What RMA can do for the Cattle Business PRF • LGM • LRP Administrator Bill Murphy

1. What RMA can do for the Cattle BusinessPRF • LGM • LRPAdministrator Bill Murphy 2011 Beef Financial Management Conference Amarillo, TX October 6, 2011

2. Who are we? Risk Management Agency (RMA) • Mission: To promote, support, and regulate sound risk management solutions to preserve and strengthen the economic stability of America’s agricultural producers • Operate and manage the Federal Crop Insurance programs • For crop year 2010, RMA , managed about $78 Billion worth of insurance liability • We merely administer the program. We do NOT sell crop insurance products. Only crop insurance agents sell • RMA web site: http://www.rma.usda.gov/

3. Business Summary William J. Murphy, Administrator Risk Management Agency As of 10-03-11

4. National Crop Ranking William J. Murphy, Administrator Risk Management Agency As of 10-03-11

5. Program Growth William J. Murphy, Administrator Risk Management Agency As of 10-03-11

6. FCIC Loss Experience, 1981-2010 William J. Murphy, Administrator Risk Management Agency As of 10-03-11

7. What do we do? Insurance Products for Cattle Business • Pasture, Rangeland & Forage (PRF) • Livestock Risk Protection (LRP) • Livestock Gross Margin (LGM)

8. Participation Rates Policies sold in 2011

9. Pasture, Rangeland & Forage (PRF) PRF: What is it? • AREA plan only • Losses cover an area called a grid • No individual coverage • Does NOT measure actual individual production • Index – based on deviation from normal /historical • No loss adjustments, records, etc. • Timely payments • Does not reward poor management practices • Producer cannot influence outcome/losses

10. Pasture, Rangeland & Forage (PRF) 2012 PRF and API Pilot Areas Vegetative Index & Rainfall Index

11. Pasture, Rangeland & Forage (PRF) Rainfall Index Overview • Area Based Plan • Approximately 0.25 degree grid vs. county area • Utilizes NOAA Climate Prediction Center data • Utilizes multiple point data, not a single point system • Deviation from Normal 1948 to present • Single Peril vs. Multiple Peril • Lack of Precipitation is the only cause of loss • Review of Historical Indices is critical

12. Pasture, Rangeland & Forage (PRF) Grid Overview - RI Area of insurance = 0.25o grids

13. Pasture, Rangeland & Forage (PRF) NOAA CPC Uses Weighted Averaging Method • Four Passes – with each successive pass, the scan radius is decreased, the weight of the closest station has higher effect on the target grid • Four passes insures that distant stations influence rainfall prediction in target grid, but weighting with distance decreases the influence

14. Pasture, Rangeland & Forage (PRF) Vegetation Index Overview • Not available in Texas • Area Based Plan: Approx 4.8 x 4.8 mile grid vs. county • Utilizes satellite remote sensing data (NDVI) • Deviation from Normal: 1989CY to present captures multiple perils • Review of Historical Indices is critical • NDVI measures photosynthesis – not forage height • NDVI will measure photosynthesis from all vegetation/biomass located w/in grid: • Forage, Weeds, Crops, Trees and Flowers

15. Pasture, Rangeland & Forage (PRF) PRF-VI: Will this work for me? • Focus MUST be on the Historical Indices web site • Have past results tracked with observed results? • Do production trends follow historical indices results? • VI will pick up all vegetation including tree canopy, crops, etc. • Changes in cropping patterns or practices can influence results • Critical the Index Intervals with the maximum growth are captured in order to reflect current year’s growth

16. Pasture, Rangeland & Forage (PRF) PRF VI & RI: Overview • The only insurable cause of loss is when the final grid index value is less than the coverage level (deductible) selected by the producer • Indexes are based on normal/historical and deviation from normal/historical • Critical that the Historical and Decision Support Tools are understood and used • Must spend time reviewing the historical and comparing to past production

17. Pasture, Rangeland & Forage (PRF) PRF VI & RI: Overview • The basis of decision to purchase MUST be based on an analysis between the historical results as compared to a producer’s results • As with any area plan – results may not track 100% of the time • Critical the appropriate Index Intervals are selected

18. Livestock Risk Protection (LRP) LRP: What is it? • Owned and maintained by Applied Analytics Group • Insures against price declines (but not other casualty/death loss) for Fed and Feeder Cattle • Actual ending values are based on weighted average prices as reported in the Chicago Mercantile Exchange Group Feeder Cattle Index

19. Livestock Risk Protection (LRP) • The length of insurance coverage available for each specific coverage endorsement is 13, 17, 21, 26, 30, 34, 39, 43, 47, or 52 weeks • Cattle producers may select coverage prices ranging from 70 to 100 percent of the expected ending value • If the actual ending value is below the coverage price, the producer will be paid an indemnity for the difference between the coverage price and actual ending value

20. Livestock Risk Protection (LRP) Nationwide Summary (2011RY)

21. Livestock Gross Margin (LGM) LGM: What is it? • Owned and maintained by Iowa Agricultural Insurance Innovations, LLC • LGM is a bundled option of Chicago Mercantile Exchange (CME) contracts that covers both livestock price and feed costs (Asian option) • Lean Hogs, Cattle, Dairy Cattle • LGM for cattle protects against loss of gross margin – market value of livestock minus feeder cattle and feed costs

22. Livestock Gross Margin (LGM) • Indemnity at end of 11-month insurance period is the difference, if positive, between gross margin guarantee and actual gross margin • Does not insure against loss due to death or damage to cattle • LGM for cattle uses futures prices to determine the expected gross margin and the actual gross margin • Producers actual price not used • The price the producer receives at the local market is not used in these calculations • Sold the last business Friday of the month till 8pm CST the following day

23. Livestock Gross Margin (LGM) LGM for Cattle is available for producers with cattle sold for commercial or private slaughter primarily intended for human consumption and fed in the following states:

24. Livestock Gross Margin (LGM) Key Features • Producers can sign up for LGM for Cattle twelve times per year and insure all of the cattle they expect to market over a rolling 11-month insurance period • The producer does not have to decide on the mix of options to purchase, the strike price of the options, or the date of entry • The LGM for Cattle policy can be tailored to any size farm • Options cover fixed amounts of commodities and those amounts may be too large to be used in the risk management portfolio of some farms

25. LGM-Dairy Participation

26. What Does the Future Hold? • Continuing Debt Issues with the Federal Budget • Potential reductions in subsidy/other? • What does Nov. 23 behold? • Uncertainty – Sequestration? • Farm Bill – Where does it Fit? • Assume changes – big and small • Threats/challenges • If direct payments now, who’s next? • Conservation compliance? • Solutions for southern states?

27. PRF • LGM • LRP Any Questions? William J. Murphy Administrator Risk Management Agency