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Taking Charge of

Yield & Revenue Risk Management

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Objective for Today’s WorkshopObjective 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

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What did we learn from the What did we learn from the capital management module?capital management module?

• How much equity are you willing to risk?

• How much revenue do you have to generate to cover alternative targets?

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Crop Insurance Decision – Corn Cost of Production

Low Debt Farm: Price/Bu Total Revenue Needed (Assume 128.5 Bu/A)

Total Economic Cost 2.40 308,400Maintain Net Worth 2.06 264,710Meet Cash Flow Requirement 2.10 269,850

Medium Debt Farm


High Debt Farm


I. Purchase Crop Insurance (Yes or N o) _______

II. Type of Crop Insurance (CRC or MP) _______

III. APH Yield (Historical Average) 128.5 Bu

IV. Level (50, 55, 60, 65, 70, 75, 80, 85%) _______

V. CRC Base Price 2.35 (CBOT Dec. 2000 during Feb. 2000)OR APH Price (Established by USDA) 2.20

VI. Number of Acres 1,000

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Calculate CRC Base Revenue Guarantee

128.5 X _________ X 2.35 = ________ X 1,000 = _________ APH Coverage CRC Base Revenue Acres Total Base

Level Price Guar./A Rev. Guar.

Calculate MP Guarantee

128.5 X ________ = ________ X ________ = _________ APH Coverage Bu Guar/A Acres Total Bu Guar.

Level

____________ X 2.20 = ___________ Total Bu. Guar. APH Price MP Guarantee

Crop Insurance Cost (to be supplied by presenter). Premium rates vary by county, product and coverageamounts. Premium rate is for Enterprise Unit and includes 25% additions (Government Subsidy)MP Est. Producer Premium $___________ CRC Est. Producer Premium $__________

A wide variety of product types are available in Michigan for 1999 including APH, CRC, and named perilproducts such as hail. For the game, to keep things simple, we only use two products – CRC & APH.

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Crop Insurance Decision – Soybeans Cost of Production

Low Debt Farm: Price/Bu Total Revenue Needed (Assume 43 Bu/A)


Medium Debt Farm


High Debt Farm


I. Purchase Crop Insurance (Yes or N o) ________

II. Type of Crop Insurance (CRC or MP) ________

III. APH Yield (Historical Average) 43 Bu

IV. Level (50, 55, 60, 65, 70, 75, 80, 85%) _________



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43 X _________ X 4.90 = _______ X 1,000 = _________ APH Coverage CRC Base Revenue Acres Total Base



43 X ________ = ________ X 1,000 = _________ APH Coverage Bu Guar/A Acres Total Bu Guar.

Level


Crop Insurance Cost (to be supplied by presenter. Premium rates vary by county, product and coverageamounts. Premium rate is for Enterprise Unit and includes 25% additional Government subsidy.MP Est. Producer Premium $___________ CRC Est. Producer Premium $__________


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Four Alternatives to RiskFour Alternatives to Risk

»Retain Risk

»Reduce Risk

»Avoid Risk

»Shift Risk

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Smith Vs. JonesSmith Vs. JonesLand Base Smith

100 A/Corn Jones 100 A/Corn

Cost/Acre $70.00 $76.00

Total Cost $7,000.00 $7,600.00

GuaranteeQuality

0 Bu. 9,000 Bu.

No guarantee Farmer has all

risk

Quality adjusted Share Risk

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Insurance to Protect Against Production Insurance to Protect Against Production Shortfall ExposureShortfall Exposure

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

10 28 46 64 82 100 118 136 154 172

Yield/planted acre

Ch

an

ce

s in

100

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Types of “Crop Insurance”Types of “Crop Insurance”

• Named Peril (NP)

• Group Risk Plan (GRP)

• Multi-Peril (MP)

• Catastrophic (CAT)

• Crop Revenue Coverage (CRC)

• Adjusted Gross Revenue (AGR)

• Hail

• CRC +

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CAT - CatastrophicCAT - Catastrophic50% 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 = $73.6073/269 = 27%

(Basic Units Only)

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Why Buy CAT Why Buy CAT As A Minimum?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.

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Multi-Peril Multi-Peril (MP)(MP)

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Perils Losses Are Paid OnPerils Losses Are Paid On

• Hail/fire

• Drought

• Disease

• Excess rain

• Animals

• Insects

• Combination of the above

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How is Coverage Based?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%.

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UnitsUnits

• Basic Units - by County, Crop, Share

• Optional Units - by Crop, Section, Share

• Enterprise Units - Combine whole farm by crop.

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How is MP Coverage Based?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.

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How are losses paid on MP?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

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MP ReviewMP 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.

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Crop Revenue Coverage:

CRC

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CRC FeaturesCRC 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.

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How is CRC Coverage based?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.

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CRC AdvantagesCRC 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.

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CRC Plus orCRC Plus orAdded Revenue ProductsAdded Revenue Products

• Private policy to add to CRC base policy only.

• Must have CRC policy.

• Not subsidized.

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CRC Loss Example # 1(Production below bushel Guar.)

1,000 X 128 X 70% = 89,600Acres APH Level Bu/Guar.

89,600 X greater of $2.40 or $2.00 = $215,040Bu/Guar. Base Price Hvst. Fut. Price Hvst. Guar.

76,800 X $2.00 = $153,600Harv. Bu. Hvst. Pr. Hvst. Rev.

$215,040 __ $153,600 = $61,440Hvst. 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.

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1,000 X 128 X 70% = 89,600Acres APH Level Bu/Guar.

89,600 X greater of 2.40 or 2.00 =215,040

Bu/Guar. Base Price Hvst.Price Hvst. Guar.

100,000 X 2.00 = 200,000Harv. 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

CRC Loss Example #2CRC Loss Example #2(Production above bushel Guar.)(Production above bushel Guar.)

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Cash Flow ComparisonCash Flow ComparisonUsing Previous Examples of MPCI & CRCUsing Previous Examples of MPCI & CRC

No Ins. MPCI MPCI CRC CRCNo Mktg. No Mktg. Mktg. No Mktg. Mktg.

Bu Harvested 76,800 76,800 76,800 76,800 76,800

Sold Price 1.70 1.70 2.10 1.70 2.10

Rev./Sold Grain 130,560 130,560 161,280 130,560 161,280

Ins. Claim 0 26,880 26,880 61,440 61,440

Gain on Oversold 0 0 5,120 0 5,120Bu @.40Cost of Ins. 0 (5,750) (5,750) (9,700) (9,700) Net Revenue 130,560 151,690 187,530 182,300 218,300

*Assumptions – 1,000 acres, 128bu APH, 70% Level, $2.40 CRC Base Price,$2.00 CRC Harvest Price, $1.70 Harvest Cash Price, $2.10 MPCI Price.

Contract 89,600bu @ $2.10 cash for total of $188,160.

[Rates for Clinton Co. Basic Units]Note: CRC rates for Enterprise Unit = 7,350 Optional Units = 10,730

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No Ins. MPCI MPCI CRCCRC

No Mktg. No Mktg. Mktg. No Mktg. Mktg. Bu Harvested 76,800 76,800 76,800 76,800 76,800Sold Price 2.40 2.40 2.10 2.40 2.10

Rev./Sold Grain 184,320 184,320 161,280 184,320 161,280

Ins. Claim 0 26,880 26,880 34,560 34,560

Loss on Oversold 0 0 (3,840) 0 (3,840)Bu @.30Cost of Ins. 0 (5,750) (5,750) (9,700) (9,700) Net Revenue 184,320 205,450 178,570 209,420 182,300

*Assumptions – 1,000 acres, 128bu APH, 70% Level, $2.40 CRC Base Price,$2.70 CRC Harvest Price, $2.40 Harvest Cash Price, $2.10 MPCI Price.

Contract 89,600bu @ $2.10 cash for total of $188,160.[’99 Premium cost for Clinton Co. Basic Units]Note: CRC rates for Enterprise Unit = 7,350

Optional Units = 10,730

Cash Flow ComparisonUsing Previous Examples of MPCI & CRC

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STOP!STOP!

• The rest of the material in your handout is for take home reading.

• Fill out “Crop Insurance Decision Worksheets now!

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Crop Insurance Decision – Corn Cost of Production

Low Debt Farm: Price/Bu Total Revenue Needed (Assume 128.5 Bu/A)


Medium Debt Farm


High Debt Farm


I. Purchase Crop Insurance (Yes or N o) _______

II. Type of Crop Insurance (CRC or MP) _______

III. APH Yield (Historical Average) 128.5 Bu

IV. Level (50, 55, 60, 65, 70, 75, 80, 85%) _______



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128.5 X _________ X 2.35 = ________ X 1,000 = _________ APH Coverage CRC Base Revenue Acres Total Base



128.5 X ________ = ________ X ________ = _________ APH Coverage Bu Guar/A Acres Total Bu Guar.

Level


Crop Insurance Cost (to be supplied by presenter). Premium rates vary by county, product and coverageamounts. Premium rate is for Enterprise Unit and includes 25% additions (Government Subsidy)MP Est. Producer Premium $___________ CRC Est. Producer Premium $__________


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Crop Insurance Decision – Soybeans Cost of Production

Low Debt Farm: Price/Bu Total Revenue Needed (Assume 43 Bu/A)


Medium Debt Farm


High Debt Farm


I. Purchase Crop Insurance (Yes or N o) ________

II. Type of Crop Insurance (CRC or MP) ________

III. APH Yield (Historical Average) 43 Bu

IV. Level (50, 55, 60, 65, 70, 75, 80, 85%) _________



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43 X _________ X 4.90 = _______ X 1,000 = _________ APH Coverage CRC Base Revenue Acres Total Base



43 X ________ = ________ X 1,000 = _________ APH Coverage Bu Guar/A Acres Total Bu Guar.

Level


Crop Insurance Cost (to be supplied by presenter. Premium rates vary by county, product andcoverage amounts. Premium rate is for Enterprise Unit and includes 25% additional Governmentsubsidy.MP Est. Producer Premium $___________ CRC Est. Producer Premium $__________

A wide variety of product types are available in Michigan for 1999 including APH, CRC, and namedperil products such as hail. For the game, to keep things simple, we only use two products – CRC &APH.

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Crop Ins. “Take Home” PointsCrop Ins. “Take Home” Points1. 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.)

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““Take Home” Points Cont’d.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).

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HailHail

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Perils Losses Are Paid OnPerils Losses Are Paid On

• Hail

• Fire

• Malicious destruction

• Transit losses

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How is Coverage Based?How is Coverage Based?

• Farmer determines dollars per acre of coverage desired

• Example– $300 per acre on corn

– $250 per acre on soybeans

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How are Losses Paid?How are Losses Paid?

• Adjuster determines the % of potential yield lost.

• % loss times coverage per acre - times number of acres damaged.

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HailHail

• 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

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Group Risk PlanGroup Risk Plan(GRP)(GRP)

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How is coverage based?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)

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How are losses paid on GRP?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

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Advantages/DisadvantagesAdvantages/DisadvantagesGRPGRP

• Less Paperwork– No yield records required

– No field loss adjustments

– No production records required

• Eliminates fraudulent claims• Higher % coverage levels than

MP/CRC

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Advantages/Disadvantages Advantages/Disadvantages GRPGRP

• 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

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CRC Loss Calculation CRC Loss Calculation WorksheetWorksheet

____ 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.

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MP Loss Calculation MP Loss Calculation WorksheetWorksheet

____ 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.

$ taking charge of yield & revenue risk management

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