1 Production and Price Risk Management Tools for use by Livestock & Specialty Crop Producers...

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Production and PriceProduction and PriceRisk Management ToolsRisk Management Tools

for use byfor use by

Livestock & Specialty Crop Livestock & Specialty Crop ProducersProducers

Collaborating Partners:Collaborating Partners:Billings RMA Regional OfficeBillings RMA Regional Office

Fort Peck Community CollegeFort Peck Community College

James B. JohnsonJames B. JohnsonMontana State UniversityMontana State University

December 19-20, 2005December 19-20, 2005

Risk Management Agency

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Outline

A. Production Risk Management for Alternative Crops

1. RMA Crop Insurance Offerings

2. Production Risk Management in the Absence of RMA Actuarial Tables

a) Request for Actuarial Change

b) NAP

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Outline, cont.

B. Price Risk Management for Alternative Crops

1. Marketing Assistance Loans

2. Markets for Alternative Crops and Contracting

C. Risk Management for Livestock Producers: Insurance Products

1. Forage Production

2. Rangeland Insurance

3. Livestock Risk Protection

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Alternative Crops:Production Risk Management

when RMA Products are Available

Self-Insure Single-PerilInsurance

RMA MultiplePeril Insurance

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Alternative Crops in Northeast Montana: Counties with Multiple Peril Crop

Insurance Coverage, 2006 Crop Year

Counties Dry Beans

Chickpeas Dry Peas

(Lentils)

Canola Mustard Safflower

Daniels MPCI MPCI MPCI MPCI MPCI

Dawson MPCI MPCI MPCI MPCI

McCone MPCI MPCI MPCI MPCI

Richland MPCI MPCI MPCI MPCI MPCI MPCI

Roosevelt MPCI MPCI MPCI MPCI MPCI

Sheridan MPCI MPCI MPCI MPCI MPCI

Valley MPCI MPCI MPCI MPCI MPCI

Wibaux MPCI MPCI MPCI MPCI

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Basics of Multiple Peril Crop Insurance

1. Causes of loss that are insured include: adverse weather, insects, wildlife, volcanic eruption, fire, disease, earthquake, and failure of irrigation water supply.

2. Coverage is differentiated by type and practice, i.e., silage corn, irrigated.

3. Producer establishes an APH by unit.

4. Producer chooses a coverage election of 50, 55, 60, 65, 70, 75, 80 OR 85% of APH, depending on the crop plan.

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Basics of Multiple Peril Crop Insurance, cont.

5. Producer chooses a price election usually 55 to 100% of the maximum price election.

6. Producer is indemnified if actual yield is less than the yield guarantee.

7. Gross premium equals maximum liability multiplied by premium rate. Producer premium is the gross premium less the premium subsidy.

8. There are replant options for annually-planted crops.

9. Catastrophic Risk Protection (CAT) is available at 50% of the yield level and a 55 percent price election.

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Basics of Multiple Peril Crop Insurance,

cont.

Coverage Level Premium Subsidy Factor

50% 0.67

55% 0.64

60% 0.64

65% 0.59

70% 0.59

75% 0.55

80% 0.48

85% 0.38

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Chickpeas: MPCI

1. Insured Crop: Desi and small Kabuli (AMIT, B-90, ChiChi and Chico varieties)

2. Insurable Units: Basic units and optional units by type

3. Coverage Level: 50, 55, 60, 65, 70, and 75

4. Replant Option: If plant populations are unable to provide 90 percent of the APH, producer will receive the lower of 10 percent of the value of the APH or 120 pounds of chickpeas.

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Chickpeas: MPCI, cont.

5. Variety restrictions: Only ascochyta-resistant varieties are insurable. Seed must be treated with recommended fungicides to prevent ascochyta blight, pythium and other diseases.

6. Cropland cannot be planted to chickpeas in any of the most recent three crop years.

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Chickpeas: MPCI Example

Contract Data Value Calculation

APH Yield 1,600 Producer

Coverage Level 75% Producer

Yield Guarantee 1,200 1,600 x 0.75

Maximum Price Election $0.09 RMA

Price Election 100% Producer

Elected Price $0.09 1.00 x 0.09 per pound for desi

Maximum Liability $108 1,200 pounds x $0.09

Premium Rate 0.06 RMA

Gross Premium $6.48 $108 x 0.06

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Chickpeas: MPCI Example

1. Suppose the producer actually harvests 800 pounds of garbanzo beans per acre.

2. Will the producer receive an indemnity?

3. If so, calculate the indemnity in bushels per acre.

4. Calculate the indemnity in dollars per acre.

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Chickpeas: MPCI Example1. Yes

2. The producer receives an indemnity because 800 pounds per acre is less than the yield guarantee of 1,200 pounds per acre.

3. The producer’s indemnity is the difference in pounds.

1,200 pounds – 800 pounds = 400 pounds per acre

4. Valued at the producer’s elected price

400 pounds x $0.09 per pound = $36.00 per acre

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Alternative CropsProduction Risk Management

when RMA Products are NOT Available

Self-Insure

Single-PerilInsurance

Request for

Actuarial Change

NAP

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Request forRequest forActuarial ChangeActuarial Change

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Request for Actuarial Change

1. The possibility is only available if there is no RMA actuarial offering for the commodity in the county including CAT coverage.

2. An RMA process that may result in a custom-tailored insurance agreement, a written agreement.

3. The producer provides production and marketing information through their insurance agent.

4. RMA reviews the application and considers the existence of RMA products in other locations.

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Request for Actuarial Change, cont.

5. RMA may provide a producer with a written agreement with the:

a. Premium calculation noted;

b. Crop price is established; and the

c. APH yield is established.

6. Producer chooses a:

a. Price election (55% - 100%); and a

b. Coverage level (50% - 75%).

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Request for Actuarial Change, cont.

7. The producer decides whether to sign (accept) the written agreement.

8. This process has to be repeated each crop year.

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Request for Actuarial Change-Chickpeas

Request for Actuarial Change in counties where Dry Bean MPCI policies exist:

• If no chickpea actuarial table exists in a county, but a dry bean policy exists for the county:

1) Producers of Desi or small Kabuli chickpeas may file a request for actuarial change.

2) Producers of large Kabuli chickpeas may also file a request for actuarial change.

• Producers can follow the procedures outlined in Briefing No. 13

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Request for Actuarial Change-Chickpeas

Request for Actuarial Change in counties where Dry Bean MPCI policies do NOT exist:

1. Producers must follow the Request for Actuarial Change procedures outlined in Briefing No. 13.

2. Additionally, the producer must provide:

a. Three years of APH records

b. The anticipated planting and harvesting dates:

c. The name, location, and distance from farm to market in which chickpeas will be sold.

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Production Risk Management Options

Choices When RMA

Offerings Are NOT Available

Self-Insure Single-PerilInsurance

RequestFor Actuarial

Change

Noninsured Crop Disaster

Assistance Program (NAP)

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Noninsured Crop Disaster Noninsured Crop Disaster

Assistance ProgramAssistance Program(NAP)(NAP)

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NAP Program Basics

1. Financial assistance: The Noninsured Crop Disaster Assistance Program (NAP) is a Farm Service Agency managed program that provides financial assistance to producers of noninsurable crops when low yields, loss of inventory, or prevented planting occurs as the result of natural disasters.

2. NAP availability: NAP provides coverage for crops for which the catastrophic level of RMA insurance is unavailable.

3. Eligible crops: Crops that are noninsurable and include crops grain for food, fiber, and planted and grown for livestock consumption.

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NAP Program Basics, cont.

4. Natural disasters: Natural disasters include damaging weather such as drought, hail, freeze, hurricane, excessive moisture or wind, an adverse natural occurrence; and a condition related to damaging weather or adverse natural occurrence such as insect infestation.

5. Producer eligibility: An eligible producer is a landowner, tenant, or sharecropper who shares in the production of a crop that is noninsurable.

6. Program eligibility requirements: The producer must report acreages and production to FSA by required dates.

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NAP Program Basics, cont.7. Normal yields: FSA calculates normal yields by

averaging a producer’s actual yields over a 4 to 10 year period. If 4 years of acceptable records are unavailable, a yield will be assigned.

8. Unit of coverage: Yields and yield losses are determined at the basic unit level. A basic unit includes all the acreage of the crop in the county on which the producer has the same interest.

9. Application for coverage: Eligible producers must apply for coverage of noninsurable crops. Application must be filed and applicable fees paid at the local Farm Service Agency (FSA) office by application closing date.

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NAP Program Basics, cont.10. Applicable fees:

a. $100 per crop per administrative county.

b. $300 per producer per county.

c. $900 per producer in all counties.

11. Compensated losses: Losses of noninsurable crops exceeding 50 percent of the expected yield. The payment rate is 55 percent of the average market price of the commodity (is set by the state FSA committee).

12.Compensation Reduction: The payment rate may be reduced for a crop that is unharvested.

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Marketing Assistance Marketing Assistance Loans:Loans:

Price Risk Management Price Risk Management Tool for Alternative CropsTool for Alternative Crops

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Marketing Assistance Loans for Alternative Crops

1. These loans provide a floor price for loan-quality production.

2. Marketing assistance loans are available for most alternative crops produced in Northeast Montana.

3. Pulse crops have uniform loan rates across counties.

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Marketing Assistance Loans for Alternative Crops, cont.

4. Minor oilseed loan rates for some crops differ across counties reflecting differences in differentials from terminal markets.

5. In periods of low prices, LDPs are available and may augment producer incomes.

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Alternative Crops in Northeast Montana: Marketing Assistance Loan Rates (per

hundredweight), 2005 Crop Year

Counties Dry Peas

Chickpeas Dry Peas

(Lentils)

Canola Mustard Safflower

Daniels $6.03 $7.43 $11.72 $9.04 $9.31 $7.22

Dawson $6.03 $7.43 $11.72 $9.11 $9.33 $7.22

McCone $6.03 $7.43 $11.72 $8.97 $9.28 $7.22

Richland $6.03 $7.43 $11.72 $9.18 $9.39 $7.22

Roosevelt $6.03 $7.43 $11.72 $9.11 $9.36 $7.22

Sheridan $6.03 $7.43 $11.72 $9.18 $9.37 $7.22

Valley $6.03 $7.43 $11.72 $8.90 $9.27 $7.22

Wibaux $6.03 $7.43 $11.72 $9.18 $9.37 $7.22

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Markets for Alternative Crops

1. World production of many alternative crops is small compared to a crop such as wheat.

2. Countries other than the U.S. producer most of the alternative crops (example: Mustard production).

3. Prices are volatile and driven by production in other countries.

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4. Marketing channels in the U.S. are less developed than for major commodities (example: Mustard exports).

5. Incentives for contracting are relatively large.

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United States4%

China2%

Myanmar6%

Canada43%

Czech Republic6%

Ukraine7%

Russian Federation

8%

Nepal19%

Romania2%

Kyrgyzstan1%

Others2%

Percent of World Mustard Seed Production by Country: 2004

703,738 metric tons


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Percent of World Mustard Seed Exports by Country: 2003

261,381 metric tons

Canada42%

Russian Federation

14%

India4%

Netherlands4%

Czech Republic8%

Ukraine13%

Germany5%

Hungary3%

Others4%

Belgium1%

United States2%


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Contracts for Alternative Crops

1. A voluntary contract exists only when:

a. Both parties EXPECT to benefit from the contract

2. Some contract terms provide benefits to a party to the contract.

3. Other contract terms impose cost to a party to the contract.

4. Buyers and sellers care about the overall net benefits of contracting.

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Contract Benefits to Producers

1. Risk Management

a. Guaranteed market access

b. Price risk management

Guaranteed price

Guaranteed basis

Guaranteed price based on a formula (spot or futures price)

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Contract Benefits to Producers

2. Other benefits:

a. Access to production and marketing information

b. Provision of inputs, technology, or management

c. Access to financing

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Contract Costs to Producers

1. Commitment to a single buyer

2. Commitment of a specific amount in the absence of “act of god” clauses

3. Risk of buyer default

4. Restrictions on input use

5. Quality discounts may exist

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Contract Benefits To Buyers

1. Guarantees key input supplies

2. Improved quality reliability

3. Shared price risk

4. Costs of inputs are more predictable

5. Identity preservation can help establish niche

markets

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Contract Costs To Buyers

5. Financial commitment to purchase

6. Specific quantities

7. Risk of quantity shortfalls

8. May not be able to transfer price risk

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Percentage Of Montana Alternative Crop Acreage

Sold Under Contract

Alternative Crop Acreage

Under Contract

71%


NOT Under Contract

29%

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NOT Under Contract

29%

Contract With Pre-Determined

Price68%

Contract Without Pre-Determined

Price1%

Basis Fixed Contract

2%

Percentage Of Montana Alternative Crop Acreage By

Contract Type

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Alternative Crop Acreage Sold Under Contract In 2003 (Source: MSU/MGAA 2004

Survey)

46.8%

73.2%

80.5%

97.5%

75.7%71.8%

57.3%

11.6%

100.0% 100.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pe

rce

nta

ge

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Risk Management for Risk Management for Livestock Producers:Livestock Producers:Insurance ProductsInsurance Products

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RMA Forage RMA Forage Production InsuranceProduction Insurance

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Forage: Non-Irrigated Alfalfa

Counties In Which Insurance Coverage

For Non-Irrigated Alfalfa Hay Is Available For 2006

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Forage: Irrigated AlfalfaCounties In Which Insurance Coverage

For Irrigated Alfalfa Hay Is Available For 2006

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Forage Production Insurance Eligibility

1. Only forages planted for harvesting are insurable (not those planted for grazing)

2. Three types of forages

a. Alfalfa

b. Alfalfa/Grass

c. Grass/Alfalfa

3. These are distinguished based on the number of living alfalfa plants per square foot

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Stand Requirements

Forage/Practice 1st Year

2nd Year

3rd Year

4th Year

5th Year

6th Year

7th Year

8th Year

Alfalfa Irrigated 6.0 4.0 3.0 3.0 3.0 3.0 3.0 **

Alfalfa/Grass Irrigated

2.5 1.7 1.2 1.2 1.2 1.2 1.2 **

Grass/Alfalfa Irrigated

0.2 0.2 0.2 0.2 0.2 0.2 0.2

Alfalfa Non-Irrigated

4.8 3.2 2.4 2.4 2.4 * * **

Alfalfa/Grass Non-Irrigated

2.0 1.3 1.0 1.0 1.0 * * **

Grass/Alfalfa Non-Irrigated

0.2 0.2 0.2 0.2 0.2 0.2 0.2

Minimum Number Of Living Alfalfa Plants Per Square Foot, By Type

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Forage Production Insurance

4. Forages can be winter-grazed

5. Basic, optional, or enterprise units

6. Must establish an APH

a. Sometimes difficult

b. Weigh bales on certified scales

c. Take pictures of stacks

d. Need records by unit, type

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Forage Production Insurance

5. Yield election: 50, 55, 60, 65, 70, 75%

6. Price election: 55 – 100%

a. Alfalfa price: $83/ton

b. Alfalfa/grass price: $83/ton

c. Grass/alfalfa price: $76/ton

7. CAT coverage is available

a. 50% coverage level

b. 55% price election

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Irrigated Alfalfa Example


APH Yield 4 tons/ac Producer

Acres 300 ac Producer

Yield Election 75% Producer*

Yield Guarantee 3 tons/ac 4 tons/ac x 0.75

Price Election 100% Producer*

Elected Price $83/ton 1.00 x $83

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Suppose you actually harvest:

a. 2 tons/acre first cutting

b. 0.5 tons/acre on the final cutting

Will you receive an indemnity?

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Yes:

3.0 tons/acre – 2.5 tons/acre = 0.5 tons/acre

0.5 tons/acre x $83.00/ton = $41.50/acre

$41.50/acre x 300 acres = $12,450

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Risk Management for Other Forage Production

1. Grass hay and grain harvested as hay

2. Use the NAP program

3. FSA price per ton, 2006 crop, is $74.67/ton, with an effective price guarantee of $41.07/ton.

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GRP Rangeland GRP Rangeland InsuranceInsurance

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Rangeland Insurance

Counties in Which GRP Rangeland Insurance is Available in 2006

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GRP Rangeland Insurance

1. Pilot group risk plan

2. Insured crop is range or pasture used for grazing

3. Individual APH is not required

4. NASS records on non-Irrigated hay production are used to determine county “yields”

5. Producer receives an indemnity if the county payment “yield” is below the producer’s trigger “yield”

6. Producer’s actual range condition is inconsequential

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GRP Rangeland Insurance: Basics

1. County base production

a. Historical average non-irrigated county hay production as estimated by RMA

2. Coverage level

a. Producers select 70, 75, 80, 85, or 90 percent of county base production

b. The CAT coverage level is set at 65 percent

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3. Trigger “yield”

a. Multiply county base production by coverage level

4. Net hay production (payment yield)

a. NASS estimate of net non-irrigated hay production in the insured year

b. CRP and small grains hay are subtracted from total non-irrigated hay production

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5. County base revenue per acre

a. Multiply private state grazing fee/AUM by a county’s rangeland productivity factor (RMA)

b. For 2006, $15.90/AUM in Montana

6. Maximum protection per acre

a. Multiply county base revenue per acre by the selected coverage level (same level as trigger “yield”

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7. Price election percentage

a. Producers select from 60 – 100 percent

b. Most select 100 percent

c. CAT price election is set at 45 percent

8. Dollar amount of protection per acre

a. Multiply maximum protection per acre by the selected price election percentage

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GRP Rangeland Insurance: Example


County Base Production

20,000 tons RMA

Coverage Level 90% Producer

Trigger “Yield” 18,000 tons 20,000 tons x 0.90

Actual Net Hay Production (Payment

Yield)8,000 tons NASS

Rangeland Productivity Factor

0.35 AUM/Acre

RMA

County Base

Revenue Per Acre$5.57/acre $15.90/AUM x 0.35 AUM/Acre

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1. [18,000 – 8,000]/18,000 = 0.5556

2. 0.5556 x $5.01 = $2.78/acre

3. If you had 10 sections

a. Total gross indemnity would be $17,792

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GRP Rangeland Insurance:Premium Calculation

1. Total Premium

a. Dollar amount of protection per acre x premium rate

2. Premium subsidy

a. Total premium x Subsidy rate

3. Producer premium

a. Total premium – Premium subsidy

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Coverage Level Premium Rate

(%)

Premium Subsidy Rate

(%)

70 7.4 64

75 8.5 64

80 9.6 59

85 10.9 59

90 12.4 55


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Total Premium

Per Acre$0.622 $5.01/acre x 0.124

Total Ranch

Premium$3,980.80 $0.622 x 6,400 acres

Premium Subsidy

Per Acre$0.342 $0.622/acre x 0.55

Premium Subsidy (Ranch)

$2,188.80 $0.342/acre x 6,400 acres

Ranch Premium $1,792.00 $3,980.80 - $2,188.80 ($0.28/acre)

Administrative Fee $30.00 RMA

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Maximum Protection Per Acre

$5.01/Acre $5.57/Acre x 0.90

Price Election

Percentage100% Producer

Dollar Amount Of

Protection Per Acre$5.01/Acre $5.01/Acre tons x 1.00

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1. Suppose actual net non-irrigated county hay production was only 8,000 tons

2. Indemnity calculation

a. [(Trigger “yield” – Net hay production)/trigger “yield”]

b. Multiply that by Dollar amount of protection per acre

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Livestock Risk Livestock Risk ProtectionProtection

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LRP Overview

1. Available in 20 states

a. Including Montana

2. Covers feeder cattle, fed cattle, and swine.

3. LRP coverage was first offered in 2003 in 10 states other than Montana.

4. LRP for feeder cattle was suspended on December 24, 2003 because of BSE.

5. LRP for feeder cattle resumed on September 30, 2004.

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LRP Overview

6. LRP is a single-peril product

a. Offers only price insurance

b. Protects producers against a decline in price below an established coverage price

7. LRP does not insure against:

a. Sickness or death losses

b. Cost of gain increases

c. Basis price risk

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LRP Feeder Cattle Concepts

1. LRP is offered for 13, 17, 21, 26, 30, 34, 39, 43, 47, and 52 week periods.

a. These periods represent the number of weeks between attaching insurance and marketing calves.

2. An application must be completed indicating beneficial interest in a group of cattle.

3. Specific coverage endorsement is required for each group of cattle.

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Insurable Type Target Weight

Steers Weight 1 less than 6.0 hundredweight

Steers Weight 2 6.0 to 9.0 hundredweight

Heifers Weight 1 less than 6.0 hundredweight

Heifers Weight 2 6.0 to 9.0 hundredweight

Brahman Weight 1 less than 6.0 hundredweight

Brahman Weight 2 6.0 to 9.0 hundredweight

Dairy Weight 1 less than 6.0 hundredweight

Dairy Weight 2 6.0 to 9.0 hundredweight

Feeder Cattle Types and Weights Eligible for LRP Feeder Cattle Coverage


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4. Endorsement limits

a. Limited to 1,000 head per specific coverage endorsement.

5. Annual policy limits

a. Limited to 2,000 head in any crop year.

b. Crop year is July 1st to June 30th

6. Specific coverage endorsement is required for each group of cattle.

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LRP Operational Details

1. Expected ending value is the expected price for feeder cattle at the time they are marketed and are reported daily at:

a. www3.rma.usda.gov/apps/livestock_reports/

2. Coverage price represents a price floor for cattle at the time they are actually marketed

a. Also on website

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LRP Coverage Table

Endorse-ment

Length Type Crop Year

Exp.

End

Value

Cov.

Price

Cov.

Level

Premium

Rate

End

Date

13

Steer

Weight

2

2006 $111.904 $106.00 0.9472 0.012066 1/23/06

13

Steer

Weight

2

2006 $111.904 $104.00 0.9294 0.009577 1/23/06

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Steer

Weight

2

2006 $109.420 $103.42 0.9452 0.010432 2/23/06

October 24, 2005

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LRP Operational Details

3. Coverage levels are jointly determined with coverage prices.

a. Range from 70 to 95 percent

4. Coverage prices have been adjusted for animal type and weight.

5. Actual ending value is the actual value of the cash-settled CME feeder cattle reported index.

a. An indemnity is triggered if actual ending value is less than the coverage price.

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LRP Example: Coverage

Contract Data Value Source

Current Date Oct 24, 05 producer

Number Of Steers 1,000 producer

Marketing Date Jan 23, 06 producer

Expected Weight 800 lb producer

Endorsement Length 13 weeks producer*

Expected Ending Value $111.904 RMA

Coverage Level 94.72% producer*

Coverage Price $106.00 RMA

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LRP Example: Premium


Insured Value $848,0001,000 hd x 8

cwt/hd x $106.00

Premium Rate 0.012066 RMA

Total Premium $10,232$848,000 x 0.012066

Subsidy Rate 13% RMA

Subsidy Amount $1,330 $10,232 x 0.13

Producer Premium $8,902 $10,232-$1,330

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LRP Problem #1

1. Suppose you actually sell 1,000 800 pound

steer calves on Jan. 23, 2006.

a. Sold the calves for $102.00/cwt

2. The CME-reported actual ending value on Jan.

23, 2006 was $102.00/cwt.

3. Will you receive an indemnity?

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LRP Problem #1

4. Indemnity calculation:

a. 1,000 head x 8 cwt/hd x ($106.00 - $102.00) = $32,000

5. Revenue from calves:

a. 1,000 x 8 cwt/head x $102.00 = $816,000

b. Plus indemnity of $32,000

c. Less premium of $8,902

d. Net revenue = $839,098

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LRP Problem #1

6. Recall that you were expecting $106.00/cwt

a. 1,000 x 8 cwt/head x $106.00 = $848,000

7. Without LRP, you would have received $816,000

8. With LRP, you received $839,000

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LRP Problem #2

1. Suppose you actually sell 1,000 800 pound

steer calves on Jan. 23, 2006

a. Sold the calves for $96.00/cwt

2. The CME-reported actual ending value on Jan.

23, 2006 was $102.00/cwt.

3. Will you receive an indemnity?

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LRP Problem #2

4. Indemnity calculation:

a. 1,000 head x 8 cwt/hd x ($106.00 - $102.00) = $32,000

5. Revenue from calves:

a. 1,000 x 8 cwt/head x $96.00 = $768,000

b. Plus indemnity of $32,000

c. Less premium of $8,902

d. Net revenue = $791,098

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LRP Problem #2

6. Recall that you were expecting $106.00/cwt

a. 1,000 x 8 cwt/head x $106.00 = $848,000

7. Without LRP, you would have received $768,000.

8. With LRP, you received $791,098.

9. Note that you were not compensated for a decline in your price below the CME price index.

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LRP Summary

1. Note that you are not insuring for:

a. Death loss

b. Rates of gain

c. A decline in YOUR price:

You are still subject to basis risk

2. You are insuring against a decline in the CME feeder cattle index

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QUESTIONS?

1 Production and Price Risk Management Tools for use by Livestock & Specialty Crop Producers...

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