Taking Charge of Yield & Revenue Risk Management on Your Farm Elliot Alfredson Spartan Crop Insurance $
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Transcript Taking Charge of Yield & Revenue Risk Management on Your Farm Elliot Alfredson Spartan Crop Insurance $
Taking Charge
of
Yield & Revenue Risk Management
on Your Farm
Elliot Alfredson
Spartan Crop Insurance
$
Objective for Today’s Workshop
“Frame” approaches to managing risk
What’s new in 2002?
Review types of crop insurance
Discuss how crop insurance can be used
to:
o
Limit financial risk exposure
o
Substitute for balance sheet liquidly
o
Facilitate pre-harvest pricing
Develop a crop insurance plan
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What’s 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
o
Insurance
o
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
High debt farm
Revenue per acre
needed:
Corn
Soybeans
To cover
economic cost
$361.01
$290.32
To meet Cash flow
requirements
$309.47
$238.78
To maintain equity
$299.19
$228.50
$
Revenue Required / Acre
Medium debt farm
Revenue per acre
needed:
Corn
Soybeans
To cover
economic cost
$352.86
$282.17
To meet Cash flow
requirements
$312.45
$241.76
To maintain equity
$284.59
213.90
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Managing Revenue Risk Exposure
Farm plans to avoid risk
o
Spread sales across year
o
Agronomic practices
Plans to shift risk
o
Options and minimum price contracts
o
LDP’s
o
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 latespring / 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
20%
18%
Chances in 100
16%
14%
12%
10%
8%
6%
4%
2%
0%
10
28
46
64
82
100
118
136
154
172
Yield/planted acre
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Crop Insurance
To directly protect against revenue
risk exposure
$
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 LDP’s
“Pure” revenue insurance and LDP’s
Yield insurance, pre-harvest price if price
moves significantly above loan and into
pricing targets, and LDP’s
Revenue insurance with “replacement
price coverage”, pre-harvest price if price
moves significantly above loan and into
pricing targets, and LDP’s
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Let’s 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 farmer’s own yield history
Producer
chooses level of
coverage: from 50% to 85% of APH
yield
Losses
are paid at a predetermined price set by the
RMA/USDA
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How is MPCI Coverage
Determined?
Case farm’s APH yield on corn is 128.5
bu / planted acre
Consider coverage @ 70% of APH yield
Yield guarantee = 128.5 x .70 = 90 bu
If yield falls below 90 bu, a loss is
triggered
$
How are losses paid on MPCI?
Loss is triggered when actual yield
goes below guarantee.
Example:
o
o
o
60 bu. realized yield
(90 bu guarantee – 60 ) = 30 bu.
Loss
30 bu loss x $2.05 = $61.50
$
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
o
RA
Revenue Insurance With Replacement
Price Coverage
o
CRC
o
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 preharvest 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
unit’s 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 Coverage:
Case Examples of How Price is Chosen
Year
Price used
Harvest Futures Price
to
calculate
the
Pre-sales
revenue
closing
Harvest guarantee
1999
$2.40
$1.96
$2.40
1995
$2.57
$3.28
$3.28
$
Calculating Replacement Price
Coverage Insurance Revenue
Guarantee:
70% Coverage Example
Year
APH
yield
(bu)
Futures
price
used
Cov
Rev.
guar.
1999 128.5
$2.40
(base)
= $308.40 x 70% = $215.88
1995 128.5
$3.28
(hvst)
= $421.48 x 70% = $295.04
$
Replacement Price Coverage:Loss Examples
Revenue
Guarantee 70%
Using
Using
Dec.
Dec.
Futures Futures
in April in Oct
Year Base
Hvst
1995 $231.17 $295.04
1999 $215.88 $176.30
Realized revenue
Hvst
fut.
price
Act.
@
Yield hvst.
Rev
Loss =
Guan.
Minus
realized
60
$3.28 =
$196.80
$98.24
100
$3.28 =
$328.00
$0.00
60
$1.96 =
$117.60
$98.28
100
$1.96 =
$196.00
$19.88
$
How is RA Protection Under the No
Replacement Price Option Determined?
RA guarantees revenue based on farm
unit’s APH yield x CBOT harvest futures
price prior to sales closing.
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Calculating the RA Insurance Revenue
Guarantee: 70% Coverage Example
Year
APH
yield
(bu)
Presales
closing
futures
price
’95
128.5
$2.57
= $330.25 x 70% = $231.17
’99
128.5
$2.40
= $308.40 x 70% = $215.88
Cov
Rev.
guar.
$
Compare Revenue Insurance Indemnities With
and Without Replacement Price Coverage
Harvest Futures
Price
Presales
Year closing Harvest
‘95 $2.57
‘99 $2.40
$3.28
$1.96
Loss
Yield
With Rep.
Price Cov.
Pure revenue
60
$98.24
$34.37
100
$0.00
$0.00
60
$98.28
$98.28
100
$19.88
$19.88
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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 farm’s 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 farm’s 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 preharvest pricing.
If the farm uses pre-harvest pricing,
Revenue insurance with replacement price
coverage typically outperforms MPCI and preharvest 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.
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