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Financial Strength & Risk Management in U.S. Agriculture - Presentation

Learn about U.S. agriculture's financial outlook, risk management strategies, crop insurance, revenue protection, and more. Understand season pricing trends and crop insurance decisions.

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Financial Strength & Risk Management in U.S. Agriculture - Presentation

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  1. March 5, 2014 Steven D. Johnson Farm & Ag Business Management Specialist (515) 957-5790sdjohns@iastate.edu www.extension.iastate.edu/polk/farm-management

  2. Presentation Objectives Understand the Current Financial Strength of U.S. Agriculture Provide Risk Management Goals & Strategies Highlight U.S. Weather Outlook/Crop Insurance Review the Role of Revenue Protection to protect Crop Yields and Prices Utilize Seasonal Price Trends and tie Pre-Harvest Marketing to Insurance Bushels Conceptualize the New Farm Program and Commodity Crop Enrollment Choices Compare Potential 2014 Payments for County ARC, Farm ARC and PLC Programs Highlight Crop Risk Management Web Sites.

  3. U.S. Net Farm Income Trends * - Forecast Source: USDA Economic Research Service, November 2013

  4. U.S. Farm Debt-to-Asset Ratio * - Forecast Source: USDA Economic Research Service, November 2013

  5. Fig 10 2014 U.S. Planted Acre Forecast Source: USDA World Outlook Board, February 2014

  6. Crop Prices to Decline from Record Highs Fig 11 Wheat, corn and soybeans in dollars per bushel; rice in dollars per hundredweight; cotton in cents per pound. Numbers in red denote record levels. Source: USDA NASS, WASDE and World Outlook Board, February 2014

  7. Crop Risk Management Goals & Strategies Learn to Use a Variety of Crop Marketing Tools; Implement Written Plans Utilize Revenue Crop Insurance Coverage, Pre-Harvest Marketing & Enrolling in ARC Reconsider 2015 Fixed Farm Leases; Consider Flexible Cash Leases Know Your Costs; Be Shrewd in Making Input Decisions Invest Wisely in Operational Excellence: Be a Low-Cost Producer Source: Johnson, ISU Extension, March 2014

  8. Iowa Land Value & Cash Rental Rate Trends 2013 Averages Cash Rent: $270/A Land Value: $8716/A 3.10% Source: Duffy & Edwards, ISU Extension Economics, May/December 2013

  9. Source: http://droughtmonitor.unl.edu/, March 11, 2014

  10. El Niño (ENSO) Neutral until Spring Spring/Summer Forecast: The tropical Pacific Ocean subsurface has warmed substantially in recent weeks, which is likely to result in a warming of the ocean surface in the coming months. The tropical Pacific Ocean with temperatures approaching or exceeding El Niño thresholds by the summer months. Source: www.bom.gov.au/climate/enso/, March 11, 2014

  11. Elwynn Taylor’s 2014 Risk Wheel La Niña Summer = 70% risk of below trendline corn yield Neutral Summer = 53% risk of above trendline corn yield El Niño Summer = 70% risk of above trendline corn yield Source: Taylor, ISU Extension Climatologist, February 2014

  12. Corn Insurance Coverage (2013) Revenue Protection = 86% of Insured Acres (Illinois) vs. 95% (Iowa) Iowa Illinois Source: USDA Risk Management Agency, October 2013

  13. Soybean Insurance Coverage (2013) Revenue Protection = 87% of Insured Acres (Illinois) vs. 95% (Iowa) Iowa Illinois Source: USDA Risk Management Agency, October 2013

  14. Marketing Revenue Protection (RP) Guaranteed Insurance Bushels Source: Johnson, ISU Extension, February 2014

  15. 2014 Crop Insurance Decisions Unit Coverage? (Basic, Optional or Enterprise)? Deductible? Trend-Adjusted APH Yield Endorsement ? Revenue Protection – RP (65%-85% Levels) Supplemental: Hail, Wind & Green Snap, Total Weather or Varying Projected Price? 2014 Projected Prices: Corn = $4.62/bu, Soybeans= $11.36/bu Source: Johnson, ISU Extension, March 2014

  16. Delivery of Corn Bushels with Revenue Protection (RP) Marketing Strategy • Pre-Harvest Sell for Delivery up to 153 Bu/A • Price Guarantee is Higher of the Projected Price vs. Harvest Price • Slight Basis Risk • Must Plant the Crop (Prevented Planting = 60%) Deductible 15% = 27 Bu/A RP @ 85% Level of Coverage 153 Bu/A Guarantee X $4.62/bu Projected Price 180 Bu/A Actual Production History (APH) = $707/A Revenue Guarantee Source: Johnson, ISU Extension, March 2014

  17. Corn Insurance Prices vs. Seasonal Highs Source: USDA Risk Management Agency & CME Group, Nov. 2013

  18. December Corn Futures Seasonals 2003-07 Average High $2.92 2008-12 Average High $5.90 2013 High $5.93 Source: www.cmegroup.com, October 2013

  19. Soybean Insurance Prices vs. Seasonal Highs Source: USDA Risk Management Agency & CME Group, Nov. 2013

  20. November Soybean Futures Seasonals 2013 Average High $12.66 2003-07 Average High $6.10 2008-12 Average High $11.14 Source: www.cmegroup.com, October 2013

  21. Strategies for Marketing 2014 Crop Expect New Crop futures prices to rally with spring planting uncertainty (Seasonals): • Consider forward contracts/HTAs (Delivery) for Guaranteed Insurance Bushels • Futures Hedges (Non-Delivery) Bushels • Buy Put Options (Non-Delivery) Bushels Sell Bushels to meet Fall/Winter Cash Flow: • Consider new-crop sales for both corn and soybeans (use spring/summer month rallies) • Avoid long-term commercial storage. Source: Johnson, ISU Extension, March 2014

  22. Farm Bill 10-year Baseline (FY 2014 to FY 2023) Source: The Agricultural Act of 2014, February 2014

  23. New Farm Program Commodity Crop Choices (5 years: 2014-18) OR Marketing Loan National Rates: $1.95/bu Corn $5.00/bu Soybeans Source: The Agricultural Act of 2014, February 2014

  24. New 5-Year Farm Program Implementation Plan Proposed Commodity Crop Rules and Regulations Released Conservation Programs (EQIP & CSP) Agricultural Act of 2014 Livestock Disaster Assistance Program Commodity Crop Program Education Commodity Crop Program Sign-up 2014 2015 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB Source: Secretary of Ag Vilsack, February 28, 2014

  25. FSA Commodity Crop Enrollment Decisions Base acres can be reallocated using 2009-12, but can’t exceed farm’s total historic base. County ARC 85% of base acres, Revenue Trigger = 5-yr. OA county yields X 5-yr. OA MYA price (Estimated Price: $5.30/bu corn & $12.17/bu soybeans) Enrollment at FSA: Summer/Fall -Base and/or Yield updates; Winter - ARC or PLC sign-up. Farm ARC 65% of base acres, Revenue Trigger = 5-yr. OA farm yields X 5-yr. OA MYA price (If elected, revenue summed across all commodity crops on farm. One-time choice (irrevocable) by FSA farm number (need both operator and landlord signatures). If a farm fails to enroll in either ARC or PLC in 2014, then PLC serves at the default for 2015 through 2018. PLC 85% of base acres, Price only Trigger = $3.70/bu corn, $8.40/bu soybean reference prices Source: www.farmdocdaily.illinois.edu, Feb. 12, 2014

  26. Reallocating Base AcreageFarm Historic: 100 Total Base Acres Corn 50 Acres Soybeans 50 Acres Source: www.farmdocdaily.illinois.edu, March 6, 2014

  27. Base Acreage ReallocationExample #1 Source: www.farmdocdaily.illinois.edu, March 6, 2014

  28. Reallocation Example #1Can be requested at ARC/PLC Sign-up Corn 65 Acres Soybeans 35 Acres Source: www.farmdocdaily.illinois.edu, March 6, 2014

  29. Base Acreage ReallocationExample #2 Source: www.farmdocdaily.illinois.edu, March 6, 2014

  30. Reallocation Example #2Can be requested at ARC/PLC Sign-up Corn 75 Acres Soybeans 25 Acres Source: www.farmdocdaily.illinois.edu, March 6, 2014

  31. Comparing ARC Average Prices vs. PLC Reference Prices Agriculture Risk Coverage (ARC) YearCornSoybeans 2009$3.55$ 9.59 2010 $5.18 $11.30 2011 $6.22 $12.50 2012$6.89$14.40 2013 $4.50 $12.70 ARC 5-yr. OA MYA Prices Corn = $5.30/bu. Soybeans = $12.17/bu. Price Loss Coverage (PLC) Corn = $3.70/bu. Soybeans = $8.40/bu. Source: www.farmdocdaily.illinois.edu, Feb. 20, 2014

  32. County ARC: Calculating Corn Revenue Source: www.farmdocdaily.illinois.edu, Feb. 20, 2014

  33. County ARC: 2014 Corn Potential Payment Source: www.farmdocdaily.illinois.edu, Feb. 20, 2014

  34. County ARC: Calculating Soybean Revenue Source: www.farmdocdaily.illinois.edu, Feb. 20, 2014

  35. County ARC: 2014 Soybean Potential Payment Source: www.farmdocdaily.illinois.edu, Feb. 20, 2014

  36. Farm ARC: 2014 Corn & Soybean Combined Revenue Guarantee Source: www.farmdocdaily.illinois.edu, Feb. 20, 2014

  37. Farm ARC: 2014 Corn & Soybean Combined Potential Payment Source: www.farmdocdaily.illinois.edu, Feb. 20, 2014

  38. PLC: Corn 2014 Payment Potential Source: www.farmdocdaily.illinois.edu, Feb. 20, 2014

  39. PLC: Soybean 2014 Payment Potential Source: www.farmdocdaily.illinois.edu, Feb. 20, 2014

  40. Crop Risk Management Web Sites • Crop Risk Management - ISU Polk County (Farmland Owners Newsletter, Webcasts and Videos, Updates on Crop Marketing Strategies, Government Farm Programs & Farmland Leasing) www.extension.iastate.edu/polk/farm-management • Farm Doc – U of IL Extension Economics (Daily e-Newsletter, FAST Tools, Newsletters, Publications) www.farmdoc.illinois.edu • Ag Manager – Kansas State Extension Economics www.agmanager.info • Purdue Extension Economics www.agecon.purdue.edu/extension • Ag Decision Maker – ISU Extension (Iowa Commodity Challenge Curriculum, Monthly e-Newsletter, Decision Tools, Newsletters, Publications, Voiced Media) www.extension.iastate.edu/agdm Source: Johnson, ISU Extension, March 2014

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