Florida Fruit Tree and AvocadoMango Tree Pilot Insurance Programs

1

RISK MANAGEMENT EDUCATION WORKSHOP August 23, 24,
25, 2007 - New York

• The 21 Century -- Multi-Media and
  Multi-Functional -- Approach to Risk Management
  Using RFD-TV Television, Internet, Interactive
  CD-ROMs, and On-Site Workshops
• Brought to you by
• AgriLogic, Inc Farm Credit New York Farm
  Bureau New York Corn Growers Association Hot
  Shots Video Productions ABG, Inc. The Practical
  Planner, LLC USDA-Farm Service Agency and with
  funding provided by the USDA-Risk Management
  Agency

RMA Agreement Number 06-IE-0833-0114-E
2
Pre-Quiz

• Handout of 10 Questions
• Have you seen our Ag Lifestyle TV shows
• on RFD-TV?
• (Channels Direct TV 379 Dish Network 231)

3
What is Risk?

• The possibility that something unpleasant will
  happen in the future.
• Risk Management
• The practice of managing our life and resources,
  in a manner that provides an acceptable level of
  risk. Risk management is everything you do to
  understand and deal proactively with risks.
• Three issues to consider
• Frequency of Loss
• Severity of Loss
• Overall Dollar Impact

4
Types of Risk

• Production Risk - Anything that hinders the
  quantity and quality of your production.
  (weather, pests, diseases, etc.)
• Market Risk - Market uncertainty for your
  product, price declines, govt actions to limit
  imports/exports, input costs.
• Financial Risk - Having the ability to pay your
  cash obligations in a timely manner, to obtain
  capital and financing, and to protect or grow
  your equity.
• Legal Risk - The possibility of being sued,
  fined, or penalized for violating current or
  future laws, regulations, or contractual
  obligations.
• People Risk - Managing people and disruptions
  that come from any of the 3 Ds death, divorce,
  or disability, which could limit or even
  eliminate the farming operation

5
Risk Tolerance

• Risk Attitude Your desire to seek risk
• Risk-Averse
• Risk-Seeking
• Risk-Neutral
• Risk Bearing Ability
  Your financial ability
  to
  sustain a loss.
• Risk Tolerance
  Assessment

6
Risk Management Techniques

• Risk Avoidance
• Risk Control
• Prevention Lowers frequency (irrigation)
• Reduction Lowers severity (spraying for a
  visible pest)
• Diversification Lowers both by spreading risk
• Risk Financing
• Self Insurance/Retention
• Transfer through Insurance Hedging

7
Risk Management Agency

• Overview
• U.S.D.A. Federal Crop Insurance Corporation
  (FCIC)
• Providing crop insurance since 1938.
• Provides reinsurance to private-sector insurance
  companies that sell and service the insurance
  policies
• Subsidy
• Premiums set to break-even on losses paid plus a
  reasonable reserve.

80 85 are available outside New York
8
RMA Insurance Products

• Actual Production History (APH) Plan GYC
• Covers individuals yield loss 50 - 75 Cov.
  Levels
• CAT 50 Coverage Level 55 Price Election
• Crop Revenue Coverage (CRC)
• Covers individual's yield and price losses
• Indexed Income Protection (IIP)
• Covers individual lost revenue uses county
  yields to index your production history to
  determine your Approved Yield
• Dollar Plan
• Specialty Crops
• Covers individuals lost revenue

9
RMA Insurance Products

• Group Risk Plan (GRP)
• Covers countys yield loss 70 - 90 Coverage
  Levels
• CAT 65 Cov. Level 45 of Max Protection/Acre
• Group Risk Income Protection (GRIP)
• Covers countys yield and price loss
• Adjusted Gross Revenue (AGR)
• Covers individuals lost revenue from multiple
  commodities
• Coverage based off Schedule F tax form
• Adjusted Gross Revenue - Lite (AGR-Lite)
• Like AGR, but liability limited to 1 million in
  revenue

10
RMA Insurance Products - Review
11
Actual Production History Plan (APH)

• Assume you average 110 bu./acre, select the 75
  coverage level, plant 100 acres, and the RMA
  price is 3.50. Your insurance coverage is
• 110 bu./acre x 75 x 100 acres x 3.50 28,875
• Loss Trigger
• Harvested Yield lt APH x Coverage Level
• You experience a drought and only harvest 6,900
  bushels. Your indemnity payment is
• (82.5 bu./acre x 100 acres 6,900 bu.) x 3.50
  4,725

All Examples Assume 100 Share and 100 Price
Election
12
Crop Revenue Coverage (CRC)

• Assume you average 110 bu./acre, select the 75
  coverage level, plant 100 acres, and the CRC Base
  price is 4.06. Your guaranteed revenue is
• 110 bu./acre x 75 x 100 acres x 4.06 33,495
• Loss Trigger
• Harv Yield x Harv Price lt APH Yield x Coverage
  Level x Higher of (Harvest Price or Base Price)
• You harvest 6,900 bu. Harvest Prices _at_ 4.06,
  3.50, 4.50. Your indemnity
• (82.5 bu. x 4.06 x 100) (6,900 bu. x 4.06)
  5,481
• (82.5 bu. x 4.06 x 100) (6,900 bu. x 3.50)
  9,435
• (82.5 bu. x 4.50 x 100) (6,900 bu. x 4.50)
  6,075

13
Indexed Income Protection (IIP)

• Assume you average 1 bu./acre above the county,
  and the county expected yield is 109 bu./acre,
  select the 75 coverage level, plant 100 acres,
  and IIP Projected price is 4.06. Your coverage
  is...
• 110 bu./acre x 75 x 100 acres x 4.06 33,495
• Loss Trigger
• Harv Yield x Harv Price lt APH Yield x Coverage
  Level x Projected Price)
• You harvest 6,900 bu. Harvest Prices _at_ 4.06,
  3.50, 4.50. Your indemnity
• (82.5 bu. x 4.06 x 100) (6,900 bu. x 4.06)
  5,481
• (82.5 bu. x 4.06 x 100) (6,900 bu. x 3.50)
  9,345
• (82.5 bu. x 4.06 x 100) (6,900 bu. x 4.50)
  2,445

14
Group Risk Plan (GRP)

• Assume the county expected yield is 110 bu./acre,
  select the 75 coverage level and 100 of Max
  Protection/Acre, plant 100 acres, and Max
  Protection/Acre 488. Your insurance coverage
  is...
• 488 Max Protection/Acre x 100 x 100 Acres
  48,800
• Loss Trigger
• Payment Yield lt County Expected Yield x Cov.
  Level
• You harvest 10 bu., but it depends on the county
• Payment Yield is 69 bu/acre. Your indemnity
  payment is
• (82.5 bu 69 bu)/82.5 bu x 488 x100 x 100
  acres) 7,985

15
Comparison 2007 Madison Corn
16
Madison County 2007 GRP vs. CAT

• Max Protection/Acre 488.08 100 acres
• Expected County Yield 110.3 bu/acre
• NASS County Yields
• 02 99 bu/ac 04 92 bu/ac 06 69 bu/ac

17
Adjusted Gross Revenue (AGR)

• Assume you average 800,000 in gross revenue,
  have 3 commodities, and select the 75 coverage
  level at the 90 payment rate. Your insurance
  coverage is
• 800,000 x 75 x 90 540,000
• Loss Trigger
• Annual Gross Revenue lt AGR x Coverage Level
• You experience loss and only have 200,000
  adjusted gross farm revenue. Your indemnity
  payment is
• (800,000 x 75 - 200,000) x 90 360,000

18
AGR AGR-Lite Issues

• Provides revenue protection from yield price
  declines
• AGR Requirements
• Insurance coverage based on Schedule F tax forms
  (5 Years)
• Amount of Insurance cannot exceed 6.5 million
• Purchase traditional Federal crop insurance when
  more than 50 of expected income is from
  insurable commodities (with a reduced AGR
  premium).
• No more than 50 of your allowable income comes
  from agricultural commodities purchased for
  resale.
• No more than 35 of the expected allowable income
  comes from animals and animal byproducts.
• AGR-Lite Exceptions
• Amount of Insurance cannot exceed 1 million
• 35 income limit from livestock is no longer
  required

19
AGR AGR-Lite Issues
20

COMING SOON???
Pasture, Rangeland and Forage Rainfall Index and
Vegetation Index
Depending on Government Funding
21
Rainfall Vegetative Indices

• Rainfall/Vegetative Index background
• Index based on precipitation (Rainfall) or
  greenness (Vegetation)
• Not measuring actual rainfall/greenness or
  individual production The deviation from
  long-term normal precipitation or greenness is
  used to establish the index
• SINGLE PERIL COVERAGE
• Precipitation/Greenness has a high degree of
  correlation to forage production
• WHY?
• Lack of actual producer/industry production data
• No consistent and practical methodology for
  measuring production of the crop

22
Rainfall Index

• Area of insurance 0.25o grids ( 12 x 12 miles)

23
Vegetation Index

• Area of insurance 8 x 8 km ( 4.8 x 4.8 miles)

24
Rainfall Vegetation Index

• Rainfall Index Intervals
• Multiple Intervals offered 6
• Crop Year divided into 6, 2-month Intervals for
  each grid
• Producers must select at least 2 Intervals
• Vegetation Index Intervals
• Multiple Intervals offered 4
• Crop Year divided into 4, 3-month Intervals for
  each grid
• Producers may select more than 1 Interval

25
Rainfall Vegetation Index

• Ability for producers to manage their individual
  risk periods
• Correlate to individual growth patterns and
  production seasons
• The Intervals provide for greater reaction to
  forage reduction events vs. a yearly average
• Not required to insure 100 of acreage
• Internet based
• Coverage Levels 90, 85, 80, 75, and 70
• Sales Closing Date Acreage Reporting Date
  November 30th
• Rating Each grid, Index Interval, and coverage
  level is individually rated

26
Risk Tolerance Coverage Levels?
27
APH GRP County Yield Correlate?
28
Commodity Marketing

• Forward Price Contracting

Photo Source USDA/ARS
29
Forward Price Contracting

• Forward Price Contracting
• Is a tool that agricultural producers of select
  commodities can use to mitigate a portion or all
  of their price risk.
• Hedge
• The practice of offsetting the price risk
  inherent in any cash market position by taking an
  equal but opposite position in the futures market
  or with another forward contracting alternative.
• The hedger (i.e. a corn producer) foregoes the
  opportunity for additional profit as a result of
  increases in the market price for their commodity
  (i.e. corn), for the ability shift risk of
  decreases in the price to another entity (i.e. a
  feed mill).
• Four general categories of hedging mechanisms
  are
• Forward Cash Contracts
• Futures Contracts
• Option Contracts
• Other privately negotiated forward contracting
  mechanisms

30
Terminology

• Forward Cash Contract
• Obligates the holder to buy or sell an asset for
  a certain price at a certain time in the future.
• Non-standardized written agreement
• Terms are open to negotiation (e.g. an
  agricultural producer and grain elevator
  manager).
• Privately negotiated
• Futures Contract
• Obligates the holder to buy or sell an asset for
  a certain price at a certain time in the future.
• Highly standardized written agreement
• Standard quality, quantity, delivery time, and
  location
• Traded only on an exchange (i.e. Chicago Board of
  Trade (CBOT), New York Board of Trade (NYBT),
  etc.)

31
Terminology

• Option Contract A written agreement that gives
  the buyer of the option the right, but not the
  obligation to, buy or sell for a limited time a
  particular good at a specific price.
• Call Option - An option to buy.
• Put Option An option to sell.
• Basis Difference in the local spot (cash) and
  futures markets price for a commodity.
• Futures Risk The risk that fluctuations in the
  level of price in the futures contract will
  occur.
• Basis Risk The risk that fluctuations will
  occur in relationship between the local cash
  (i.e. New York) and futures markets (i.e. CBOT).

32
Forward Cash Contract

• Scenario
• New York Corn Producer
• 250 acres of Corn
• 100 bushels / ac. expected yield
• 250 acres 100 bushel per ac. yield 25,000
  bushels expected production
• Hedges 100 of 25,000 bushels of expected
  production

NOTE 100 Hedge is unlikely, but is used for
example purposes. Depending on your risk
tolerance, production, etc. you should consider
hedging 40 - 80 of your crop.
33
Option Contract

• Scenario
• The same New York Corn Producer
• Hedges 100 of 25,000 bushels of expected
  production
• 1 CBOT Option Contract is for 1 CBOT Futures
  Contract

34
Other Risk Management Strategies
35
Other Risk Management Strategies

• Production Risk
• FSA
• NAP
• Disasters
• Emergency Loans
• Crop-Hail Insurance
• New Technologies (seeds, sprays, precision
  farming, etc)
• Production Market Risk
• Diversification fields, crops, types, non-farm
  income
• Record Keeping!!!

36
Financial Risk

• Obtaining Capital Financing (Interest rates)
• Mitigate by lowering debt-to-asset ratio have
  collateral, crop insurance and marketing plan
  shop for better borrowing terms and conditions
  establish relationships with lenders.
• Meeting Cash-Flow Needs (short-term)
• Mitigate by having liquidity, reducing expenses,
  lines of credit, insurance for crops, machinery,
  equipment, etc.
• Protecting Growing Equity (long-term)
• Mitigate by having insurance for major events
  crops, property, liability, heath, disability,
  and life
• During good years, build-up liquid reserves,
  invest (possibly in non-farm assets), pay down
  debt.

37
Legal Risk

• Concern Risk of being sued. Mitigate by
• Structural Entity of Operation
• Sole Proprietor (all risk all reward)
• Partnership (shared risk and reward)
• LLC (1 or multiple owners with limited liability)
• Corporations (Sub S or C having 1 owners with
  limited liability)
• Contractual Agreements
• Non-performance Get it in writing use
  trustworthy parties
• Tort Liability Neglect or Harm to
  Person/Property
• Review general liability insurance for coverage
  and exclusions
• Statutory Laws lots of them for farming
• Labor Environmental Have insurance and
  maintain accurate documentation

38
People Risk

• Concern losing key owners/partners/employees
• Managing People
• Death
• Divorce
• Disability
• Mitigate by having
• Life insurance and disability insurance to offset
  lost income, hire new employees, and meet
  cash-flow needs
• Heath insurance and long-term care to offset any
  new expenses
• Cross-functional training of employees and owners
• Written succession and estate plans

39
Estate Planning

• Is the process of planning for the final
  disposition of your life's work.
• Benefits of Estate Planning
• Peace of mind for you and your family.
• The guardianship and care of dependent children.
• A reduction in estate tax liability.
• Distribution of assets according to your wishes.
• An assurance that your business will continue
  with the least amount of disruption
• Mitigate by having
• A Will, use Trusts (Revocable Living Trust,
  Marital Trust, Charitable Trusts, etc) and Gifting

40
Goals - SMART

• S - Specific - Goals need to be clearly defined
  and written...no room for ambiguity here. For
  example, 10 return on capital, break-even this
  year, etc.
• M - Measurable - Acceptable standards of
  measurement need to be consistently used for each
  goal, e.g. bushels, dollars, hours.
• A - Attainable - It may be exciting to reach for
  the stars, but accomplishing realistic goals is
  rewarding. Are you shooting for the highest
  yield ever or a reasonable average?
• R - Related - Goals should be written so that
  they are related to each other and do not
  compromise your basic values and beliefs. Related
  goals include moving the operation toward higher
  returns this year and long-term equity/ownership.
• T - Tractable - Goals should be established with
  progressive steps and checked or monitored over
  time.

41
Implementation

• Identify and analyze your risks and risk
  tolerances
• Establish your goals
• Evaluate the alternatives available
• Implement the action plan with your best
  alternatives
• Monitor the progress and results
• Update the plan as needed

42
Need more information?

• Education Manual
• RFD-TV (Channels Direct TV 379 Dish Network
  231)
• Interactive CD-ROM
• Online
• www.rma.usda.gov
• www.agrilogic.com/education
• Contact your local crop insurance agent
• RMA Regional Offices

43
Post Quiz

• Handout of 10 Questions
• DONT FORGET YOUR DVD CDS!!!