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Goal For Farmers

Optimal Grain Marketing: Balancing Risks and Revenue Developed by National Grain and Feed Foundation RMA/USDA. Goal For Farmers.

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Goal For Farmers

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  1. Optimal Grain Marketing:Balancing Risks and RevenueDeveloped byNational Grain and Feed FoundationRMA/USDA

  2. Goal For Farmers • To manage yield risk and price risk within acceptable ranges, resulting in more predictable revenue outcomes that will sustain and achieve the goals of the farming enterprise.

  3. Exchange Futures/Options MPCI Delayed Price CAT FixedPrice CRC+ Basis GRP MPCI+ GMP CRC CROP/HAIL Mini-Max HTA

  4. When will prices reach the high this year?

  5. Analyzing Objective Marketing Decisions:Avoid leaving money “on the table”

  6. Optimal Grain Marketing Faculty • Diana Klemme, Grain Service Corp. • Tom Coyle, Continental Grain Co. • Rod Clark, CGB/Diversified Services • Frank Beurskens, Frank Beurskens Consulting Inc. • John Stewart, John P. Stewart Inc.

  7. Overview of Popular Crop Insurance Products Rodney Clark CGB Diversified Services

  8. Traditional Products Revenue-Based Products

  9. Important Terms • Enterprise Unit: Everything you farm (your share) in a county • Basic Unit: Individual farm units (your share) in a county • Optional Units: Everything in a section (your share)

  10. Yieldx Price = Revenue Traditional Crop Insurance Products Address Yield Only • Catastrophic Coverage • Multi Peril Crop Insurance (MPCI) • Companion Hail • Group Risk

  11. Traditional Coverages . . . Catastrophic (CAT) Co • Required for Government Disaster Progs • 50% of APH (Actual Production Hist) • Pays at 60% of Gov. set Spring Price • Coverage is for whole crop in county • Cost: $60/crop • Some yield coverage (not much) • No price coverage

  12. Traditional Coverages . . . Multi-Peril Crop Insurance • 50% - 75% of APH coverage available • Pays at 100% of Gov. set Spring Price • Enterprise, Basic, or Optional Units Available • Yield Coverage (for the amount purchased) • No Price Protection

  13. Traditional Coverages . . . Group Risk Plan (GRP) • Based off of Expected County Yield (ECY) • May purchase 70-90% of ECY • Introduces a revenue component • Yield coverage is based off of county yield that disregards individual yields • Price is not protected in any great degree. Revenue is introduced, but not for specific farm.

  14. Traditional Coverages . . . Crop Hail (Companion Hail) • Most often purchased in companion with other coverages (but need not be) • Only pays for hail loss • Limited yield coverage (peril specific) • No price protection

  15. Variations of Traditional Coverage • Multi Peril Buy-ups • Specific Loss Policies • Forward Price Protection Policies • Private Policies

  16. Yieldx Price = Revenue Revenue Based Products address both Price and Yield • Crop Revenue Coverage (CRC) • Income Protection (IP) • Revenue Assurance (RA)

  17. . . . Revenue Based Products Crop Revenue Coverage (CRC) • Minimum Revenue Guarantee (MPCI plus price component) • Minimum Revenue is higher of spring or fall guarantee • Price is established by the market, not the government • 50-75% of APH • Enterprise, Basic, or Optional Units Available

  18. . . . Revenue Based Products What makes CRC different? • Based on Revenue • Builds in component for rising prices • Combines yield and price components into one product

  19. Variations of RevenueBased Products • Income Protection • Revenue Assurance • CRC Plus • Private Products

  20. MPCI and CRC Compared

  21. MPCI Contracted Market Return Cost of Acquiring Contract Bu. Crop Insurance Return Crop Value Base Price Harvest Price (+ or -) (+ or -) (+ or -) + + + = Total Revenue Actual Yield

  22. MPCI Contracted Market Return Cost of Acquiring Contract Bu. Crop Insurance Return Crop Value Base Price Harvest Price (+ or -) (+ or -) (+ or -) + + + = Total Revenue Actual Yield Crop Value (yield x harvest price) +

  23. MPCI Contracted Market Return Cost of Acquiring Contract Bu. Crop Insurance Return Crop Value Harvest Price (+ or -) (+ or -) (+ or -) + + + = Total Revenue Actual Yield Crop insurance return (indemnity payment - premium) +

  24. MPCI Contracted Market Return Cost of Acquiring Contract Bu. Crop Insurance Return Crop Value Harvest Price (+ or -) (+ or -) (+ or -) + + + = Total Revenue Actual Yield Contracted market return (net revenue from contract exceeding harvest price) +

  25. MPCI Contracted Market Return Cost of Acquiring Contract Bu. Crop Insurance Return Crop Value Harvest Price (+ or -) (+ or -) (+ or -) + + + = Total Revenue Actual Yield Cost of acquiring contract bushels

  26. MPCI Contracted Market Return Cost of Acquiring Contract Bu. Crop Insurance Return Crop Value Base Price Harvest Price (+ or -) (+ or -) (+ or -) + + + = Total Revenue .65 APH .65 APH Actual Yield

  27. MPCI • Only one way to get indemnity payment: actual yield below 65% APH

  28. Cash Contracting with MPCI • Forward fixed price contract • Sell forward with defined yield protection • Flexibility to price at acceptable level to producer • Guaranteed minimum price contract • Participate in price rallies • Eliminate risk of acquiring bushels at high cost

  29. Crop Revenue Coverage (CRC) Revenue Guarantee Excess Over Crop Value Contracted Market Return Cost of Acquiring Contract Bu. Crop Value Dec. Futures Dec. Futures (+ or -) (+ or -) (+ or -) + + + = Total Revenue .65 APH .65 APH Actual Yield

  30. Crop Revenue Coverage • CRC pays indemnities if: (Actual Yield x Harvest Price) < (65% APH* x Dec. futures) • Where December futures is higher of February or November average price of December futures * 65% is used in this example. Keep in mind the farmer can choose any level between 50% and 75%.

  31. Major Difference in CRC: Many Ways for Yield/Price Combinations to Achieve CRC Coverage Level • High Actual Yields: Low price protection • Normal Actual Yields: 65% Price Protection (in this example) • If harvest price high, $ coverage increases • Yield protection never below coverage bought (65% in our example)

  32. Points About CRC • Negative correlation of farm yield/futures price means probability of CRC payoff • Has characteristics of put option on price, but high yield variability erodes minimum • CRC is a put on revenue, not price • Since CRC assures only 65% (range: 50%-75%) of futures, CRC mostly yield policy • Expect higher than normal yields? Consider contracting more

  33. MPCI vs. CRC • If MPCI base price =CRC Feb. price = CRC Nov. price, MPCI = CRC gross payoff • If MPCI base price = CRC Feb. price < CRC Nov. price, CRC gross payoff is higher • If MPCI base price = CRC Feb. price > CRC Nov. price, CRC gross payoff is higher • If MPCI base price > CRC Feb. price and CRC Nov. price does not increase to a level equal to or exceeding MPCI base price, MPCI gross payoff is higher (generally -- there are exceptions!)

  34. MPCI vs. CRC • Conclusion: Without considering the typically higher premiums for CRC, CRC is superior to MPCI in virtually all situations. Determining whether to buy MPCI or CRC though should be based upon both potential for payoff and relative premiums.

  35. Risk Factors Confronting Farmers

  36. Goal =Maximize revenue per acre

  37. Revenue Per Acre • Yield Price per bushel • $2.00/bu. $2.50 $3.00 $3.50 • 80 bu./acre$160/acre $200 $240 $280 • 120$240 $300 $360 $420 • 160$320 $400 $480 $560

  38. Risk • Exposure to the chance of injury or loss • Degree of probability of such loss

  39. Dealing with business risk factors • Controllable versus manageable • Acceptable versus unacceptable • Market risks versus others

  40. Choice of crops/production practices Drying/conditioning of the crop Behavioral responses Logistics issues Choice/timing market strategy Counter party credit risk LDP/marketing loans Risk factors producer can control

  41. Weather Crop Quality USDA program rules World supply/demand Market Risks Futures prices Basis Futures spreads Risk factors producer can not control

  42. Assess the level of exposure and categorize it • Acceptable risks; or • Unacceptable risks

  43. Summary Can not control two biggest revenue factors • Yield • Price Therefore can not control revenue/acre!

  44. Solution • Minimize production costs • Manage market risks aggressively!

  45. Tips • Eliminate risks if you can’t afford the loss • Focus on revenue per acre, not price • Know how strategies work in various market scenarios • Know your costs, but set marketing goals based on market reality • Assume nothing!

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