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Crop Insurance Education for Michigans Beginning Ag Producers Custom Ag Solutions United States Department of Agriculture Risk Management Agency (RMA)

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Presentation on theme: "Crop Insurance Education for Michigans Beginning Ag Producers Custom Ag Solutions United States Department of Agriculture Risk Management Agency (RMA)"— Presentation transcript:

1 Crop Insurance Education for Michigans Beginning Ag Producers Custom Ag Solutions United States Department of Agriculture Risk Management Agency (RMA)

2 2 Program Sponsorship, Coordination, and Delivery USDA / Risk Management Agency (RMA) –Oversees $62B Federal Crop Insurance Program –Springfield, IL, Regional Office –Around 500 Employees –Main Offices in Washington, DC, and Kansas City, MO Custom Ag Solutions –Crop Insurance Education Programs –Risk Management Tools –Rural Appraisals –Technology Development

3 33 Think Chance Think Bad and What is Risk?

4 4 Chance Bad

5 5 Are You a Risk Taker?

6 6 Are You Risk Averse?

7 7 Risk Taker?

8 8 Are You Risk Averse?

9 9 Risk Taker?

10 10 Not All Risks Are Equal

11 11 Some Risks Can Be Managed

12 12 Some Risks Cant

13 13 Some Risks Bring Rewards

14 14 Some Risks Bring Losses

15 15 1.Market Risk 2.Production Risk 3. Financial Risk 4.Human Risk 5.Legal Risk Five Categories of Agricultural Risk

16 16 Risk Management Choosing Among Alternatives to Balance Risk and Reward AB C

17 17 How Can We Balance Risk and Reward in Agriculture? Management Practices Diversification Flexibility Transfer Risk to Someone Else (e.g., Crop Insurance)

18 18 You now own the Green Jeans Nursery, and you will operate it for five years. Your profitability could vary dramatically depending on uncontrollable chance and the risks you choose to take. Green Jeans Nursery

19 19 Try to Earn $400,000 or more Try to Earn $150,000 to $400,000 If your cash balance falls below -$10,000 at any time during the five years, the bank forecloses on your operation, and you are out of the game. Green Jeans Nursery Risk vs. Reward

20 20 Green Jeans Nursery - Year 1 You have just inherited two 10,000 square foot greenhouses configured for bedding plant production. Because of volatile production and market situations, bedding plants have more potential to make money and lose money than landscape trees and ornamentals. Landscape trees and ornamentals generate lower average returns, but are less likely to lose money in the long run.

21 21 Green Jeans Nursery - Year 1 Expected Net Income from Bedding Plants and Landscape Trees is as Follows:

22 22 Green Jeans Nursery - Year 1 You could sell one of your greenhouse units to a neighbor and buy 5 acres of landscape trees from another neighbor. If you raise both bedding plants and landscape trees you are 25% less likely to go bankrupt than if you raise only bedding plants.

23 23 You could also sell both of your greenhouse units and buy 10 acres of landscape trees that your neighbor is selling. You can make this change for no money out of pocket. If you raise only landscape trees you are less likely to reach $150,000 in five years, but you are also 75% less likely to go bankrupt than if you just produce bedding plants. Green Jeans Nursery - Year 1

24 24 Green Jeans Nursery - Year 1 Expected Net Income: Two greenhouse units (bedding plants) 10 acres of landscape trees One greenhouse unit and 5 acres of landscape trees

25 25 Your Year 1 Choices : 1.Stick with bedding plants only 2.Diversify to raise both bedding plants and landscape trees 3.Convert your entire operation to landscape trees Green Jeans Nursery - Year 1

26 26 Transfer Risk to Someone Else Contracting –Production –Pricing Hedging –Futures –Options Crop Insurance

27 27 Its December, and a buyer has offered to buy half of your bedding plants or landscape trees or both this fall. He is offering $45/tree for 1,000 landscape trees, and $5.45/unit for 25,000 units of bedding plants. These are wholesale prices. Assuming average production, this means you are almost certain to make your expected average net income. Green Jeans Nursery - Year 2

28 28 Prices vary by as much as 50% from year to year, and your net income could be significantly higher if you allow the market to dictate prices. On the other hand, prices can just as easily drop, and a soft market could put you out of business quickly. Green Jeans Nursery - Year 2

29 29 1.Take the buyers offer, and establish your prices today 2.Sell all of your product retail Green Jeans Nursery - Year 2 Your Year 2 Choices:

30 30 The real estate market is hot and you are considering selling your farm to a developer. With the money from the sale you could buy a nursery operation further out in the country and operate without a mortgage, thereby significantly reducing your annual expenses. However, the new farm is also farther from the city and your customer base. Customer traffic and resulting sales are likely to be less certain in the new location. Green Jeans Nursery - Year 3

31 31 Green Jeans Nursery - Year 3 Profitability Comparison between the two farms: Green JeansMinimumAverageMaximum Both-$50,000$35,000$150,000 Bedding-$76,000$40,000$190,000 Landscape-$26,000$30,000$100,000 NewMinimumAverageMaximum Both-$ 70,000$40,000$180,000 Bedding-$100,000$45,000$220,000 Landscape-$ 40,000$35,000$130,000

32 32 The new farm is zoned for agricultural production, and you can produce landscape trees, bedding plants, or both. If you buy the new farm, you will produce the same products you currently produce. Green Jeans Nursery - Year 3

33 33 Green Jeans Nursery - Year 3 Your Year 3 Choices: Green JeansMinimumAverageMaximum Both-$50,000$35,000$150,000 Bedding-$76,000$40,000$190,000 Landscape-$26,000$30,000$100,000 NewMinimumAverageMaximum Both-$ 70,000$40,000$180,000 Bedding-$100,000$45,000$220,000 Landscape-$ 40,000$35,000$130,000

34 34 Crop Insurance 101 What is Insurance? Insurance is purchased protection against a specific loss over a defined period of time. What is Crop Insurance? Crop Insurance is purchased protection against specific crop losses over a defined period of time.

35 35 How Does Crop Insurance Work? Risk Transference (pooling): Risk is Transferred from Many Individuals to the Federal Crop Insurance Corporation and Participating Insurance Companies. Law of Large Numbers: The Larger the Pool, the More Predictable the Losses.

36 36 Federal Crop Insurance Programs Multiple Peril Crop Insurance (MPCI) Catastrophic (CAT) Crop Revenue Coverage (CRC) Income Protection (IP) Group Risk Plan (GRP) Revenue Assurance (RA) Adjusted Gross Revenue (AGR) Livestock Risk Protection (LRP)

37 37 Insurable Interest Levels of Coverage Deductible Underwriting Crop Insurance Terms

38 38 Rating Premium Loss Event Indemnity Crop Insurance Terms

39 39 YearRevenuesPremiumIndemnityNet Revenues 1$ 100 2$ 50 3$ 150 4$ 25 5$ 175 Avg.$ 100 Basic Crop Insurance Example

40 40 YearRevenuesPremiumIndemnityNet Revenues 1$ 100- $ 25 2$ 50- $ 25 3$ 150- $ 25 4$ 25- $ 25 5$ 175- $ 25 Avg.$ 100 Basic Crop Insurance Example

41 41 YearRevenuesPremiumIndemnityNet Revenues 1$ 100- $ 25$ 0 2$ 50- $ 25$ 50 3$ 150- $ 25$ 0 4$ 25- $ 25$ 75 5$ 175- $ 25$ 0 Avg.$ 100 Basic Crop Insurance Example

42 42 YearRevenuesPremiumIndemnityNet Revenues 1$ 100- $ 25$ 0$ 75 2$ 50- $ 25$ 50$ 75 3$ 150- $ 25$ 0$ 125 4$ 25- $ 25$ 75 5$ 175- $ 25$ 0$ 150 Avg.$ 100 Basic Crop Insurance Example

43 43 Federal Crop Insurance Programs UNITED STATES In 2007, RMA insured over $62 billion in crop value across 1 million policies, 250 million acres, and 100 commodities. Michigan In 2007, RMA insured nearly $1 billion in crop value across 3,600 policies, 3.6 million acres, and 20 commodities.

44 44 Michigan Commodities Covered by Federal Crop Insurance Programs Apples Barley Blueberries Cabbage Cherries Corn Dry Beans Grapes Green Peas Hybrid Seed Corn Oats Onions Peaches Popcorn Potatoes Processed Beans Soybeans Sugar Beets Tomatoes Wheat Federal Crop Insurance Programs

45 45 For $2,000 you can buy RMAs nursery insurance, which protects against damage from wildlife, fire, and irrigation system failure. Losses from these events are rare, but they can be catastrophic when they do occur. On the other hand, every dollar counts in this game. Green Jeans Nursery - Year 4

46 46 Green Jeans Nursery - Year 4 Your Year 4 Choices: 1.Buy nursery insurance 2.Take your chances

47 47 AGR-Lite Based on a producers average historical adjusted gross revenue. Protects against many causes of loss. Premiums are subsidized up to 56 percent. Federal Risk Management (Crop Insurance) Programs

48 48 Your Year 5 Choices: 1.Buy AGR-Lite 2.Take your chances with the market Green Jeans Nursery - Year 5 For $2,000, you can purchase an AGR-Lite policy that guarantees you an adjusted gross revenue of at least 80% of your average revenues.

49 49 Summary Risk is the Chance of a Bad Outcome. Some Risks Can be Managed; Some Cant. Risk Management Involves the Concept of Balancing Risk and Reward. We Can Sometimes Transfer Risk to Others Using Tools such as (Crop) Insurance. Federal Crop Insurance Programs are Subsidized to Promote Grower Participation

50 50 Thank You


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