$ Case Study Farm for Today’s Workshop Bob Battel Extension Agriculture Agent Calhoun and Branch Counties

$ Case Study “Game” Case farm How the game works Today, we’ll pretend its my farm and you are running it for me

$ Case Farm Plan Resource base: –2,000 Acres (900 owned, 1100 cash rented) –6,000 Hours (including $25,000 hired) –60,000 bu of “flexible” on farm storage “Expected” acreage and yield: –1,000 acres bu Corn –1,000 acres 43.0 bu Soybeans

$ Decision times: Pre-plant Late spring / early summer Harvest Post Harvest –All grain is priced, there is no decision

$ What Information Do You Have To Start The Planning Process?

$ Case Farm Financial Information Balance sheet (Assets, liabilities, and Equity/Net worth) Crop enterprise budgets “Cost of production” worksheets to calculate revenue requirements to: –Cover economic cost –Meet cash flow commitments –Maintain equity

$ Case Farm Yield Information... Expected corn and soybean yields based upon farm’s yield history Probabilities of alternative yields Realized (drawn randomly at harvest; based upon historical probabilities over the last 50 years)

$ Expected Yields bushels / planted acre 43 bushels / planted acre

$ Pre-March 15 Yield Expectations: Expected corn yield = bu / planted acre Pre-March 15 Yield Expectations: Expected corn yield = bu / planted acre Corn yield/ planted acre Probability that the realized corn yield / planted acre will be less than this yield 1% 5% 10% 15% 20% 30% 50% 70% 90%

$ Case Farm Price Information... Harvest contract corn and soybean prices prior to planting (based upon futures market)

$ Pre-March 15 prices: Dec CBOT $2.50/bu Harvest $0.40/bu =Cash forward $2.10/bu Price $1.85 $2.04 $2.19 $2.32 $2.45 $2.59 $2.75 $2.95 $3.24 Probability that the realized CBOT corn futures price at maturity will be less than this price 10% 20% 30% 40% 50% 60% 70% 80% 90%

$ Pre-March 15 prices: Nov CBOT $4.85/bu Harvest $0.40/bu =Cash forward $4.45/bu Price $3.80 $4.11 $4.35 $4.56 $4.77 $4.99 $5.24 $5.54 $6.00 Probability that the realized CBOT soy futures price at maturity will be less than this price 10% 20% 30% 40% 50% 60% 70% 80% 90%

$ Case Farm Price Information... Harvest delivery contract price offers after planting & before harvest (drawn randomly) Realized harvest price (drawn randomly)

$ Case Farm Price Information... Feb delivery contract price harvest (drawn randomly … given harvest price) Realized Feb price (drawn randomly)

$ Pre-March 15 Decisions: Crop insurance purchase decision Farm yield (MPCI) Revenue (RA) Revenue with replacement price coverage (CRC, RA) Pre-harvest price Cash forward contract Minimum price contract

$ Decisions: Late Spring - Early Summer –Pre-harvest pricing Cash forward contract Minimum price contract Harvest –Store –Post-harvest price Cash forward contract Minimum price contract February (everything is sold)

$ Other Key Features of Game Each team gets the same contract offer prices for corn and soybeans, for harvest delivery, for the pre-March 15 period.

$ Each team gets a different set of random draws: Harvest delivery price offers during late spring-early summer period. Harvest yields Harvest prices Feb delivery price offers at harvest. Feb realized price

$ Where do prices and yields come from? Yields are based on individual farm historical yields over the last 50 years (adjusted to current technology) Prices are based on option market information and last 25 years of history of price changes between: –planting and harvest –harvest and post-harvest

$ Chances of alternative corn yields: a review of the last 50 years

$ Chances of Alternative Corn Prices: “Expected” cash forward price –Based upon $2.50 / bu futures and market review –Based on “expected” basis of $.40/bu –Giving an expected local market price of $2.10 Volatility exposure (+/- $1.00/bu)

$ Chances of Alternative Soy Prices: “Expected” price –Based on $4.85 /bu futures and market review –Based on “expected” basis of $0.40/bu –Giving an expected local market price of $4.45/bu Volatility exposure (+/- $1.50/bu)

$ Stop! Do you have your: –FINPACK Financial Information? –Cost of production worksheets? Do you have the envelope containing your “to be discovered” offer and realized prices and realized yields? DO NOT OPEN !