Transcript Case Study Farm for Today’s Workshop Bob Battel Extension Agriculture Agent Calhoun and Branch Counties $

Case Study Farm for Today’s
Workshop
Bob Battel
Extension Agriculture Agent
Calhoun and Branch Counties
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Case Study “Game”
• Case farm
• How the game works
• Today, we’ll pretend its my farm and
you are running it for me
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Case Farm Plan
• Resource base:
– 2,000 Acres (900 owned, 1100 cash rented)
– 6,000 Hours (including $25,000 hired)
– 60,000 bu of “flexible” on farm storage
• “Expected” acreage and yield:
– 1,000 acres 128.5 bu Corn
– 1,000 acres 43.0 bu Soybeans
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Decision times:
• Pre-plant
• Late spring / early summer
• Harvest
• Post Harvest
– All grain is priced, there is no decision
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What Information Do You Have
To Start The Planning
Process?
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Case Farm Financial Information
• Balance sheet (Assets, liabilities, and
Equity/Net worth)
• Crop enterprise budgets
• “Cost of production” worksheets to
calculate revenue requirements to:
– Cover economic cost
– Meet cash flow commitments
– Maintain equity
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Case Farm Yield Information ...
• Expected corn and soybean yields
based upon farm’s yield history
• Probabilities of alternative yields
• Realized (drawn randomly at harvest;
based upon historical probabilities
over the last 50 years)
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Expected Yields
• Corn @ 128.5 bushels / planted acre
• Soybeans @ 43 bushels / planted acre
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Pre-March 15 Yield Expectations:
Expected corn yield = 128.5 bu / planted acre
Corn
yield/
planted
acre
12
50
87
103
109
119
131
142
161
Probability that the
realized corn yield /
planted acre will be
less than this yield
1%
5%
10%
15%
20%
30%
50%
70%
90%
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Case Farm Price Information ...
• Harvest contract corn and soybean
prices prior to planting (based
upon futures market)
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Pre-March 15 prices:
Dec CBOT corn @ $2.50/bu
Harvest basis @ $0.40/bu
=Cash forward contract @ $2.10/bu
Price
$1.85
$2.04
$2.19
$2.32
$2.45
$2.59
$2.75
$2.95
$3.24
Probability that the
realized CBOT
corn futures price at
maturity will be
less than this price
10%
20%
30%
40%
50%
60%
70%
80%
90%
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Pre-March 15 prices:
Nov CBOT soys @ $4.85/bu
Harvest basis @ $0.40/bu
=Cash forward contract @ $4.45/bu
Price
$3.80
$4.11
$4.35
$4.56
$4.77
$4.99
$5.24
$5.54
$6.00
Probability that the
realized CBOT
soy futures price at
maturity will be
less than this price
10%
20%
30%
40%
50%
60%
70%
80%
90%
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Case Farm Price Information ...
• Harvest delivery contract price offers
after planting & before harvest (drawn
randomly)
• Realized harvest price (drawn
randomly)
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Case Farm Price Information ...
• Feb delivery contract price offers @
harvest (drawn randomly … given
harvest price)
• Realized Feb price (drawn randomly)
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Pre-March 15 Decisions:
• Crop insurance purchase decision
• Farm yield (MPCI)
• Revenue (RA)
• Revenue with replacement price
coverage (CRC, RA)
• Pre-harvest price
• Cash forward contract
• Minimum price contract
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Decisions:
• Late Spring - Early Summer
– Pre-harvest pricing
• Cash forward contract
• Minimum price contract
• Harvest
– Store
– Post-harvest price
• Cash forward contract
• Minimum price contract
• February (everything is sold)
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Other Key Features of Game
• Each team gets the same contract offer
prices for corn and soybeans, for harvest
delivery, for the pre-March 15 period.
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Each team gets a different set of
random draws:
• Harvest delivery price offers during
late spring-early summer period.
• Harvest yields
• Harvest prices
• Feb delivery price offers at harvest.
• Feb realized price
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Where do prices and yields come from?
• Yields are based on individual farm
historical yields over the last 50 years
(adjusted to current technology)
• Prices are based on option market
information and last 25 years of
history of price changes between:
– planting and harvest
– harvest and post-harvest
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Chances of alternative corn yields: a review
of the last 50 years
20%
18%
Chances in 100
16%
14%
12%
10%
8%
6%
4%
2%
0%
10
28
46
64
82
100
118
Yield/planted acre
136
154
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172
Chances of Alternative Corn Prices:
• “Expected” cash forward price
– Based upon $2.50 / bu futures and market
review
– Based on “expected” basis of $.40/bu
– Giving an expected local market price of $2.10
• Volatility exposure (+/- $1.00/bu)
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Chances of Alternative Soy Prices:
• “Expected” price
– Based on $4.85 /bu futures and market review
– Based on “expected” basis of $0.40/bu
– Giving an expected local market price of
$4.45/bu
• Volatility exposure (+/- $1.50/bu)
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Stop!
• Do you have your:
– FINPACK Financial Information?
– Cost of production worksheets?
• Do you have the envelope containing your “to be
discovered” offer and realized prices and realized
yields?
• DO NOT OPEN !
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