1. The Basics, Importance, & Need of Risk Management
Ag Lending Meeting
South Bend, Nebraska
Sept. 28, 2011
Chad Hart
Assistant Professor/Grain Markets Specialist 1 1

3. Corn Prices vs. Costs

4. Agricultural Risks Production risk Price or market risk Financial risk
Institutional risk
Human risk
Source: USDA-ERS, Dismukes, Aug. 2009

5. Ag. Risk Management Enterprise diversification Financial leverage
Vertical integration
Contracting
Hedging
Liquidity
Crop insurance
Off-farm income and/or investment
Source: USDA-ERS, Dismukes, Aug. 2009

6. Fear, Greed, and Ego Fear of making a bad decision
-- Watching prices slip away as you wait
Greed of expecting even higher prices
-- Not taking advantage of good price opportunities
Ego of wanting to claim you caught the market high
-- “Lake Wobegon” marketing

7. Ego
Greed
Fear

8. Marketing Plan
To avoid fear, greed, and ego dominating your marketing, have a plan and stick to it.
A marketing plan outlines your market strategy and your marketing objectives.
It should examine marketing opportunities before and after harvest.

9. Building a Marketing Plan
5 basic steps:
Estimate number of bushels/animals to sell
Calculate breakeven price
Project price and production scenarios
Compare pricing tools and analyze market opportunities
Develop a pricing plan

10. Outlining Cash Flow Needs

11. Outlining Cash Flow Needs

12. Iowa Averages,

13. Seasonal Pattern

14. Pre-Harvest Strategies
56%
52%
52%
52%
72%
68%
68%
68%
With strong prices for 2011 crops, pre-harvest price opportunities are great right now. And pre-harvest strategies generally work well as the graph shows. Some years they do not pan out (see for example 2010), but 2011 looks to be a good year.
72%
68%
Source: Farm Futures magazine

15. Contracting Basic Hedge-to-Arrive Basis Deferred Price Minimum Price
New Generation
Automated Pricing
Managed Hedging
Combination

16. Futures and Options Market tools to help manage (share) price risks
Mechanisms to establish commodity trades among participants at a future time
Available from commodity exchanges / futures markets

17. Summary on Options Buyer Seller Buying puts Buying calls
Pays premium, has limited risk and unlimited potential
Seller
Receives premium, has limited potential and unlimited risk
Buying puts
Establish minimum prices
Buying calls
Establish maximum prices

18. Average Price Captured

19. Lowest Average

20. Highest Average

21. Longer History

22. Decision Chart Futures Increase Basis Contract
Sell Cash and Buy Futures
Call Options
Minimum Price Contract, Fixed Basis
Store & Wait to Price
Delayed Price Contract
Minimum Price Contract, Variable Basis
Basis
Weakens
Expected
Change
Basis
Strengthens
Hedge
Hedge to Arrive
Put Options
Cash Sale
Forward Contract
Futures
Decrease

23. Factors Leading to Higher Commodity Prices
Source: USDA-ERS, Trostle, July 2008

24. Government Programs Direct payments – Crop-specific income support
Counter-cyclical payments – Crop-specific price support
Marketing loans – Crop-specific price support
ACRE – Crop-specific revenue support
SURE – Whole-farm revenue support

25. Federal Crop Insurance

26. Causes of Loss for Iowa Corn, 1948-2010

27. Causes of Loss for Iowa Soy, 1955-2010

28. Acres Insured in 2011 Corn and Soybeans--Iowa

29. Corn Insurance Prices

30. Current Subsidy Rates 60% 64% 80% 65% 59% 70% 75% 55% 77% 48% 68% 71%
Coverage level
Basic Units
Optional Units
Enterprise Units
Whole Farm Units
60%
64%
80%
not avail.
65%
59%
70%
75%
55%
77%
48%
68%
71%
85%
38%
53%
56%

31. Premium Differences 2011 Story County, Iowa Corn 180 bushel APH
2 100-acre optional units
Revenue Protection

32. Coverage Level Choice

33. Iowa Averages,

34. Thank you for your time. Any questions. My web site: http://www. econ
Thank you for your time! Any questions? My web site: Iowa Farm Outlook: Ag Decision Maker: