$ Taking Charge of Yield & Revenue Risk Management

$ Objective 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

$ What did we learn from the 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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$ Four Alternatives to Risk »Retain Risk »Reduce Risk »Avoid Risk »Shift Risk

$ Smith Vs. Jones

$ Insurance to Protect Against Production Shortfall Exposure

$ 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 +

$ CAT - Catastrophic 50% of Yield / 55% of Price = 27% net coverage. Example bu/A Yld. X $2.10 = $ Expected Rev. 128bu X 50% = 64bu $2.10 Price X 55% = $1.15 Guarantee = $ /269 = 27% (Basic Units Only)

$ Why Buy CAT 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.

$ Multi-Peril (MP)

$ Perils Losses Are Paid On Hail/fire Drought Disease Excess rain Animals Insects Combination of the above

$ 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%.

$ Units Basic Units - by County, Crop, Share Optional Units - by Crop, Section, Share Enterprise Units - Combine whole farm by crop.

$ How is MP Coverage Based? Example: bu. Yield History x 70% Coverage = 90 bu. Guarantee Loss $2.20 Each bushel below 90 is $2.20/bu.

$ 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

$ MP 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.

$ Crop Revenue Coverage: CRC

$ CRC 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.

$ 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.

$ CRC 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.

$ CRC Plus or Added Revenue Products Private policy to add to CRC base policy only. Must have CRC policy. Not subsidized.

$ CRC Loss Example # 1 (Production below bushel Guar.) 1,000X 128X 70%=89,600 Acres APH LevelBu/Guar. 89,600 X greater of $2.40or $2.00 =$215,040 Bu/Guar. Base Price Hvst. Fut. PriceHvst. Guar. 76,800X $2.00 =$153,600 Harv. Bu.Hvst. Pr.Hvst. Rev. $215,040__$153,600 = $61,440 Hvst. 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.

$ 1,000X 128X 70% =89,600 Acres APH LevelBu/Guar. 89,600X greater of 2.40 or 2.00 =215,040 Bu/Guar. Base Price Hvst.Price Hvst. Guar. 100,000X 2.00 =200,000 Harv. 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 #2 (Production above bushel Guar.)

$ Cash Flow Comparison Using Previous Examples of MPCI & CRC

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$ 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 Ins. “Take Home” Points 1. 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.)

$ “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).

$ Hail

$ Perils Losses Are Paid On Hail Fire Malicious destruction Transit losses

$ How is Coverage Based? Farmer determines dollars per acre of coverage desired Example –$300 per acre on corn –$250 per acre on soybeans

$ How are Losses Paid? Adjuster determines the % of potential yield lost. % loss times coverage per acre - times number of acres damaged.

$ Hail 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

$ Group Risk Plan (GRP)

$ 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 the MP price)

$ 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

$ Advantages/Disadvantages GRP Less Paperwork –No yield records required –No field loss adjustments –No production records required Eliminates fraudulent claims Higher % coverage levels than MP/CRC

$ Advantages/Disadvantages GRP 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

$ CRC Loss Calculation Worksheet ____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.

$ MP Loss Calculation Worksheet ____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.