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1
Production and PriceProduction and PriceRisk Management ToolsRisk Management Tools
for use byfor use by
Livestock & Specialty Crop Livestock & Specialty Crop ProducersProducers
Collaborating Partners:Collaborating Partners:Billings RMA Regional OfficeBillings RMA Regional Office
Fort Peck Community CollegeFort Peck Community College
James B. JohnsonJames B. JohnsonMontana State UniversityMontana State University
December 19-20, 2005December 19-20, 2005
Risk Management Agency
2
Outline
A. Production Risk Management for Alternative Crops
1. RMA Crop Insurance Offerings
2. Production Risk Management in the Absence of RMA Actuarial Tables
a) Request for Actuarial Change
b) NAP
3
Outline, cont.
B. Price Risk Management for Alternative Crops
1. Marketing Assistance Loans
2. Markets for Alternative Crops and Contracting
C. Risk Management for Livestock Producers: Insurance Products
1. Forage Production
2. Rangeland Insurance
3. Livestock Risk Protection
4
Alternative Crops:Production Risk Management
when RMA Products are Available
Self-Insure Single-PerilInsurance
RMA MultiplePeril Insurance
5
Alternative Crops in Northeast Montana: Counties with Multiple Peril Crop
Insurance Coverage, 2006 Crop Year
Counties Dry Beans
Chickpeas Dry Peas
(Lentils)
Canola Mustard Safflower
Daniels MPCI MPCI MPCI MPCI MPCI
Dawson MPCI MPCI MPCI MPCI
McCone MPCI MPCI MPCI MPCI
Richland MPCI MPCI MPCI MPCI MPCI MPCI
Roosevelt MPCI MPCI MPCI MPCI MPCI
Sheridan MPCI MPCI MPCI MPCI MPCI
Valley MPCI MPCI MPCI MPCI MPCI
Wibaux MPCI MPCI MPCI MPCI
6
Basics of Multiple Peril Crop Insurance
1. Causes of loss that are insured include: adverse weather, insects, wildlife, volcanic eruption, fire, disease, earthquake, and failure of irrigation water supply.
2. Coverage is differentiated by type and practice, i.e., silage corn, irrigated.
3. Producer establishes an APH by unit.
4. Producer chooses a coverage election of 50, 55, 60, 65, 70, 75, 80 OR 85% of APH, depending on the crop plan.
7
Basics of Multiple Peril Crop Insurance, cont.
5. Producer chooses a price election usually 55 to 100% of the maximum price election.
6. Producer is indemnified if actual yield is less than the yield guarantee.
7. Gross premium equals maximum liability multiplied by premium rate. Producer premium is the gross premium less the premium subsidy.
8. There are replant options for annually-planted crops.
9. Catastrophic Risk Protection (CAT) is available at 50% of the yield level and a 55 percent price election.
8
Basics of Multiple Peril Crop Insurance,
cont.
Coverage Level Premium Subsidy Factor
50% 0.67
55% 0.64
60% 0.64
65% 0.59
70% 0.59
75% 0.55
80% 0.48
85% 0.38
9
Chickpeas: MPCI
1. Insured Crop: Desi and small Kabuli (AMIT, B-90, ChiChi and Chico varieties)
2. Insurable Units: Basic units and optional units by type
3. Coverage Level: 50, 55, 60, 65, 70, and 75
4. Replant Option: If plant populations are unable to provide 90 percent of the APH, producer will receive the lower of 10 percent of the value of the APH or 120 pounds of chickpeas.
10
Chickpeas: MPCI, cont.
5. Variety restrictions: Only ascochyta-resistant varieties are insurable. Seed must be treated with recommended fungicides to prevent ascochyta blight, pythium and other diseases.
6. Cropland cannot be planted to chickpeas in any of the most recent three crop years.
11
Chickpeas: MPCI Example
Contract Data Value Calculation
APH Yield 1,600 Producer
Coverage Level 75% Producer
Yield Guarantee 1,200 1,600 x 0.75
Maximum Price Election $0.09 RMA
Price Election 100% Producer
Elected Price $0.09 1.00 x 0.09 per pound for desi
Maximum Liability $108 1,200 pounds x $0.09
Premium Rate 0.06 RMA
Gross Premium $6.48 $108 x 0.06
12
Chickpeas: MPCI Example
1. Suppose the producer actually harvests 800 pounds of garbanzo beans per acre.
2. Will the producer receive an indemnity?
3. If so, calculate the indemnity in bushels per acre.
4. Calculate the indemnity in dollars per acre.
13
Chickpeas: MPCI Example1. Yes
2. The producer receives an indemnity because 800 pounds per acre is less than the yield guarantee of 1,200 pounds per acre.
3. The producer’s indemnity is the difference in pounds.
1,200 pounds – 800 pounds = 400 pounds per acre
4. Valued at the producer’s elected price
400 pounds x $0.09 per pound = $36.00 per acre
14
Alternative CropsProduction Risk Management
when RMA Products are NOT Available
Self-Insure
Single-PerilInsurance
Request for
Actuarial Change
NAP
15
Request forRequest forActuarial ChangeActuarial Change
16
Request for Actuarial Change
1. The possibility is only available if there is no RMA actuarial offering for the commodity in the county including CAT coverage.
2. An RMA process that may result in a custom-tailored insurance agreement, a written agreement.
3. The producer provides production and marketing information through their insurance agent.
4. RMA reviews the application and considers the existence of RMA products in other locations.
17
Request for Actuarial Change, cont.
5. RMA may provide a producer with a written agreement with the:
a. Premium calculation noted;
b. Crop price is established; and the
c. APH yield is established.
6. Producer chooses a:
a. Price election (55% - 100%); and a
b. Coverage level (50% - 75%).
18
Request for Actuarial Change, cont.
7. The producer decides whether to sign (accept) the written agreement.
8. This process has to be repeated each crop year.
19
Request for Actuarial Change-Chickpeas
Request for Actuarial Change in counties where Dry Bean MPCI policies exist:
• If no chickpea actuarial table exists in a county, but a dry bean policy exists for the county:
1) Producers of Desi or small Kabuli chickpeas may file a request for actuarial change.
2) Producers of large Kabuli chickpeas may also file a request for actuarial change.
• Producers can follow the procedures outlined in Briefing No. 13
20
Request for Actuarial Change-Chickpeas
Request for Actuarial Change in counties where Dry Bean MPCI policies do NOT exist:
1. Producers must follow the Request for Actuarial Change procedures outlined in Briefing No. 13.
2. Additionally, the producer must provide:
a. Three years of APH records
b. The anticipated planting and harvesting dates:
c. The name, location, and distance from farm to market in which chickpeas will be sold.
21
Production Risk Management Options
Choices When RMA
Offerings Are NOT Available
Self-Insure Single-PerilInsurance
RequestFor Actuarial
Change
Noninsured Crop Disaster
Assistance Program (NAP)
22
Noninsured Crop Disaster Noninsured Crop Disaster
Assistance ProgramAssistance Program(NAP)(NAP)
23
NAP Program Basics
1. Financial assistance: The Noninsured Crop Disaster Assistance Program (NAP) is a Farm Service Agency managed program that provides financial assistance to producers of noninsurable crops when low yields, loss of inventory, or prevented planting occurs as the result of natural disasters.
2. NAP availability: NAP provides coverage for crops for which the catastrophic level of RMA insurance is unavailable.
3. Eligible crops: Crops that are noninsurable and include crops grain for food, fiber, and planted and grown for livestock consumption.
24
NAP Program Basics, cont.
4. Natural disasters: Natural disasters include damaging weather such as drought, hail, freeze, hurricane, excessive moisture or wind, an adverse natural occurrence; and a condition related to damaging weather or adverse natural occurrence such as insect infestation.
5. Producer eligibility: An eligible producer is a landowner, tenant, or sharecropper who shares in the production of a crop that is noninsurable.
6. Program eligibility requirements: The producer must report acreages and production to FSA by required dates.
25
NAP Program Basics, cont.7. Normal yields: FSA calculates normal yields by
averaging a producer’s actual yields over a 4 to 10 year period. If 4 years of acceptable records are unavailable, a yield will be assigned.
8. Unit of coverage: Yields and yield losses are determined at the basic unit level. A basic unit includes all the acreage of the crop in the county on which the producer has the same interest.
9. Application for coverage: Eligible producers must apply for coverage of noninsurable crops. Application must be filed and applicable fees paid at the local Farm Service Agency (FSA) office by application closing date.
26
NAP Program Basics, cont.10. Applicable fees:
a. $100 per crop per administrative county.
b. $300 per producer per county.
c. $900 per producer in all counties.
11. Compensated losses: Losses of noninsurable crops exceeding 50 percent of the expected yield. The payment rate is 55 percent of the average market price of the commodity (is set by the state FSA committee).
12.Compensation Reduction: The payment rate may be reduced for a crop that is unharvested.
27
Marketing Assistance Marketing Assistance Loans:Loans:
Price Risk Management Price Risk Management Tool for Alternative CropsTool for Alternative Crops
28
Marketing Assistance Loans for Alternative Crops
1. These loans provide a floor price for loan-quality production.
2. Marketing assistance loans are available for most alternative crops produced in Northeast Montana.
3. Pulse crops have uniform loan rates across counties.
29
Marketing Assistance Loans for Alternative Crops, cont.
4. Minor oilseed loan rates for some crops differ across counties reflecting differences in differentials from terminal markets.
5. In periods of low prices, LDPs are available and may augment producer incomes.
30
Alternative Crops in Northeast Montana: Marketing Assistance Loan Rates (per
hundredweight), 2005 Crop Year
Counties Dry Peas
Chickpeas Dry Peas
(Lentils)
Canola Mustard Safflower
Daniels $6.03 $7.43 $11.72 $9.04 $9.31 $7.22
Dawson $6.03 $7.43 $11.72 $9.11 $9.33 $7.22
McCone $6.03 $7.43 $11.72 $8.97 $9.28 $7.22
Richland $6.03 $7.43 $11.72 $9.18 $9.39 $7.22
Roosevelt $6.03 $7.43 $11.72 $9.11 $9.36 $7.22
Sheridan $6.03 $7.43 $11.72 $9.18 $9.37 $7.22
Valley $6.03 $7.43 $11.72 $8.90 $9.27 $7.22
Wibaux $6.03 $7.43 $11.72 $9.18 $9.37 $7.22
31
Markets for Alternative Crops
1. World production of many alternative crops is small compared to a crop such as wheat.
2. Countries other than the U.S. producer most of the alternative crops (example: Mustard production).
3. Prices are volatile and driven by production in other countries.
32
Markets for Alternative Crops
4. Marketing channels in the U.S. are less developed than for major commodities (example: Mustard exports).
5. Incentives for contracting are relatively large.
33
United States4%
China2%
Myanmar6%
Canada43%
Czech Republic6%
Ukraine7%
Russian Federation
8%
Nepal19%
Romania2%
Kyrgyzstan1%
Others2%
Percent of World Mustard Seed Production by Country: 2004
703,738 metric tons
Markets for Alternative Crops
34
Percent of World Mustard Seed Exports by Country: 2003
261,381 metric tons
Canada42%
Russian Federation
14%
India4%
Netherlands4%
Czech Republic8%
Ukraine13%
Germany5%
Hungary3%
Others4%
Belgium1%
United States2%
Markets for Alternative Crops
35
Contracts for Alternative Crops
1. A voluntary contract exists only when:
a. Both parties EXPECT to benefit from the contract
2. Some contract terms provide benefits to a party to the contract.
3. Other contract terms impose cost to a party to the contract.
4. Buyers and sellers care about the overall net benefits of contracting.
36
Contract Benefits to Producers
1. Risk Management
a. Guaranteed market access
b. Price risk management
Guaranteed price
Guaranteed basis
Guaranteed price based on a formula (spot or futures price)
37
Contract Benefits to Producers
2. Other benefits:
a. Access to production and marketing information
b. Provision of inputs, technology, or management
c. Access to financing
38
Contract Costs to Producers
1. Commitment to a single buyer
2. Commitment of a specific amount in the absence of “act of god” clauses
3. Risk of buyer default
4. Restrictions on input use
5. Quality discounts may exist
39
Contract Benefits To Buyers
1. Guarantees key input supplies
2. Improved quality reliability
3. Shared price risk
4. Costs of inputs are more predictable
5. Identity preservation can help establish niche
markets
40
Contract Costs To Buyers
5. Financial commitment to purchase
6. Specific quantities
7. Risk of quantity shortfalls
8. May not be able to transfer price risk
41
Percentage Of Montana Alternative Crop Acreage
Sold Under Contract
Alternative Crop Acreage
Under Contract
71%
Alternative Crop Acreage
NOT Under Contract
29%
42
Alternative Crop Acreage
NOT Under Contract
29%
Contract With Pre-Determined
Price68%
Contract Without Pre-Determined
Price1%
Basis Fixed Contract
2%
Percentage Of Montana Alternative Crop Acreage By
Contract Type
43
Alternative Crop Acreage Sold Under Contract In 2003 (Source: MSU/MGAA 2004
Survey)
46.8%
73.2%
80.5%
97.5%
75.7%71.8%
57.3%
11.6%
100.0% 100.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Pe
rce
nta
ge
52
44
Risk Management for Risk Management for Livestock Producers:Livestock Producers:Insurance ProductsInsurance Products
45
RMA Forage RMA Forage Production InsuranceProduction Insurance
46
Forage: Non-Irrigated Alfalfa
Counties In Which Insurance Coverage
For Non-Irrigated Alfalfa Hay Is Available For 2006
47
Forage: Irrigated AlfalfaCounties In Which Insurance Coverage
For Irrigated Alfalfa Hay Is Available For 2006
48
Forage Production Insurance Eligibility
1. Only forages planted for harvesting are insurable (not those planted for grazing)
2. Three types of forages
a. Alfalfa
b. Alfalfa/Grass
c. Grass/Alfalfa
3. These are distinguished based on the number of living alfalfa plants per square foot
49
Stand Requirements
Forage/Practice 1st Year
2nd Year
3rd Year
4th Year
5th Year
6th Year
7th Year
8th Year
Alfalfa Irrigated 6.0 4.0 3.0 3.0 3.0 3.0 3.0 **
Alfalfa/Grass Irrigated
2.5 1.7 1.2 1.2 1.2 1.2 1.2 **
Grass/Alfalfa Irrigated
0.2 0.2 0.2 0.2 0.2 0.2 0.2
Alfalfa Non-Irrigated
4.8 3.2 2.4 2.4 2.4 * * **
Alfalfa/Grass Non-Irrigated
2.0 1.3 1.0 1.0 1.0 * * **
Grass/Alfalfa Non-Irrigated
0.2 0.2 0.2 0.2 0.2 0.2 0.2
Minimum Number Of Living Alfalfa Plants Per Square Foot, By Type
50
Forage Production Insurance
4. Forages can be winter-grazed
5. Basic, optional, or enterprise units
6. Must establish an APH
a. Sometimes difficult
b. Weigh bales on certified scales
c. Take pictures of stacks
d. Need records by unit, type
51
Forage Production Insurance
5. Yield election: 50, 55, 60, 65, 70, 75%
6. Price election: 55 – 100%
a. Alfalfa price: $83/ton
b. Alfalfa/grass price: $83/ton
c. Grass/alfalfa price: $76/ton
7. CAT coverage is available
a. 50% coverage level
b. 55% price election
52
Irrigated Alfalfa Example
Contract Data Value Calculation
APH Yield 4 tons/ac Producer
Acres 300 ac Producer
Yield Election 75% Producer*
Yield Guarantee 3 tons/ac 4 tons/ac x 0.75
Price Election 100% Producer*
Elected Price $83/ton 1.00 x $83
53
Irrigated Alfalfa Example
Suppose you actually harvest:
a. 2 tons/acre first cutting
b. 0.5 tons/acre on the final cutting
Will you receive an indemnity?
54
Irrigated Alfalfa Example
Yes:
3.0 tons/acre – 2.5 tons/acre = 0.5 tons/acre
0.5 tons/acre x $83.00/ton = $41.50/acre
$41.50/acre x 300 acres = $12,450
55
Risk Management for Other Forage Production
1. Grass hay and grain harvested as hay
2. Use the NAP program
3. FSA price per ton, 2006 crop, is $74.67/ton, with an effective price guarantee of $41.07/ton.
56
GRP Rangeland GRP Rangeland InsuranceInsurance
57
Rangeland Insurance
Counties in Which GRP Rangeland Insurance is Available in 2006
58
GRP Rangeland Insurance
1. Pilot group risk plan
2. Insured crop is range or pasture used for grazing
3. Individual APH is not required
4. NASS records on non-Irrigated hay production are used to determine county “yields”
5. Producer receives an indemnity if the county payment “yield” is below the producer’s trigger “yield”
6. Producer’s actual range condition is inconsequential
59
GRP Rangeland Insurance: Basics
1. County base production
a. Historical average non-irrigated county hay production as estimated by RMA
2. Coverage level
a. Producers select 70, 75, 80, 85, or 90 percent of county base production
b. The CAT coverage level is set at 65 percent
60
GRP Rangeland Insurance: Basics
3. Trigger “yield”
a. Multiply county base production by coverage level
4. Net hay production (payment yield)
a. NASS estimate of net non-irrigated hay production in the insured year
b. CRP and small grains hay are subtracted from total non-irrigated hay production
61
GRP Rangeland Insurance: Basics
5. County base revenue per acre
a. Multiply private state grazing fee/AUM by a county’s rangeland productivity factor (RMA)
b. For 2006, $15.90/AUM in Montana
6. Maximum protection per acre
a. Multiply county base revenue per acre by the selected coverage level (same level as trigger “yield”
62
GRP Rangeland Insurance: Basics
7. Price election percentage
a. Producers select from 60 – 100 percent
b. Most select 100 percent
c. CAT price election is set at 45 percent
8. Dollar amount of protection per acre
a. Multiply maximum protection per acre by the selected price election percentage
63
GRP Rangeland Insurance: Example
Contract Data Value Calculation
County Base Production
20,000 tons RMA
Coverage Level 90% Producer
Trigger “Yield” 18,000 tons 20,000 tons x 0.90
Actual Net Hay Production (Payment
Yield)8,000 tons NASS
Rangeland Productivity Factor
0.35 AUM/Acre
RMA
County Base
Revenue Per Acre$5.57/acre $15.90/AUM x 0.35 AUM/Acre
64
GRP Rangeland Insurance: Example
1. [18,000 – 8,000]/18,000 = 0.5556
2. 0.5556 x $5.01 = $2.78/acre
3. If you had 10 sections
a. Total gross indemnity would be $17,792
65
GRP Rangeland Insurance:Premium Calculation
1. Total Premium
a. Dollar amount of protection per acre x premium rate
2. Premium subsidy
a. Total premium x Subsidy rate
3. Producer premium
a. Total premium – Premium subsidy
66
Coverage Level Premium Rate
(%)
Premium Subsidy Rate
(%)
70 7.4 64
75 8.5 64
80 9.6 59
85 10.9 59
90 12.4 55
GRP Rangeland Insurance:Premium Calculation
67
GRP Rangeland Insurance:Premium Calculation
Contract Data Value Calculation
Total Premium
Per Acre$0.622 $5.01/acre x 0.124
Total Ranch
Premium$3,980.80 $0.622 x 6,400 acres
Premium Subsidy
Per Acre$0.342 $0.622/acre x 0.55
Premium Subsidy (Ranch)
$2,188.80 $0.342/acre x 6,400 acres
Ranch Premium $1,792.00 $3,980.80 - $2,188.80 ($0.28/acre)
Administrative Fee $30.00 RMA
68
GRP Rangeland Insurance: Example
Contract Data Value Calculation
Maximum Protection Per Acre
$5.01/Acre $5.57/Acre x 0.90
Price Election
Percentage100% Producer
Dollar Amount Of
Protection Per Acre$5.01/Acre $5.01/Acre tons x 1.00
69
GRP Rangeland Insurance: Example
1. Suppose actual net non-irrigated county hay production was only 8,000 tons
2. Indemnity calculation
a. [(Trigger “yield” – Net hay production)/trigger “yield”]
b. Multiply that by Dollar amount of protection per acre
70
Livestock Risk Livestock Risk ProtectionProtection
71
LRP Overview
1. Available in 20 states
a. Including Montana
2. Covers feeder cattle, fed cattle, and swine.
3. LRP coverage was first offered in 2003 in 10 states other than Montana.
4. LRP for feeder cattle was suspended on December 24, 2003 because of BSE.
5. LRP for feeder cattle resumed on September 30, 2004.
72
LRP Overview
6. LRP is a single-peril product
a. Offers only price insurance
b. Protects producers against a decline in price below an established coverage price
7. LRP does not insure against:
a. Sickness or death losses
b. Cost of gain increases
c. Basis price risk
73
LRP Feeder Cattle Concepts
1. LRP is offered for 13, 17, 21, 26, 30, 34, 39, 43, 47, and 52 week periods.
a. These periods represent the number of weeks between attaching insurance and marketing calves.
2. An application must be completed indicating beneficial interest in a group of cattle.
3. Specific coverage endorsement is required for each group of cattle.
74
Insurable Type Target Weight
Steers Weight 1 less than 6.0 hundredweight
Steers Weight 2 6.0 to 9.0 hundredweight
Heifers Weight 1 less than 6.0 hundredweight
Heifers Weight 2 6.0 to 9.0 hundredweight
Brahman Weight 1 less than 6.0 hundredweight
Brahman Weight 2 6.0 to 9.0 hundredweight
Dairy Weight 1 less than 6.0 hundredweight
Dairy Weight 2 6.0 to 9.0 hundredweight
Feeder Cattle Types and Weights Eligible for LRP Feeder Cattle Coverage
LRP Feeder Cattle Concepts
75
LRP Feeder Cattle Concepts
4. Endorsement limits
a. Limited to 1,000 head per specific coverage endorsement.
5. Annual policy limits
a. Limited to 2,000 head in any crop year.
b. Crop year is July 1st to June 30th
6. Specific coverage endorsement is required for each group of cattle.
76
LRP Operational Details
1. Expected ending value is the expected price for feeder cattle at the time they are marketed and are reported daily at:
a. www3.rma.usda.gov/apps/livestock_reports/
2. Coverage price represents a price floor for cattle at the time they are actually marketed
a. Also on website
77
LRP Coverage Table
Endorse-ment
Length Type Crop Year
Exp.
End
Value
Cov.
Price
Cov.
Level
Premium
Rate
End
Date
13
Steer
Weight
2
2006 $111.904 $106.00 0.9472 0.012066 1/23/06
13
Steer
Weight
2
2006 $111.904 $104.00 0.9294 0.009577 1/23/06
17
Steer
Weight
2
2006 $109.420 $103.42 0.9452 0.010432 2/23/06
October 24, 2005
78
LRP Operational Details
3. Coverage levels are jointly determined with coverage prices.
a. Range from 70 to 95 percent
4. Coverage prices have been adjusted for animal type and weight.
5. Actual ending value is the actual value of the cash-settled CME feeder cattle reported index.
a. An indemnity is triggered if actual ending value is less than the coverage price.
79
LRP Example: Coverage
Contract Data Value Source
Current Date Oct 24, 05 producer
Number Of Steers 1,000 producer
Marketing Date Jan 23, 06 producer
Expected Weight 800 lb producer
Endorsement Length 13 weeks producer*
Expected Ending Value $111.904 RMA
Coverage Level 94.72% producer*
Coverage Price $106.00 RMA
80
LRP Example: Premium
Contract Data Value Calculation
Insured Value $848,0001,000 hd x 8
cwt/hd x $106.00
Premium Rate 0.012066 RMA
Total Premium $10,232$848,000 x 0.012066
Subsidy Rate 13% RMA
Subsidy Amount $1,330 $10,232 x 0.13
Producer Premium $8,902 $10,232-$1,330
81
LRP Problem #1
1. Suppose you actually sell 1,000 800 pound
steer calves on Jan. 23, 2006.
a. Sold the calves for $102.00/cwt
2. The CME-reported actual ending value on Jan.
23, 2006 was $102.00/cwt.
3. Will you receive an indemnity?
82
LRP Problem #1
4. Indemnity calculation:
a. 1,000 head x 8 cwt/hd x ($106.00 - $102.00) = $32,000
5. Revenue from calves:
a. 1,000 x 8 cwt/head x $102.00 = $816,000
b. Plus indemnity of $32,000
c. Less premium of $8,902
d. Net revenue = $839,098
83
LRP Problem #1
6. Recall that you were expecting $106.00/cwt
a. 1,000 x 8 cwt/head x $106.00 = $848,000
7. Without LRP, you would have received $816,000
8. With LRP, you received $839,000
84
LRP Problem #2
1. Suppose you actually sell 1,000 800 pound
steer calves on Jan. 23, 2006
a. Sold the calves for $96.00/cwt
2. The CME-reported actual ending value on Jan.
23, 2006 was $102.00/cwt.
3. Will you receive an indemnity?
85
LRP Problem #2
4. Indemnity calculation:
a. 1,000 head x 8 cwt/hd x ($106.00 - $102.00) = $32,000
5. Revenue from calves:
a. 1,000 x 8 cwt/head x $96.00 = $768,000
b. Plus indemnity of $32,000
c. Less premium of $8,902
d. Net revenue = $791,098
86
LRP Problem #2
6. Recall that you were expecting $106.00/cwt
a. 1,000 x 8 cwt/head x $106.00 = $848,000
7. Without LRP, you would have received $768,000.
8. With LRP, you received $791,098.
9. Note that you were not compensated for a decline in your price below the CME price index.
87
LRP Summary
1. Note that you are not insuring for:
a. Death loss
b. Rates of gain
c. A decline in YOUR price:
You are still subject to basis risk
2. You are insuring against a decline in the CME feeder cattle index
88
QUESTIONS?