATIVE FEES
 Catastrophic Coverage - $60, per crop, per
county
 Limited Coverage - $50 per crop, per
county, not to exceed $200/county, $600
total
 Additional Coverage - $20 per crop
**Small-Limited Resource Farmer Fee Waiver is Available
on Some Programs / Coverage Levels
Crop Insurance
Premium
Calculation & Loss
Indemnity
Scenarios & Examples
Pacific Northwest
Wheat Crop
Multi-Peril Crop Insurance
(MPCI) Calculation
Eastern Washington Wheat Farm
MPCI Premium Calculation
Assume: MPCI Insurance Policy - Non-Irrigated Winter
Wheat - WITHOUT Winter Wheat Option - Basic
Unit Discount - 75 % Coverage Level
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APH Yield is 62 Bushel = 46.5
Bushel/Acre Guarantee
Price Election is $3.30
$153.45 Insurance Coverage per Acre
$4.33 Producer’s Premium Per Acre
MPCI Premium Calculation
Assume: MPCI Insurance Policy - Non-Irrigated Winter
Wheat - WITH Winter Wheat Option B Basic Unit
Discount - 75%Coverage Level
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APH Yield is 62 Bushel = 46.5
Bushel/Acre Guarantee
Price Election is $3.30
$153.45 Insurance Coverage per Acre
+ Winter Damage Coverage
$7.08 Producer’s Premium Per Acre
MPCI Indemnity
Assume: All Acres Harvested/Winter Wheat Endorsement Not Exercised
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62 Bu APH X 75% Coverage Level =
46.5 Bu/Acre Guarantee
46.5 Bu Guarantee - 35 Bu
Production Harvested = 11.5 Bu
Loss/Acre
11.5 Bu Loss X $3.30 Price Election =
$37.95 Indemnity/Acre
Crop Revenue Coverage (CRC)
Insurance Calculation
Eastern Washington Wheat Farm
Crop Revenue Coverage (CRC)
Insurance Calculation
Assume: Crop Revenue Protection Insurance Policy Non-Irrigated Winter Wheat -WITHOUT
Winter Wheat Option A or B - Basic Unit
Discount - 75% Coverage Level
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APH Yield is 62 Bushel = 46.5
Bushel/Acre Guarantee
Base Price is $3.40
$158.10 Insurance Coverage per
Acre
$8.35 Producer’s Premium Per Acre
Crop Revenue Coverage
Insurance Premium Calculation
Assume: Crop Revenue Protection Insurance Policy Non-Irrigated Winter Wheat -WITH Winter
Wheat Option B - Basic Unit Discount 75%
Coverage Level
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APH Yield is 62 Bushel = 46.5
Bushel/Acre Guarantee
Base Price is $3.40
$158.10 Insurance Coverage per Acre
+ Winter
Damage Coverage
$13.63 Producer’s Premium Per Acre
Crop Revenue Coverage
Insurance Indemnity
Assume: All Acres Harvested - Winter Wheat - Endorsement
Not Exercised -Harvest Price Lower than Base
Price (With a Production Loss)
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Revenue Guarantee: Approved APH yield of 62
Bu/Acre X 75% Coverage Level X the higher of
Base Price or Harvest Price is $3.40 Base Price =
$158.10/Acre Guarantee
Value of Production (Harvested) 35 Bu/Acre X $3.00
Harvest Price = $105/Acre Income
Loss Payment: $158.10 Guarantee - $105/Acre
Income = $53.10 Acre Indemnity
Crop Revenue Coverage
Insurance Indemnity
Assume: Harvest Price Higher than Base Price (With a
Production Loss)
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Revenue Guarantee: Approved APH yield of 62
Bu/Acre X 75% Coverage Level X the higher of
Base Price or Harvest Price of $3.70 Harvest
Price = $172.05/Acre Guarantee
Value of Production (Harvested) 35 Bu/Acre X
$3.70 Harvest Price = $129.50/Acre Income
Loss Payment: $172.05 Guarantee $129.50/Acre Income = $42.55 Acre Indemnity
Income Protection (IP) Crop
Insurance Calculation
Eastern Washington Wheat Farm
Income Protection Crop
Insurance Premium Calculation
Assume: Income Protection Insurance Policy - Non- Irrigated
Winter Wheat WITHOUT Winter Wheat -Not
Available under IP Basic Unit Discount 75 Percent
Coverage Level
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APH Yield is 62 Bushel = 46.5
Bushel/Acre
Guarantee
Projected Winter Wheat Price is $3.40
$158.10 Insurance Coverage per Acre
$4.83 Producer’s Premium Per Acre
Income Protection Crop
Insurance Indemnity
Assume: Harvest Price Lower than Projected Price (With a
Production Loss) Dollar Guarantee: 62 Bu/Acre
X 75% Coverage Level X $3.40 Projected Price
= $158.10/Acre Guarantee
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Value of Production (Harvested) 35 Bu/Acre X
$3.00 Harvest Price = $105/Acre Income
Loss Payment: $158.10 Guarantee $105/Acre Income =
$53.10 Acre Indemnity
Income Protection Crop
Insurance Indemnity
Assume: Harvest Price Higher than Projected Price (With a
Production Loss) Dollar Guarantee: 62 Bu/Acre X
75% Coverage Level X $3.40 Projected Price =
$158.10/Acre Guarantee
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Value of Production (Harvested)
35 Bu/Acre X $3.70 Harvest Price =
$129.50/Acre
Income Loss Payment:
$158.10 Guarantee - $129.50/Acre
Income = $28.60 Acre Indemnity
Reference Materials
Risk Management
 List of National Crop Insurance
Companies
 Web sites
 Definitions
 Program FACT Sheets
 State & County Data Tables
 Skill Quiz
Adjusted Gross Revenue (AGR)
Pilot Program
AGR insurance plan is a non- traditional,
whole farm risk management tool which
uses a producer’s historic Schedule F tax
form information as a base to provide a
level of guaranteed revenue for the
insurance period.
Dairy Options Pilot Program (DOPP)
Educational Program
DOPP is an risk management education
program designed to give dairy producers
an opportunity to learn how futures and
options markets work and, at the same time,
give dairy producers first-hand experience in
buying option contracts to insure a minimum
price for their milk.
PLAN AHEAD . . .
. . .Take Steps Toward Managing Your
Production Risks to Protect Agricultural
Business! ! !
Pacific Northwest Risk
Management Education Project

Managing Production Risks Developed by:
USDA / Risk Management Agency
Spokane Regional Office
112 North University, # 205
Spokane, Washington 99206
(509)353-2147
(509)353-3149 FAX
Web Site: www.usda.gov.rma/rme