MANAGINGPRODUCTION RISKS

DISCLAIMER

The purpose of the following material is to promote the awareness of risk management concepts and to highlight USDA’s risk management products, features, benefits and availability. This material does not change the content or the meaning of current policy provisions, filed actuarial documents or approved procedures.

Today’s Objectives

Sources of Production Risk when Alternative Actions/Plans are Taken

Various Production Risks Management Strategies

Specific Focus: Crop Insurance Programs

Review and Answer the

‘Questions to Consider’

Blocks at the end ofeach section.

Sources of Production Risk

Technology & Crop Production Practices Sustainable Agriculture Elements of Sustainability

Integrated Pest Management Soil & Water Conservation Field/Landscape Diversity Seed Selection

Precision Agriculture Biotechnology Organically Grown Crops

Enterprise Diversification Capital Investments

Irrigation Drainage Machinery

Landlord / Tenant Relationship Contract Production

Sources of Production Risk

Production Risk Strategy Programs

CROP INSURANCE USDA subsidized insurance

programs provide farm producers and owners various methods to lower production yield and revenue risks.

USDA's RISK MANAGEMENT PROGRAMS/PRODUCTS

NAP

Uninsured

Dollar

DOPP

AGR

GRP

Other

RA

CRC

IP

Revenue

Limited

Add’l

CAT

MPCI

Traditional

Risk Mgt. TOOLS

Insurance Availability by State

IDAHO

Apples, Barley, Canola, Corn, Dry Beans, Dry Peas, Grapes, Green Peas, Nursery, Oats, Onions, Potatoes, Safflower, Sugar Beets, Processing Beans, Processing Sweet Corn and Wheat

(Program availability varies by county and is subject to change)

Insurance Availability by State

OREGON

Apples, Barley, Cabbage, Canola, Cherries, Corn, Cranberries, Dry Beans, Dry Peas, Forage, Grapes, Green Peas, Nursery, Oats, Onions, Pears, Potatoes, Sugar Beets, Processing Beans, Processing Sweet Corn and Wheat

(Program availability varies by county and is subject to change)

Insurance Availability by State

WASHINGTON

Apples, Barley, Cabbage, Canola, Cherries, Corn, Cranberries, Dry Beans, Dry Peas, Grapes, Green Peas, Mint, Nursery, Oats, Onions, Pears, Potatoes, Sugar Beets, Processing Beans, Processing Sweet Corn and Wheat

(Program availability varies by county and is subject to change)

YIELD / PRODUCTION RISK CROP INSURANCE

COVERAGE PROGRAMS

Multi-Peril Crop Insurance (MPCI)

Yield Guarantee Units Contract Changes Reporting of Insured Acreage Reporting Crop Damage Reporting of Production Records

Proving Yields

Actual Production History (APH) is a simple average of 4-10 years of actual yields, based on a producer’s records.

If a producer does not have records for four (4) years: A transition yield is used to complete the four (4)

year minimum base. ‘T’ yields are based on a county’s average yield

determined by USDA’s National Agricultural Statistics Service (NASS).

The Reason to Prove Yields

When using ‘T’ yields, a significant loss would have to occur before an indemnity would be paid.

Records Records Records Records

NORECORDS

1 YEAR 2 YEARS 3 YEARS

65% of T 80% of T 90% of T 100% of T

Providing Production EvidenceYEAR YIELD YIELD

90 No records No records

91 No records No records

92 No records No records

93 No records 80 Bu. Actual Yld

94 No records 72 Bu. Actual Yld

95 48 Bu. T Yld 81 Bu. Actual Yld

96 48 Bu. T Yld 76 Bu. Actual Yld

97 48 Bu. T Yld 78 Bu. Actual Yld

98 80 Bu. Actual Yld 80 Bu. Actual Yld

224 Total Bu. Divided by 4 years = 56 Bu.

467 Total Bu. Divided by 6 years = 78 Bu.

Assume: 80 BU Average Wheat Yield60 BU 'T' Yield3.30 Expected Market Price (MPCI PE)

Yields Not Provided/Certified: 65% 'T' = 39 BU75% LEVEL: 75% X 39 BU = 29 BU

29 BU X $3.30 = $96.53/ac Yields Provided/Certified:75% LEVEL: 75 % X 80 BU = 60 BU

60 BU X $3.30 = $198/ac

Proving Your Yields PAYS DIVIDENDS !!

Benefits of Actual/Certified Yields

COVERAGE LEVEL & PRICES Coverage Options - Choice of variable

percentages of the APH, from 50% up to 75%, in 5% increments (85% for Wheat and IP Barley in some areas).

Price Elections - Price at which you are compensated in the event of a loss. Choice of 60 to 100% of the expected market price or market price election.

Multi-Peril Crop Insurance (MPCI)

CATASTROPHIC CROP INSURANCE (CAT)

CAT Coverage is available at the 50% coverage level and 55% maximum price election (this is a change from previous year’s 60%).

Multi-Peril Crop Insurance (MPCI)

Insurance Coverage Endorsements Wheat Insurance Policy

Endorsements Winter Wheat Option A Winter Wheat Option B

Malting Barley Price and Quality Endorsements Option A Option B

Multi-Peril Crop Insurance (MPCI)

Additional Production Risk Tools

Group Risk Plan (GRP) Named-Peril Protection Program (Hail,

Fire, Flood) Non-Insured Assistance Program (NAP)

YIELD / PRODUCTION and REVENUE RISK CROP

INSURANCE COVERAGE PROGRAMS

INCOME PROTECTION (IP)

Enterprise Unit (County) CAT is Available Projected / Harvest Price derived from

Portland Grain Exchange Late Planting/Replant Payment IP Barley with Malt Barley Option (Price

derived from Corn Futures)

IP protects against reductions in gross income when yields or prices fall.

INCOME PROTECTION (IP)

Crop Revenue Coverage (CRC)

Guarantees a stated amount of revenue - final guarantee.

Covers revenue losses due to low price, low yield, or any combination of the two.

Basic / Optional / Enterprise Enterprise - Premium Discount CAT Not Available Base / Harvest Price derived from

Portland Grain Exchange Late Planting/Replant Payment Winter Coverage Endorsement Replacement Coverage Level

Crop Revenue Coverage (CRC)

CROP INSURANCE COMPARISON CHART

Side-by-Side WHEAT Insurance Program Comparisons: MPCI Income Protection Crop Revenue Coverage

ADMINISTRATIVE FEES

Catastrophic Coverage - $60, per crop, per county

Limited Coverage - $50 per crop, per county, not to exceed $200/county, $600 total

Additional Coverage - $20 per crop

**Small-Limited Resource Farmer Fee Waiver is Available on Some Programs / Coverage Levels

Crop Insurance

Premium

Calculation & Loss

Indemnity

Scenarios & ExamplesPacific Northwest Wheat Crop

Multi-Peril Crop Insurance (MPCI) Calculation

Eastern Washington Wheat Farm

MPCI Premium Calculation

APH Yield is 62 Bushel = 46.5 Bushel/Acre Guarantee

Price Election is $3.30 $153.45 Insurance Coverage per Acre $4.33 Producer’s Premium Per Acre

Assume: MPCI Insurance Policy - Non-Irrigated Winter Wheat - WITHOUT Winter Wheat Option - Basic Unit Discount - 75 % Coverage Level

APH Yield is 62 Bushel = 46.5 Bushel/Acre Guarantee

Price Election is $3.30 $153.45 Insurance Coverage per Acre

+ Winter Damage Coverage $7.08 Producer’s Premium Per Acre

MPCI Premium Calculation

Assume: MPCI Insurance Policy - Non-Irrigated Winter Wheat - WITH Winter Wheat Option B Basic Unit Discount - 75%Coverage Level

MPCI Indemnity

Assume: All Acres Harvested/Winter Wheat - Endorsement Not Exercised

62 Bu APH X 75% Coverage Level = 46.5 Bu/Acre Guarantee

46.5 Bu Guarantee - 35 Bu Production Harvested = 11.5 Bu Loss/Acre

11.5 Bu Loss X $3.30 Price Election = $37.95 Indemnity/Acre

Crop Revenue Coverage (CRC) Insurance Calculation

Eastern Washington Wheat Farm

Assume: Crop Revenue Protection Insurance Policy - Non-Irrigated Winter Wheat -WITHOUT Winter Wheat Option A or B - Basic Unit Discount - 75% Coverage Level

APH Yield is 62 Bushel = 46.5 Bushel/Acre Guarantee

Base Price is $3.40 $158.10 Insurance Coverage per

Acre $8.35 Producer’s Premium Per Acre

Crop Revenue Coverage (CRC) Insurance Calculation

Crop Revenue Coverage Insurance Premium Calculation

Assume: Crop Revenue Protection Insurance Policy - Non-Irrigated Winter Wheat -WITH Winter Wheat Option B - Basic Unit Discount 75% Coverage Level

APH Yield is 62 Bushel = 46.5 Bushel/Acre Guarantee Base Price is $3.40 $158.10 Insurance Coverage per Acre

+ Winter Damage Coverage $13.63 Producer’s Premium Per Acre

Crop Revenue Coverage Insurance Indemnity

Assume: All Acres Harvested - Winter Wheat - Endorsement Not Exercised -Harvest Price Lower than Base Price (With a Production Loss)

Revenue Guarantee: Approved APH yield of 62 Bu/Acre X 75% Coverage Level X the higher of Base Price or Harvest Price is $3.40 Base Price = $158.10/Acre Guarantee

Value of Production (Harvested) 35 Bu/Acre X $3.00 Harvest Price = $105/Acre Income

Loss Payment: $158.10 Guarantee - $105/Acre Income = $53.10 Acre Indemnity

Assume: Harvest Price Higher than Base Price (With a Production Loss)

Revenue Guarantee: Approved APH yield of 62 Bu/Acre X 75% Coverage Level X the higher of Base Price or Harvest Price of $3.70 Harvest Price = $172.05/Acre Guarantee

Value of Production (Harvested) 35 Bu/Acre X $3.70 Harvest Price = $129.50/Acre Income

Loss Payment: $172.05 Guarantee - $129.50/Acre Income = $42.55 Acre Indemnity

Crop Revenue Coverage Insurance Indemnity

Income Protection (IP) Crop Insurance Calculation

Eastern Washington Wheat Farm

Income Protection Crop Insurance Premium Calculation

Assume: Income Protection Insurance Policy - Non- Irrigated Winter Wheat WITHOUT Winter Wheat -Not Available under IP Basic Unit Discount 75 Percent Coverage Level

APH Yield is 62 Bushel = 46.5 Bushel/Acre

Guarantee Projected Winter Wheat Price is $3.40 $158.10 Insurance Coverage per Acre $4.83 Producer’s Premium Per Acre

Income Protection Crop Insurance Indemnity

Value of Production (Harvested) 35 Bu/Acre X $3.00 Harvest Price = $105/Acre Income

Loss Payment: $158.10 Guarantee - $105/Acre Income =

$53.10 Acre Indemnity

Assume: Harvest Price Lower than Projected Price (With a Production Loss) Dollar Guarantee: 62 Bu/Acre X 75% Coverage Level X $3.40 Projected Price = $158.10/Acre Guarantee

Income Protection Crop Insurance Indemnity

Value of Production (Harvested) 35 Bu/Acre X $3.70 Harvest Price =

$129.50/Acre Income Loss Payment: $158.10 Guarantee - $129.50/Acre Income = $28.60 Acre Indemnity

Assume: Harvest Price Higher than Projected Price (With a Production Loss) Dollar Guarantee: 62 Bu/Acre X 75% Coverage Level X $3.40 Projected Price = $158.10/Acre Guarantee

Reference Materials

Risk Management List of National Crop Insurance

Companies Web sites Definitions Program FACT Sheets State & County Data Tables Skill Quiz

Adjusted Gross Revenue (AGR)

Pilot ProgramAGR insurance plan is a non- traditional, whole farm risk management tool which uses a producer’s historic Schedule F tax form information as a base to provide a level of guaranteed revenue for the insurance period.

Dairy Options Pilot Program (DOPP)

Educational ProgramDOPP is an risk management education program designed to give dairy producers an opportunity to learn how futures and options markets work and, at the same time, give dairy producers first-hand experience in buying option contracts to insure a minimum price for their milk.

PLAN AHEAD . . .

. . .Take Steps Toward Managing Your Production Risks to Protect Agricultural Business! ! !

Pacific Northwest Risk Management Education Project

Managing Production Risks Developed by: USDA / Risk Management Agency

Spokane Regional Office

112 North University, # 205

Spokane, Washington 99206

(509)353-2147

(509)353-3149 FAX

Web Site: www.usda.gov.rma/rme