Risk Management – Principles and Tools for Wisconsin Christmas Tree Growers John Mangus Custom Ag Solutions United States Department of Agriculture Risk Management Agency (RMA) January 25, 2008

2 Program Sponsorship, Coordination, and Delivery USDA / Risk Management Agency (RMA) –Oversees $62B Federal Crop Insurance Program –St. Paul, MN, Regional Office (One of Ten Regions) –Relatively Few Employees (About 500) –Main Offices in Washington, DC, and Kansas City, MO Custom Ag Solutions –Crop Insurance Education Programs –Risk Management Tools (BeefBasis.com and CTRAT) –Rural Appraisals –Technology Development

3 What is Risk? Risk is a Function of Possible Outcomes and Variance

4 Think “Chance” Think “Bad” and What is Risk?

5 Not All Risks Are Equal

6 Some Risks Can Be Managed

7 Some Risks Can’t

8 1.Production Risk 2.Market Risk 3.Financial Risk 4.Human Risk 5.Legal Risk Five Categories of Agricultural Risk

9 How Can We Balance Risk and Reward in Agriculture? Management Practices Diversification Flexibility Transfer Risk to Someone Else (e.g., Crop Insurance)

10 Management Practices Resource Availability Site Selection Site Preparation Planting Stock Planting Technique Plantation Protection Fertility Management Irrigation Options Weed Management Shaping/Shearing Insect/Disease Control Harvesting Marketing Starting Over

11 Diversification / Flexibility Retail Lot Wholesale Choose and Cut Destination Attractions Ancillary Product Sales Ancillary Product Production Alternative Season Revenues Provision of Services to Other Growers Off-Farm Income

12 Transfer Risk to Someone Else Contracted Pricing and/or Production Hedging Instruments (futures / options) Insurance Tools –Liability Insurance –Property – Casualty Insurance –Life Insurance –Federal Crop Insurance Programs

13 Federal Crop Insurance Programs Multiple Peril Crop Insurance (MPCI) Catastrophic (CAT) Crop Revenue Coverage (CRC) Income Protection (IP) Group Risk Plan (GRP) Revenue Assurance (RA) Adjusted Gross Revenue (AGR) (AGR-Lite) Livestock Risk Protection (LRP)

14 UNITED STATES In 2007, RMA insured over $67 billion in crop value across 1 million policies, 272 million acres, and 100 different commodities. Wisconsin In 2007, RMA insured $1.5 billion in crop value across 7,100 policies, 4.3 million acres, and 20 different commodities. Federal Crop Insurance Programs

15 Wisconsin Commodities Covered by Federal Crop Insurance Programs Apples Barley Cabbage (pilot) Cigar Binder Tobacco Corn Cranberries Dry Beans Forage Production Forage Seeding Grain Sorghum Green Peas Hybrid Seed Corn Mint (pilot) Nursery Oats Potatoes Processing Beans Soybeans Sweet Corn Wheat Federal Crop Insurance Programs

16 Crop Insurance Options for Christmas Tree Growers Adjusted Gross Revenue-Lite (AGR-Lite) Whole-Farm Revenue Policy Insurable Causes of Loss: –Production failures (natural causes) –Unforeseen market conditions Can be used as stand-alone coverage or with other crop insurance products

17 Adjusted Gross Revenue-Lite (AGR-Lite) Coverage levels from 65% to 80%; highest coverage levels require production of at least three commodities Liability Limit of $1 million No limit on portion of revenue obtained from livestock Crop Insurance Options for Christmas Tree Growers

18 Adjusted Gross Revenue-Lite (AGR-Lite) Based on IRS Schedule F Sales Closing Date: March 15, 2008 Premiums are subsidized 48% to 59% AGR-Lite only addresses farm revenue – not expenses More information is readily available Crop Insurance Options for Christmas Tree Growers

19 Chance……..…..Bad

20 How Can Christmas Tree Growers Manage Their Risks? Management Practices Diversification Flexibility Transfer Risk to Someone Else (e.g., Crop Insurance)

21 Management Practices Resource Availability Site Selection Site Preparation Planting Stock Planting Technique Plantation Protection Fertility Management Irrigation Options Weed Management Shaping/Shearing Insect/Disease Control Harvesting Marketing Starting Over

22 Management Practices Efficiency: Acting or producing effectively with a minimum of waste, expense, or unnecessary effort. Exhibiting a high ratio of output to input Management practices are chosen and implemented to generate a benefit greater than the accompanying cost.

23 Economic Darwinism Survival of the Efficient As more growers enter the market, competition for buyers will increase. Maximizing efficiency is the only way to ensure survival in a competitive market. The most efficient producer is not necessarily the lowest cost producer

24 Improving Efficiency 1.Reduce costs without decreasing the quantity or quality of production 2.Increase production quantity or quality without increasing costs 3.Create cost savings greater than any resulting production loss 4.Increase production to a level greater than any accompanying cost increase

25 Improving Efficiency How can we improve our operating efficiency if we do not measure, analyze, and actively manage our key measures of cost and production?

26 The First Steps to Efficiency Efficiency cannot be improved without a basic understanding of your cost and price structure. –What is your break-even cost per tree? –What is your average selling price per tree? –How do your costs vary by production year? Risk and Reward <> Costs and Benefits

27 The First Steps to Efficiency Balance Risk and Reward

28 Understand Costs and Benefits The First Steps to Efficiency

29 Evaluating Your Decisions Four “Knows” for Every Decision: Know the Associated Risks Know the Anticipated Rewards Know the Likely Costs Know the Expected Benefits

30 Chance……..…..Bad

31 The Christmas Tree Risk Analysis Tool (CTRAT) Developed Beginning in 2005 Under Several USDA/RMA Partnerships Oversight by Dr. Mel Koelling (Michigan State), Chal Landgren (Oregon State), Dr. Rick Bates (Penn. State), and Jeff Owen (North Carolina State) Designed to Help Christmas Growers Model and Better Understand Their Operations. The CTRAT can be Downloaded for Free at

32 The Christmas Tree Risk Analysis Tool (CTRAT) Allows Growers to Model Their Key Operational Characteristics Generates an Enterprise Budget, Balance Sheet, and Multi-Year Statement of Planned Cash Flows Provides a Dynamic Operational Summary Break-Even Analysis. Offers ‘What-If” Analysis Capabilities

33 Operational Understanding See Your Key Operational Characteristics and Financial Results in One Place Provide More Transparency and Understanding for Bank / Investors

34 Efficiency cannot be improved without a basic understanding of your cost and price structure. –What is your break-even cost per tree? –What is your average selling price per tree? –How do your costs vary by production year? Risk and Reward <> Costs and Benefits

35 Developing a Cost Budget Data Collection and Organization Income and Expense Allocation Calculation

36 Data Collection 1.Income and Expense Normalize to a typical year Build up from the lowest unit 2.Inventory Acres and/or Trees Trees Planted – Estimated Loss 3.Expenses Tax Return Information

37 Decision Support After modeling your operation in the CTRAT, you can use the tool’s ‘What-If’ capabilities to evaluate –Your ability to withstand a price drop –Your ability to meet your financial obligations at various price levels –The costs and benefits of the practices used to manage production, human, and legal risks

38 Decision Support If you understand your current costs and returns, you can better focus on improving efficiency and returns by analyzing the effects of different management practices. –Tree Spacing –Marketing Different Tree Sizes –Irrigation Options

39 Allocation Total Operation Enterprise Species Income Expense Species Enterprise Species

40 Allocation Total Operation Christmas Trees Fraser Income Expense Douglas Fir Landscape Trees Blue Spruce Scotch Pine

41 Allocating Income Species Year Type: Price X Quantity Year Type: Price X Quantity Year Type: Price X Quantity

42 Allocating Income Fraser Year 7 #1 6-7: $20 X 10,000 = $200,000 #1 7-8: $28 X 1,500 = $42,000

43 Allocated Income

44 Allocating Expenses Begin with Schedule F Expenses Direct vs. Indirect Cash vs. Non-Cash Non-Expense Cash Requirements

45 Schedule F Expenses Car and Truck Expense Chemicals Conservation Expenses Custom Hire Depreciation Employee Benefits Fertilizer and Lime Trucking and Freight Gasoline, Fuel, and Oil Insurance Mortgage Interest Other Interest Labor Pension and Profit- Sharing Plan Rent/Lease-Equipment Rent/Lease-Land Repairs Seeds and Plants Storage/Warehousing Supplies Purchased Utilities Dues and Sub. Professional Fees Real Estate Taxes

46 Allocating Expense Species Year Expense Year Expense

47 Allocating Expense Fraser Year 1 Planting Fertilizer Year 2 Re-Planting Fertilizer

48 Allocated Expenses

49 Allocated Income

50 Allocated Expenses

51 Calculated Costs and Returns

52 Calculated Costs and Returns

53 Chance……..…..Bad

54 For More Information Custom Ag Solutions – –