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Tools Decision for Risk Management: Specialty Crops by Trent Teegerstrom Russell Tronstad Department of Agricultural & Resource Economics The University of Arizona, Tucson AZ Objectives Provide example of available and future crop ins. products. Introduce tools available for decision analysis. Make aware of future risk management workshop Top 10 Reasons for Not Managing Risk 10. 9. 8. 7. 6. 5. 4. 3. 2. 1. There s no free cap or jacket I m waiting for my neighbor to try it The media created El Nino Crop failures build character It s more fun to keep my lender guessing about my ability to repay I probably deserve a total crop loss Sleeping too soundly would make my spouse wonder The IRS would take the profits anyway My children would just fight over the estate Life would be dull without daily doses of fear Source: Farm Futures Ability to Increase Profitability @ Lowest Cost Motivation The greatest leverage point to manage risk and increase profits is in the Planning phase High Low Planning Planting Nurturing Harvesting Marketing Phases of the Cropping Cycle Tools for Managing Risk Crop Insurance (?) Crop Diversification Precision Farming Contracting/Futures (?) Current Feasibility Studies for Vegetable Crop Insurance Policies Asparagus Broccoli Carrots Cauliflower Celery Garlic Globe artichoke Lettuce-head Lettuce-leaf Lettuce-romaine Spinach Essentials for Evaluating Risk Data/Info.: yields, prices, costs, resources, etc. Analysis: pencil, calculator, or computer Wisdom : risk-profit tradeoff Programs For Risk Mgt. Analysis Ag Decisions: Web based program to evaluate profit-risks in selecting a marketing plan and crop mix strategy Farm Survivor: Web based game for risk management decision analysis. Programs For Risk Mgt. Analysis RMA: Site for premium calculation http://www3.rma.usda.gov/apps/premcalc/ Quicken: Financial Software Customized spreadsheet to help answer what if questions. RMA Website On-line Crop Insurance Quotes Crop, Price Elections, Etc. NAP/Disaster Assistance Current AZ Crop Insurance Options On-line Crop Insurance Quotes www.rma.usda.gov Account Setup Required Utilize Pull-Down Menus Crop, Price Elections, ... Current AZ Crop Insurance Options NAP/Disaster Assistance NAP Eligibility NAP Assistance No up-front fee or premium required. Greater than 35% of area in county impacted by natural disaster. Pay for yield less than 55% of normal at 55% of avg. mkt. price. Crop Insurance Value for AZ For each dollar spent by AZ producers (admin. fee & premiums) what was the return? $ spent 1995 1996 1997 1998 1999 2000 2001 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 All Crops $3.59 $1.99 $3.04 $1.59 $3.38 $0.93 $1.41 Crop Insurance Value for AZ For each dollar spent by AZ producers (admin. fee & premiums) what was the return? $ spent 1995 1996 1997 1998 1999 2000 2001 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 All Crops APH Cotton $3.59 $1.99 $3.04 $1.59 $3.38 $0.93 $1.41 $3.37 $2.19 $2.78 $1.78 $0.98 $0.97 $0.36 Ag Decisions Program Several Cropping Options Diversification % of Profits by Crop? Start small: build bigger Diversification Example Acreage Limits Crop Mix by Acres Crop Mix by Profit Price & Yield Risk of Cantaloupes Challenges & Opportunities Ahead Discriminating Consumer Preferences Rural-Urban Interfaces. New Technologies GIS/GPS -- -- Tractor guidance systems Food Safety and Tracking Should the govt. increase efforts to improve traceability from consumer to producer? 80% 70% 60% 50% 40% 30% 20% 10% 0% affirmative responses AZ: Some Specialty or Other Ag. AZ: Only Field Crops AZ: Only Livestock US: Overall Average Future Workshops 2003 El Central (TBA) Yuma (TBA) Dewey Feb. 24th Parker (TBA) AZ s Crop Insurance Profile Misleading # s since many policies are CAT (50% yield and 55% price election) Crop Insurance Discounts Govt. has always paid for 100% of CAT premium -- modest sign-up fee. 100% price election: at least 50 for 2002 Yield Coverage Subsidy 50% 60% 70% 80% 85% 74% 71% 67% 58% 50% AZ s Crop Insurance Profile, 1999 AZ s Crop Insurance Profile (1997) Upland Payout for 2 AZ Counties Maricopa 1997 1998 1999 2000 2001 $ spent $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 minimum CAT $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $9.34 $0.00 BuyUp $3.19 $3.45 $2.89 $0.21 $0.05 $0.00 $0.00 $0.38 $1.79 $0.62 CRC $4.39 $0.00 $8.07 $0.00 $0.97 n/a n/a $7.05 $0.00 $0.00 Pinal 1997 1998 1999 2000 2001 Insurance Mix for all AZ Crops 1995 1996 1997 1998 1999 2000 2001 CAT 1,913 2,087 1,738 1,605 1,430 1,382 1,206 BUP 373 398 460 540 742 781 670 Insurance Mix for AZ Cotton 2001 Policies Acres Insured Insured Catastrophic 296 82,994 APH Buyup 312 134,109 Crop Rev. Cov. 55 25,983 Although CAT coverage accounts for 45% of policies it only accounts for 34% of acreage. CRC accounts for only 8% of policies but 11% of acreage. A Look at AZ Upland Options Actual Production History(APH) + CAT 50:55 (yld %:price%) + Buyup 85:100 Crop Revenue Coverage (CRC) APH 02 crop : 1,300 lbs, Maricopa $160 $140 $120 $100 $80 $60 $40 $20 $0 50:55 CAT premium cost $/acre Coverage $/acre $600 $500 $400 Coverage / Acre Grower Premium $300 $200 Govt. Subsidy 50:100 55:100 60:100 65:100 70:100 75:100 80:100 85:100 $100 $0 Yield: Price Coverage Crop Revenue Coverage Insures for revenue: price & yield combinations can trigger an indemnity payment. Pay for yield losses at a higher price than at planting if prices rise by harvest time. CRC: 1,300 lbs. $.50 price election $250 $200 $150 $100 $200 $50 $0 premium cost $/acre Coverage $/acre Coverage / Acre Grower Premium $600 $500 $400 $300 Govt. Subsidy 50:55 CAT 50:100 55:100 60:100 65:100 70:100 75:100 80:100 85:100 $100 $0 Yield: Price Coverage Upland Subsidies ($/acre) APH 50:55 50:100 60:100 70:100 80:100 85:100 14.15 18.57 26.15 39.89 63.63 73.42 CRC ---25.89 37.30 57.44 90.26 102.85 % of Prem 100% 74% 71% 67% 58% 50% CRC Price Election for 2002 Jan. 15 - Feb. 15 Futures Dec. Fut in Price Election ELS January APH CRC 1999 2000 2001 2002 $1.00 $0.83 $1.00 $0.83 $.63 $.60 $.61 $.43 $.64 $.59 $.60 $.50 n/a $.61 $.61 ?? 20% Yield Shortfall & 20% Price Shortfall (40 /lb.) (1, 040 lbs./acre) APH Coverage Indemnity CRC Min. Cov. Indemnity 50:55 50:100 70:100 85:100 $182 $0.00 ------CAT $325 $0.00 $325 $0.00 $455 $0.00 $455 $553 $32.5 $553 $39.0 $136.5 Assumes approved yield of 1,300 lbs./acre and base price of 50 /lb. for both policies. 40% Yieldlbs./acre) Shortfall & 25% Price Increase (63 /lb.) (780 APH Coverage Indemnity CRC Min. Cov. Indemnity 50:55 50:100 70:100 85:100 $182 $0.00 ------CAT $325 $0.00 $325 $0.00 $455 $553 $65.0 $162.5 $455 $553 $81.3 $203.1 Assumes approved yield of 1,300 lbs./acre and base price of 50 /lb. for both policies.

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