Forage Risk Management J. Shannon Neibergs and Jon Paul Driver Western Center For Risk Management Education Disclaimer: This information is provided for training only. Any discrepancy between the training material and the policy is not intended. The information provided in this training does not supersede policy and procedure. USDA RMA Risk Management Education Partnership 53102-005

Presentation overview Forage producers often become complacent when they hear the term risk management Misunderstanding the terms risk and uncertainty Complacency in evaluating risk outlook Thinking that risk management is limited to futures, options and forward contracting and that there are limited management actions for forage producers Thinking crop insurance isn’t available for forage production Lack of trust in programs Risk management contains a number of levels Sources of risk Risk bearing ability and attitudes Tools for managing risk

Risk and Uncertainty Risk Uncertainty Risk is present when future evens occur with measurable probability For example your individual farm/field forage yield Price Car insurance The larger the error of measurement the larger the risk The larger the impact on farm revenue the greater the risk Management actions can be made to mitigate risk Uncertainty Indefinite, indeterminate, and occurs so infrequently that an numeric estimate of its occurrence can not be made so there is no specific management tools that can be implemented. Uncertainty Risk

The difference between risk and uncertainty is not just semantics Guard Dog On Duty Source: Kauffman, N. When Uncertainty Turns to Risk in Ag. Finance

The degree of risk also matters Uncertainty Risk Guard Dog On Duty Source: Kauffman, N. When Uncertainty Turns to Risk in Ag. Finance

The risk in U.S. agriculture has increased Source: Kauffman, N. When Uncertainty Turns to Risk in Ag. Finance

Washington Alfalfa Price - Monthly

U.S. $ Exchange Rate

Farm debt is increasing Source: Kauffman, N. Agricultural Finance Databook Federal Reserve Bank of Kansas City

Two alternatives to manage risk Attitude toward risk Two alternatives to manage risk Self Insure Adequate financial capacity Operating loan “Hedge” risk Implement management action Purchase insurance

Two alternatives to manage risk Attitude toward risk Two alternatives to manage risk Self Insure Adequate financial capacity Operating loan “Hedge” risk Implement management action Purchase insurance What’s available Will it work on my operation What is the expected net cash flow

Agencies USDA RMA – Risk Management Agency Operates and manages the Federal Crop Insurance Corporation Insurance sold by 15 private-sector insurance companies FSA – Farm Service Agency Local Administration of Federal Farm Programs

New and Expanded Coverage Forage Production Insurance (Expanded)(RMA) Whole Farm Revenue Protection Pilot (New)(RMA) Pasture, Rangeland and Forage Pilot – Rainfall Index (Expanded)(RMA) NAP Buy-up (New) (Farm Service Agency)

Forage Production Insurance What is it: Yield insurance at a specified price Where is it available: Select counties ID, OR, WA WA: Pend Oreille, Spokane, Stevens or by requesting coverage by written agreement When do you have to purchase by: For 2016 sales closing September 30, 2015

Forage Production Insurance What yield: Actual Production History Yield established by farm records Certified scale weights with descriptive records Pre-harvest appraisal with descriptive records What price: Specified prior to sales closing (Sept. 30)

Forage Production Insurance Coverage level (of APH): Insurance premium (cost): Depends on coverage level and the percent of the specified price you elect to insure Ask crop insurance agent

RMA Premium Calculator https://ewebapp.rma.usda.gov/apps/costestimator/Estimates/QuickEstimate.aspx

Forage Production Insurance Loss Example Assume a 75% coverage level, a 100 percent price election of $230/ton, a APH yield of 4 tons per acre and an actual yield of 2.5 tons per acre.

Causes of Loss Adverse Weather Hail, Frost, Freeze, Drought, Excess Moisture Failure of Irrigation Water Supply If Caused by Insured Peril That Occurs During the Insurance Period Volcanic Eruption Insects and Disease Must Have Used Proper and Sufficient Control Measures

Historical Analysis

WHAT ABOUT QUALITY ?!?!? Whole Farm Revenue !!!!

Whole Farm Revenue Protection What is it: Revenue insurance Insure Schedule F farm revenue (historic 5 years) Exemptions for beginning farmers Where is it available: All counties in all 50 states When do you have to purchase by: County specific - multiple closing dates Talk to your crop insurance agent

Whole Farm Revenue Protection Covered losses: Revenue loss Replanting coverage loss Coverage levels: 50 to 85% of revenue

Whole Farm Revenue Protection Premium cost: Elect to cover 50 to 85% of revenue Depends on number of qualifying crops grown

RMA Premium Calculator https://ewebapp.rma.usda.gov/apps/costestimator/Estimates/QuickEstimate.aspx

Record Keeping 5 Years of Schedule F (Or Equivalent tax records) Written Farm Plan Historical Records Inventories, Accounts Receivable or Accounts Payable Summaries of Coverage for Other Insurance Policies

Program Restrictions Livestock Or Nursery Over $1 Million in Annual Sales, 35% of revenue Potatoes Must Have at least 2 Crops Based on Commodity Count Calculation Note - the Qualifying Crops are quite diverse Over $17 Million in Total Revenue or $8.5 Million in Coverage

Historical Analysis Different For EVERY Farm Note Insuring Revenue Not Net Income Subsidy and overall farm coverage makes this program attractive

Pasture, Rangeland and Forage Pilot (PRF) What is it: Updated RMA Insurance Program Against Drought Hedge on precipitation measured by National Oceanic and Atmospheric Administration (NOAA) grid rainfall index “Insurance protection for losses of forage produced for grazing or harvested for hay” – qualifies you to purchase the insurance product Insuring the rainfall index in a grid No Record Keeping Requirements Available in 48 states

Pasture, Rangeland and Forage Pilot (PRF) What is a grid: About 17x17 miles (0.25 degrees Lat. and Long.) Grid locator tool http://maps.agforceusa.com/prf/ri/

Pasture, Rangeland and Forage Pilot (PRF) What am I insuring: Payment trigger is precipitation below the elected coverage level of your grid rainfall index Insure only the acres you choose Select a productivity factor to establish a value between 60% to 150% of the county base value Match mount of protection to the value of forage of your specific hay operation

Pasture, Rangeland and Forage Pilot (PRF) Coverage Periods: Must insure TWO bi-monthly periods January – February February - March March – April April – May May - June June – July July – August August – September September – October October – November November - December

Noninsured Crop Disaster Assistance Program (NAP) What is it: The NAP was reauthorized by the 2014 Farm Bill Administered by USDA FSA Covers crops that do NOT have a USDA RMA insurance program Hay growers have USDA RMA forage production insurance and PRF but some forage crops may be eligible

Noninsured Crop Disaster Assistance Program (NAP) What does it cover: Loss from natural disaster Drought, hail, freeze, wind, etc. NAP provides catastrophic coverage of loss that exceeds 50% of expected production at 55% of average market price Additional coverage buy up is available ranging from 50% to 65% of production at 100% of market price

Noninsured Crop Disaster Assistance Program (NAP) What does it cost: Service fee + premium Fees capped at maximums Beginning, limited resource and traditionally underserved farmes are eligible for a waiver of the service fee and a 50% premium reduction Potential for eligible crops to get natural disaster coverage at low cost

Review - When to Buy Sales Closing Dates Forage Production Insurance September 30th Whole Farm Revenue Protection Pilot March 15th Pasture, Rangeland, and Forage November 15th NAP Refer to FSA office for application closing date

Review - Where to Buy – Get more information Your Existing Insurance Agent Ask Your Neighbor http://www.rma.usda.gov/tools/agent.html

Thank you sneibergs@wsu.edu 509 335 6360 http://ses.wsu.edu/extension/livestock_marketing/