Objective for Today’s Workshop

1. Taking Charge ofYield & Revenue Risk Management on Your FarmElliot AlfredsonSpartan Crop Insurance

2. 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: • Limit financial risk exposure • Substitute for balance sheet liquidly • Facilitate pre-harvest pricing • Develop a crop insurance plan

3. 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)

4. 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 • Insurance • Options on futures contracts

5. 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?

6. Revenue Required / Acre

7. Revenue Required / Acre

8. Managing Revenue Risk Exposure • Farm plans to avoid risk • Spread sales across year • Agronomic practices • Plans to shift risk • Options and minimum price contracts • LDP’s • Crop insurance

9. 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 late-spring / early summer new crop markets • But, I also have created a delivery risk if I have a short crop

10. 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

11. Insurance to Protect Against Production Shortfall Exposure

12. Crop Insurance To directly protect against revenue risk exposure

13. Crop Insurance Tailored to protect against revenue risk exposure and reduce delivery risk associated with pre-harvest pricing

14. 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

15. Let’s Review Some Specific Policies

16. Multiple-Peril (MPCI)

17. Losses Are Paid As A Result of Shortfalls Due to Acts Of God, Not Management • Hail/fire • Drought • Disease • Excess moisture • Animals • Insects

18. 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 pre-determined price set by the RMA/USDA

19. 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

20. How are losses paid on MPCI? • Loss is triggered when actual yield goes below guarantee. • Example: • 60 bu. realized yield • (90 bu guarantee – 60 ) = 30 bu. Loss • 30 bu loss x $2.05 = $61.50

21. 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

22. 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

23. “Catastrophic” Yield Coverage • 50 % yield coverage • Losses are paid at 55% of MPCI indemnity price • Optional units are not permitted • $100 / crop / county

24. Selected Revenue Insurances • “Pure” Revenue Insurance • RA • Revenue Insurance With Replacement Price Coverage • CRC • RA w/ RPC option

25. CROP REVENUE COVERAGE • CRC is a Revenue index contract with replacement price coverage • CRC is Designed to facilitate pre-harvest pricing • CRC is an index contract because the futures price is used to calculate “farm revenue” , not the local cash price

26. 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

27. Replacement Price Coverage:Case Examples of How Price is Chosen

28. Calculating Replacement Price Coverage Insurance Revenue Guarantee:70% Coverage Example

29. Replacement Price Coverage:Loss Examples

30. 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.

31. Calculating the RA Insurance Revenue Guarantee: 70% Coverage Example

32. Compare Revenue Insurance Indemnities With and Without Replacement Price Coverage

33. 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

34. 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

35. 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

36. 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 pre-harvest pricing. • If the farm uses pre-harvest pricing, Revenue insurance with replacement price coverage typically outperforms MPCI and pre-harvest pricing … particularly, if farm yield and market price are correlated.

37. STOP! • Fill out Crop Insurance Decision Worksheets!

38. 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.