Taking Charge of Yield & Revenue Risk Management

1. Taking Charge ofYield & Revenue Risk Management

2. Objective for Today’s Workshop • Different types of crop insurance • Awareness and understanding of how coverage dovetails with the farm’s financial and marketing risk • Strategies and tactics for the insured

3. What did we learn from the capital management module? • How much equity are you willing to risk? • How much revenue do you have to generate to cover alternative targets?

8. Four Alternatives to Risk • Retain Risk • Reduce Risk • Avoid Risk • Shift Risk

9. Smith Vs. Jones

10. Insurance to Protect Against Production Shortfall Exposure

11. Named Peril (NP) Group Risk Plan (GRP) Multi-Peril (MP) Catastrophic (CAT) Crop Revenue Coverage (CRC) Adjusted Gross Revenue (AGR) Hail CRC + Types of “Crop Insurance”

12. CAT - Catastrophic 50% of Yield / 55% of Price = 27% net coverage. Example- 128 bu/A Yld. X $2.10 = $268.80 Expected Rev. 128bu X 50% = 64bu $2.10 Price X 55% = $1.15 Guarantee = $73.60 73/269 = 27% (Basic Units Only)

13. Why Buy CAT As A Minimum? Covers that last 27% of loss. • Cheap - $60 / crop / county regardless of number of acres. • Stay in the game for disaster. • Keep established, certified yield records for future use.

14. Multi-Peril (MP)

15. Perils Losses Are Paid On • Hail/fire • Drought • Disease • Excess rain • Animals • Insects • Combination of the above

16. How is Coverage Based? • Guarantees a certain yield based on the farmers own yield history. • Losses are paid at a pre-determined price set by the RMA/USDA. • Producer chooses level of coverage - 50% thru 85%.

17. Units • Basic Units - by County, Crop, Share • Optional Units - by Crop, Section, Share • Enterprise Units - Combine whole farm by crop.

18. How is MP Coverage Based? Example: 128.5 bu. Yield History x 70% Coverage = 90 bu. Guarantee Loss payable @ $2.20 Each bushel below 90 is payable @ $2.20/bu.

19. How are losses paid on MP? • Loss is not triggered until actual yield goes below guarantee. • Example: 71 bu. Produced = 19 bu. loss 19 bu loss x $2.20 = $41.80/A

20. MP Review • Available on most crops • Loss of 15% up to 50% of proven history must occur before losses are paid • Crops can be insured by section; increases “effective” coverage • Rates & Prices are established by the RMA/USDA and vary by county experience • Subsidized by the RMA/USDA with 25% additional subsidy for 2000.

21. Crop Revenue Coverage: CRC

22. CRC Features • Procedures are the same as MP • Available on only corn, soybeans and wheat • Rates are based on MP policy with an adjustment for the price risk component; vary by historical county experience. • 25% additional subsidy for 2000.

23. How is CRC Coverage based? • Guarantees revenue based on APH times CBOT price. • Guarantee determined by the higher of CBOT harvest price or CBOT base price, giving upside & downside price protection. • Price is CBOT price - not local elevator price.

24. CRC Advantages • Can be used for advance marketing protection. • Revenue guarantee can go up but not down. • Subsidized by government of 25% extra does apply in 2000.

25. CRC Plus orAdded Revenue Products • Private policy to add to CRC base policy only. • Must have CRC policy. • Not subsidized.

26. CRC Loss Example # 1 (Production below bushel Guar.) 1,000 X 128 X 70% = 89,600 Acres APH Level Bu/Guar. 89,600 X greater of $2.40 or $2.00 =$215,040 Bu/Guar. Base Price Hvst. Fut. Price Hvst. Guar. 76,800 X $2.00 = $153,600 Harv. Bu. Hvst. Pr. Hvst. Rev. $215,040 __ $153,600 = $61,440 Hvst. Guar. Hvst. Rev. Loss Pmt. Note:If harvest is complete and loss is adjusted prior to Dec., Producer would receive 2 checks: 1) 89,600bu - 76,800bu = 12,800bu X $2.40 = $30,720 as 1st Pmt. 2) $61,440 Loss Rev. - $30,720 Adv. Pmt. = $30,720 as 2nd Pmt.

27. CRC Loss Example #2(Production above bushel Guar.) 1,000 X 128 X 70% = 89,600 Acres APH Level Bu/Guar. 89,600 X greater of2.40 or 2.00 =215,040 Bu/Guar. Base Price Hvst.Price Hvst. Guar. 100,000 X 2.00 = 200,000 Harv. Bu. Hvst. Pr. Hvst. Rev. 215,040 __ 200,000 = 15,040 Hvst. Guar. Hvst. Rev. Loss Pmt. Note:In this example the producer did not have bu loss, but does qualify for revenue loss. Trigger yield is Harvest Guarantee / Harvest Price. (215,040/2.00 = 107,520bu / 1,000A = 107.5bu/A) This is 84% of the 128bu APH

28. Cash Flow ComparisonUsing Previous Examples of MPCI & CRC

29. Cash Flow ComparisonUsing Previous Examples of MPCI & CRC

30. STOP! • The rest of the material in your handout is for take home reading. • Fill out “Crop Insurance Decision Worksheets now!

35. Crop Ins. “Take Home” Points 1. Select an agent who will handle your business timely and accurately. 2. Know the key deadlines which are: * Sign Up - (change, add, delete, cancel) March 15th - Information needed… What crop? What level of coverage? * Yield (APH) Information - April 30th 3. Know your yields, they are the basis of your coverage. 4. Report your yields to your agent. * Break down by section and % share for current year. * Provide prior average yields and acres. (Ex. - ‘00 ins. needs ‘99 yields. by section; ‘98 and previous can be average.)

36. “Take Home” Points Cont’d. 5. If you carry multi-peril, how many bushels are you guaranteed?________ If you carry Crop Revenue Coverage, how many dollars are you guaranteed?_______ 6. Incorporate your yield and revenue guarantees into a marketing plan (communicate coverage to your grain merchandiser). 7. Work your marketing plan and maintain communications with your crop insurance agent, especially if you carry Crop Revenue Coverage(CRC).

37. Hail

38. Perils Losses Are Paid On • Hail • Fire • Malicious destruction • Transit losses

39. How is Coverage Based? • Farmer determines dollars per acre of coverage desired • Example • $300 per acre on corn • $250 per acre on soybeans

40. How are Losses Paid? • Adjuster determines the % of potential yield lost. • % loss times coverage per acre - times number of acres damaged.

41. Hail • Available on all crops raised • Rates based on per $100 coverage • Full dollar coverage - no deductible • NOT Government subsidized - insurance companies develop own rates • Can be a supplement to CRC, MP, GRP or a stand alone

42. Group Risk Plan(GRP)

43. How is coverage based? • Insured chooses the trigger yield based on expected county yield. • Can choose trigger that’s 70% up to 90% of “expected / trend” county yield. • Protection can be purchased up to 150%of the $ value of expected county yield (valued @ the MP price)

44. How are losses paid on GRP? • Paid only if actual county yield (per NASS) goes below insured trigger • Loss payment will be determined by trigger yield minus payment yield divided by trigger yield x dollar production

45. Advantages/DisadvantagesGRP • Less Paperwork • No yield records required • No field loss adjustments • No production records required • Eliminates fraudulent claims • Higher % coverage levels than MP/CRC

46. Advantages/Disadvantages GRP • May not pay even though insured has loss; no protection for any peril that tends to be site specific • Consider only when farm yield is expected to be highly related to county yield; must go up and down together • Offers less protection for forward contracting or viable collateral for lender

47. CRC Loss Calculation Worksheet ____ X ___ X ____ = ______ Acres APH Level Bu/Guar. _____ X greater of $_____ or $_____ = $_______ Bu/Guar. Base Price Hvst. Fut. Price Hvst. Guar. _____ X $_____ = $_______ Hvst. Bu. Hvst. Pr. Hvst. Rev. $________ $________ = $_________ Hvst. Guar. Hvst. Rev. Loss Pmt.

48. MP Loss Calculation Worksheet ____ X ___ X ____ = ______ Acres APH Level Bu/Guar. _____ X greater of $_____ or $_____ = $_______ Bu/Guar. Base Price Hvst. Fut. Price Hvst. Guar. _____ X $_____ = $_______ Hvst. Bu. Hvst. Pr. Hvst. Rev. $________ $________ = $_________ Hvst. Guar. Hvst. Rev. Loss Pmt.