Risk Management Education for Wyoming Livestock Producers
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Transcript of Risk Management Education for Wyoming Livestock Producers
Risk Management Education for Wyoming Livestock Producers
Custom Ag Solutions
Brett Crosby
Casey Crosby
January 10, 2005
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Custom Ag Solutions
• Established in 2004• Based in Cowley, Wyoming• Previous Experience• Focus on Agricultural Finance
– Risk Management– Feasibility– Valuation– Technology Applications
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Custom Ag Solutions
• Casey Crosby– BS in Animal Science;– 8 Years Ag Production Experience– 2 Years Ag Finance Consulting
• Brett Crosby– BS in Animal Science; MBA– 16 Years Ag Production Experience– 8 Years Ag Finance Consulting
• Other Key Employees
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• USDA Agency• Created in 1996 to Administer the Federal
Crop Insurance Program• Three Divisions
– Insurance Services– Research & Development – Risk Compliance
• RMA Quick Facts– Over 500 Employees– Ten Regional Offices – Main Offices in Kansas City and Washington, DC
Risk Management Agency (RMA)
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RMA’s Vision: To serve America’s agricultural producers through effective, market-based risk management solutions.
RMA’s Mission: Promote, support, and regulate sound risk management solutions to preserve and strengthen the economic stability of America’s agricultural producers.
Risk Management Agency (RMA)
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RMA’s Approach:• Partner with Public and Private
Organizations to Develop New Risk Management Programs.
• Partner with Private Insurance Companies to Deliver Risk Management Products (e.g., crop insurance, LRP).
• Partner with Public and Private Organizations to Provide Risk Management Education.
Risk Management Agency (RMA)
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What is Risk?
Think “Chance”
Think “Bad”
and
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“Chance” and “Bad”
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What is Risk Management?
Think “Risk”
Think “Reward”
and
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“Risk” and “Reward”
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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“Risk” and “Reward”
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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“Risk” and “Reward”
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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“Risk” and “Reward”
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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“Risk” and “Reward”
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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What is Chance?
Know The Odds
Heads Tails
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A “Fifty – Fifty” Chance
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A One-in-Five Chance
Five Doors
One Good Result
Choose a Door 1 2 3 4 5
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How Often Do We Know the Chance of a Given Outcome?
How Can We “Know the Odds” in Agriculture and Livestock Production?
Know The Odds
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Information– Experience– Education– Data Collection
Analysis– Summaries– Statistics– Decision Support Tools
Know The Odds
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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Section II
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Let’s Check Your Risk Management Skills
• Start with $5.00.
• Make four decisions.
• If you lose all of your money at any time, you are out.
• The person with the most money after four decisions wins.
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Decision #1
Earn $5.00 (Net +$1.00)
Risk $4.00
For an 80% Chance to
+
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1 2 3 4 5 6 7 8 9 10
Decision #1
Risk $4.00 for an 80% Chance to Earn $5.00 (Net +$1.00)
Avoid the Big X … X
XX
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Decision #1
Earn $5.00 (Net +$1.00)
Risk $4.00
For an 80% Chance to
+
XX
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Decision #1 Analysis
Outcome GOOD BAD
Value of Outcome + 1.00 - 4.00
Probability of Outcome 80% 20%
Expected Value + .80 - .80
Total Expected Value + 0.00
RULE 1. Don’t Risk a Lot for a Little!
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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Decision #2
Earn $25.00 (Net +$20.00)
Risk $5.00
For a 25% Chance to
+
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Decision #2 Analysis
Outcome GOOD BAD
Value of Outcome
Probability of Outcome
Expected Value
Total Expected Value
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Decision #2 Analysis
Outcome GOOD BAD
Value of Outcome + 20.00 - 5.00
Probability of Outcome 25% 75%
Expected Value
Total Expected Value
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Decision #2 Analysis
Outcome GOOD BAD
Value of Outcome + 20.00 - 5.00
Probability of Outcome 25% 75%
Expected Value + 5.00 - 3.75
Total Expected Value
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Decision #2 Analysis
Outcome GOOD BAD
Value of Outcome + 20.00 - 5.00
Probability of Outcome 25% 75%
Expected Value + 5.00 - 3.75
Total Expected Value + 1.25
RULE 2. Don’t Risk More Than You Can Afford to Lose!
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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Decision #3
20% Chance of Loss
Pay $3.00
Or Risk Losing $15.00
X
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Decision #3 Analysis
Outcome PayNo Pay – No Loss
No Pay – Yes Loss
Value of Outcome - 3.00 0.00 - 15.00
Probability of Outcome 100% 80% 20%
Expected Value - 3.00 0.00 - 3.00
Total Expected Value - 3.00 - 3.00
Don’t Risk More Than You Can Afford to Lose
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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Decision #4
Making or Losing
$25.00
Receive $5.00
Or take a 50% Chance of X
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Decision #4 Analysis
Outcome Take $5Risk – Good
Risk – Bad
Value of Outcome + 5.00 + 25.00 - 25.00
Probability of Outcome 100% 50% 50%
Expected Value + 5.00 + 12.50 - 12.50
Total Expected Value + 5.00 - 0.00
Rule 3. Know the Odds
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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Know the OddsUnderstand the Odds
The Odds are Against You When You Gamble.
What is the Difference Between Investing and Gambling?
The Odds Should be with You When You Invest.
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Playing for Keeps
• Each of you now has $1.00.
• You may keep your dollar, or risk it in the next two decisions.
• Depending on your decisions and chance, you may – Double your money, – Lose your entire dollar, or– Land somewhere in the middle.
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Decision A
Losing $1.00
Pay 25 Cents
Or Take a 33% Chance of
X
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Decision A Analysis
Outcome Pay .25Risk – Good
Risk – Bad
Value of Outcome - .25 + 0.00 - 1.00
Probability of Outcome 100% 67% 33%
Expected Value - .25 0.00 - .33
Total Expected Value - .25 - .33
Rule 3. Know the Odds
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Decision BReceive 25 Cents
For a 40% Chance of
Or Risk 75 Cents
Earning $2.75 (Net +$2.00)
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Decision B Analysis
Outcome Get .25Risk – Good
Risk – Bad
Value of Outcome + .25 + 2.00 - 0.75
Probability of Outcome 100% 40% 60%
Expected Value + .25 + 0.80 - .45
Total Expected Value + .25 +.35
Risk vs. Reward…
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Risk: “Chance” and “Bad”
• Investing is Not Gambling; Keep the Odds in Your Favor.
• Regardless of the Odds, When Risk Exists, You may Realize a Loss.
• Greater Risks Require Greater Rewards.
Greater Risk Should Have Greater Reward
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management