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Managing Risk in Vegetable Production

Managing Risk in Vegetable Production. Jayson K. Harper Professor of agricultural economics Department of Agricultural Economics and Rural Sociology The Pennsylvania State University Penn State is committed to affirmative action, equal opportunity, and the diversity of its workforce.

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Managing Risk in Vegetable Production

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  1. Managing Risk in Vegetable Production • Jayson K. Harper • Professor of agricultural economics • Department of Agricultural Economics and Rural Sociology • The Pennsylvania State University • Penn State is committed to affirmative action, equal opportunity, and the diversity of its workforce

  2. Types of Agricultural Risks • Production • Marketing • Financial • Legal • Human resource • Environmental

  3. Risk Management Strategies: 1) Retain 2) Shift 3) Reduce 4) Self-insure 5) Avoid

  4. Is Your Vegetable Crop Profitable? • Who are your competitors? • What is your cost of production? • What is your production target? • What is your price target? • How sensitive are your net returns to changes in prices and yields?

  5. Risk Management Tools: Project and Evaluate • Enterprise budgets/cost of production • Breakeven analysis • Profit sensitivity

  6. Purpose of Enterprise Budgets: • Project revenues, costs, and profit • Specify inputs required/production practices • Evaluate efficiency • Estimate benefits and costs • Provide the basis for crop selection and market planning • Support applications for credit

  7. Variable--vary with the level or intensity of production Fertilizers Pesticides Fuel Labor Repairs Marketing/grading Fixed--stay the same regardless of the level or intensity of production Depreciation Interest Repairs Taxes Insurance Two types of costs:

  8. Breakeven Analysis/Profit Sensitivity:Breakeven Price = anticipated total costs / expected yield…Price target for marketing decisions…How do changes in yields affect my profitability?Breakeven Yield = anticipated total costs / expected price…Yield target for production decisions…How do changes in prices affect my profitability?

  9. Agricultural Alternatives • fruits and vegetables • livestock • farm management and marketing • horticultural management • discuss marketing, production, resource requirements, and cost of production

  10. Titles in the Agricultural Alternatives series • Vegetables • Sweet corn • Broccoli • Bell pepper • Snap bean • Tomato • Pumpkin • Onion • Asparagus • Cucumber • Potato • Garlic http://agalternatives.aers.psu.edu

  11. Yield Risk:Sources and Solutions Sources: • Adverse weather • Pest damage Solutions: • Pest management practices • Site selection • Variety/hybrid selection • Rotation/diversification • Irrigation • Crop insurance

  12. Advantages of diversification: spreads risk among additional enterprises rotational benefits labor demands more spread out Disadvantages of diversification: specialized equipment may be needed broader production and marketing expertise needed more constant labor supply required Diversification:Idea that prices and yields of different enterprises do not exhibit the same variabilityTypes of diversification: multiple crops, crops and livestock, geographical, marketing

  13. Irrigation:Factors to consider • Field soil type, drainage, erosion potential, location of power sources, topography, distance to water supply • Water availability, quality, cost to develop, crop water requirements • Crop yield potential, need for frost protection, cultural practices • System type of power supply required, labor requirements and availability, initial capital and annual operating costs

  14. Irrigation for Fruit and Vegetable Production • Water sources and their effect on irrigation costs • Laws affecting irrigation water use • Choosing an irrigation system for vegetables • Choosing an irrigation systems for tree fruit • Scheduling irrigation • Equipment use and maintenance

  15. Drip Irrigation for Vegetable Production • Advantages of drip irrigation • Disadvantages and limitations of drip irrigation • Drip irrigation system components • delivery systems • filters • pressure regulators • valves and gauges • water management • Choosing an irrigation systems for tree fruit • Scheduling irrigation • Equipment use and maintenance

  16. drought excess rain excess wind fire freeze hail tornado earthquake insects disease wildlife failure of irrigation supply Multi-Peril Crop Insurance (MPCI) Causes of losses covered:

  17. apples (45) barley (54) processing beans (15) cabbage (1) corn (grain and silage) (66) forage production (66) forage seedling (66) grain sorghum (57) grapes (1) green peas (10) nursery (67) oats (66) pasture, rangeland, forage (26) peaches (30) pears (1) potatoes (13) soybeans (51) fresh-mkt. sweet corn (66) processing sweet corn (12) tobacco (3) fresh-market tomatoes (4) processing tomatoes (16) wheat (57) Also: Whole farm coverage (AGR/AGR-Lite) LGM Dairy LRP Lamb Crops covered by MPCI in Pennsylvania:

  18. Crop Insurance Program Basics: 1) Determine actual production history (APH) yield minimum of 4 successive years of records maximum of 10 successive years of records (5 years for fruit crops) <4 years of records … T-yields Transitional yields vary by county and production practices 0 years of records: 65% of county T-yield 1 year of records: 80% of county T-yield 2 years of records: 90% of county T-yield 3 years of records: 100% of county T-yield

  19. Crop Insurance Program Basics: 2) Select desired coverage level • 50, 55, 60, 65, 70, or 75% of APH yield 50% for catastrophic (CAT) coverage 3) Select desired price election • Up to 100% of indemnity price 55% for catastrophic (CAT) coverage

  20. Crop insurance calculations: Yield guarantee = APH • coverage level Premium/acre = yield guarantee • premium rate • price election Notes: • CAT program has a $300/crop/county administrative fee. • MPCI has a $30/crop administrative fee.

  21. Crop insurance calculations: If actual yield is less than the yield guarantee: Indemnity payment = (yield guarantee – actual production) • price election If actual yield is equal to or greater than the yield guarantee: Indemnity payment = 0

  22. Other types of policies: • Dollar Plan—provides protection against declining value from damage that causes a yield loss. Losses are paid when the value of the crops is less than the amount of insurance. • Available in 66 counties for fresh-market sweet corn; maximum amount of insurance: $1,076 ($395 CAT)

  23. Other types of policies: • Adjusted Gross Revenue (AGR)--insures the revenue of the entire farm rather than an individual crop by guaranteeing a percentage of average gross farm revenue, including up to 35% livestock revenue. Uses information from a producer's Schedule F tax forms to calculate the policy revenue guarantee. Maximum liability is $6.5 million.

  24. Authorized in 2000 Berks Co. Carbon Co. Lackawanna Co. Lehigh Co. Monroe Co. Northampton Co. Added for 2003 Crawford Co. Columbia Co. Erie Co. Fayette Co. Lancaster Co. Schuylkill Co. Westmoreland Co. York Co. Pennsylvania AGR Counties

  25. Other types of policies: • AGR-Lite--insures the revenue of the entire farm rather than individual crops by guaranteeing a percentage of average gross farm revenue. All farm raised crops, animals, and animal products are eligible for coverage. Uses information from a producer's Schedule F tax forms to calculate the policy revenue guarantee. Limited to a maximum liability of $1 million per farm.

  26. Should I buy crop insurance? • Yield variability • Cash flow requirements • Self insurance • CAT coverage • Premium discounts for higher levels of coverage

  27. Sales closing dates JANUARY 31-- AGR insurance MARCH 15-- spring seeded crops MAY 31– nursery crops JULY 31-- forage seedings SEPTEMBER 30-- fall seeded crops NOVEMBER 20-- fruit crops NOVEMBER 30-- GRP insurance For more information, visit the Penn State Crop Insurance Education Web Site: http://cropins.aers.psu.edu

  28. Noninsured Crop Disaster Assistance Program (NAP) • Eligible Crops: Agricultural commodities for which the CAT level of crop insurance is not available, including controlled environment crops (mushrooms and floriculture), specialty crops (maple syrup and honey), and value loss crops (aquaculture, Christmas trees, ginseng, ornamentals, and turfgrass)

  29. NAP Program (cont.) • Eligible producers: a landowner, tenant, or sharecropper who shares in the risk of producing an eligible crop (<$2 million gross revenue) • Eligible natural disaster (before or during harvest): • Damaging weather (drought, excess moisture) • Natural occurrence (earthquake, flood) • Excessive heat, insect infestation

  30. NAP Program (cont.) • NAP assistance is available if a natural disaster causes expected production to be less than 50% or prevented more than 35% of crop acreage from being planted planting • NAP payments are paid based on a farmers crop acreage, approved yield, and net production at 55% of the average market price established by the FSA state committee

  31. NAP Program (cont.) • Must apply to FSA for coverage by state closing date and pay applicable service fee ($250/crop/county)Note: Limited-resource farmers can request waiver of fees • Coverage begins 30 days after application or the date the crop is planted

  32. NAP Program (cont.) • To remain eligible for NAP assistance farmers must report crop acreage information, production practices used, and the disposition of the harvested crop (ie., how much was marketable)

  33. Supplemental Revenue Assistance Payments (SURE) • Provides benefits for farm revenue losses due to natural disaster • 2008 Farm Bill successor to ad hoc crop disaster assistance (legislated through 2011) • Available to producers on farms in counties (and contiguous counties) covered by a qualifying USDA secretarial natural disaster declaration

  34. SURE program eligibility • Producer must obtain crop insurance or non-insurable crop disaster assistance (NAP) coverage for all crops including hayed and grazed land that is planted or intended to be planted • In counties with a disaster declaration (or contiguous counties without one), any farm with more than 50% overall farm loss because of adverse weather is eligible

  35. SURE payments • Producers with qualifying losses are eligible to receive 60% of the difference between the SURE disaster program guarantee and actual farm revenue • Total SURE guarantee is calculated by summing the CI or NAP guarantees for each crop • SURE calculator is available on-line at: http://www.fsa.usda.gov/

  36. Summary • What are your sources of risk? • Know your cost of production • Breakeven price and yield • Risk management options • Diversification • Irrigation • Crop insurance and NAP…SURE

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