Production and PriceRisk Management Toolsfor use byLivestock & Specialty Crop ProducersCollaborating Partners:Billings RMA Regional OfficeFort Peck Community CollegeJames B. JohnsonMontana State UniversityDecember 19-20, 2005 Risk Management Agency
Outline • Production Risk Management for Alternative Crops • RMA Crop Insurance Offerings • Production Risk Management in the Absence of RMA Actuarial Tables • Request for Actuarial Change • NAP
Outline, cont. • Price Risk Management for Alternative Crops • Marketing Assistance Loans • Markets for Alternative Crops and Contracting • Risk Management for Livestock Producers: Insurance Products • Forage Production • Rangeland Insurance • Livestock Risk Protection
Alternative Crops:Production Risk Managementwhen RMA Products are Available Single-Peril Insurance Self-Insure RMA Multiple Peril Insurance
Alternative Crops in Northeast Montana: Counties with Multiple Peril Crop Insurance Coverage, 2006 Crop Year
Basics of Multiple Peril Crop Insurance • Causes of loss that are insured include: adverse weather, insects, wildlife, volcanic eruption, fire, disease, earthquake, and failure of irrigation water supply. • Coverage is differentiated by type and practice, i.e., silage corn, irrigated. • Producer establishes an APH by unit. • Producer chooses a coverage election of 50, 55, 60, 65, 70, 75, 80 OR 85% of APH, depending on the crop plan.
Basics of Multiple Peril Crop Insurance, cont. • Producer chooses a price election usually 55 to 100% ofthe maximum price election. • Producer is indemnified if actual yield is less than the yield guarantee. • Gross premium equals maximum liability multiplied by premium rate. Producer premium is the gross premium less the premium subsidy. • There are replant options for annually-planted crops. • Catastrophic Risk Protection (CAT) is available at 50% of the yield level and a 55 percent price election.
Chickpeas: MPCI • Insured Crop: Desi and small Kabuli (AMIT, B-90, ChiChi and Chico varieties) • Insurable Units: Basic units and optional units by type • Coverage Level: 50, 55, 60, 65, 70, and 75 • 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.
Chickpeas: MPCI, cont. • Variety restrictions: Only ascochyta-resistant varieties are insurable. Seed must be treated with recommended fungicides to prevent ascochyta blight, pythium and other diseases. • Cropland cannot be planted to chickpeas in any of the most recent three crop years.
Chickpeas: MPCI Example • Suppose the producer actually harvests 800 pounds of garbanzo beans per acre. • Will the producer receive an indemnity? • If so, calculate the indemnity in bushels per acre. • Calculate the indemnity in dollars per acre.
Chickpeas: MPCI Example • Yes • The producer receives an indemnity because 800 pounds per acre is less than the yield guarantee of 1,200 pounds per acre. • The producer’s indemnity is the difference in pounds.1,200 pounds – 800 pounds = 400 pounds per acre • Valued at the producer’s elected price400 pounds x $0.09 per pound = $36.00 per acre
Alternative CropsProduction Risk Managementwhen RMA Products are NOT Available Self-Insure Single-Peril Insurance Request for Actuarial Change NAP
Request for Actuarial Change • The possibility is only available if there is no RMA actuarial offering for the commodity in the county including CAT coverage. • An RMA process that may result in a custom-tailored insurance agreement, a written agreement. • The producer provides production and marketing information through their insurance agent. • RMA reviews the application and considers the existence of RMA products in other locations.
Request for Actuarial Change, cont. • RMA may provide a producer with a written agreement with the: • Premium calculation noted; • Crop price is established; and the • APH yield is established. • Producer chooses a: • Price election (55% - 100%); and a • Coverage level (50% - 75%).
Request for Actuarial Change, cont. • The producer decides whether to sign (accept) the written agreement. • This process has to be repeated each crop year.
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: • Producers of Desi or small Kabuli chickpeas may file a request for actuarial change. • Producers of large Kabuli chickpeas may also file a request for actuarial change. • Producers can follow the procedures outlined in Briefing No. 13
Request for Actuarial Change-Chickpeas • Request for Actuarial Change in counties where Dry Bean MPCI policies do NOT exist: • Producers must follow the Request for Actuarial Change procedures outlined in Briefing No. 13. • Additionally, the producer must provide: • Three years of APH records • The anticipated planting and harvesting dates: • The name, location, and distance from farm to market in which chickpeas will be sold.
Production Risk Management Options Choices When RMA Offerings Are NOT Available Noninsured Crop Disaster Assistance Program (NAP) Request For Actuarial Change Self-Insure Single-Peril Insurance
NAP Program Basics • 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. • NAP availability: NAP provides coverage for crops for which the catastrophic level of RMA insurance is unavailable. • Eligible crops: Crops that are noninsurable and include crops grain for food, fiber, and planted and grown for livestock consumption.
NAP Program Basics, cont. • 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. • Producer eligibility: An eligible producer is a landowner, tenant, or sharecropper who shares in the production of a crop that is noninsurable. • Program eligibility requirements: The producer must report acreages and production to FSA by required dates.
NAP Program Basics, cont. • 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. • 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. • 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.
NAP Program Basics, cont. • Applicable fees: • $100 per crop per administrative county. • $300 per producer per county. • $900 per producer in all counties. • 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). • Compensation Reduction: The payment rate may be reduced for a crop that is unharvested.
Marketing Assistance Loans:Price Risk Management Tool for Alternative Crops
Marketing Assistance Loans for Alternative Crops • These loans provide a floor price for loan-quality production. • Marketing assistance loans are available for most alternative crops produced in Northeast Montana. • Pulse crops have uniform loan rates across counties.
Marketing Assistance Loans for Alternative Crops, cont. • Minor oilseed loan rates for some crops differ across counties reflecting differences in differentials from terminal markets. • In periods of low prices, LDPs are available and may augment producer incomes.
Alternative Crops in Northeast Montana: Marketing Assistance Loan Rates (per hundredweight), 2005 Crop Year
Markets for Alternative Crops • World production of many alternative crops is small compared to a crop such as wheat. • Countries other than the U.S. producer most of the alternative crops (example: Mustard production). • Prices are volatile and driven by production in other countries.
Markets for Alternative Crops • Marketing channels in the U.S. are less developed than for major commodities (example: Mustard exports). • Incentives for contracting are relatively large.
Markets for Alternative Crops Percent of World Mustard Seed Production by Country: 2004 703,738 metric tons
Markets for Alternative Crops Percent of World Mustard Seed Exports by Country: 2003 261,381 metric tons
Contracts for Alternative Crops • A voluntary contract exists only when: • Both parties EXPECT to benefit from the contract • Some contract terms provide benefits to a party to the contract. • Other contract terms impose cost to a party to the contract. • Buyers and sellers care about the overall net benefits of contracting.
Contract Benefits to Producers • Risk Management • Guaranteed market access • Price risk management • Guaranteed price • Guaranteed basis • Guaranteed price based on a formula (spot or futures price)
Contract Benefits to Producers • Other benefits: • Access to production and marketing information • Provision of inputs, technology, or management • Access to financing
Contract Costs to Producers • Commitment to a single buyer • Commitment of a specific amount in the absence of “act of god” clauses • Risk of buyer default • Restrictions on input use • Quality discounts may exist
Contract Benefits To Buyers • Guarantees key input supplies • Improved quality reliability • Shared price risk • Costs of inputs are more predictable • Identity preservation can help establish niche markets
Contract Costs To Buyers • Financial commitment to purchase • Specific quantities • Risk of quantity shortfalls • May not be able to transfer price risk
Alternative Crop Acreage Sold Under Contract In 2003 (Source: MSU/MGAA 2004 Survey) 52
Forage: Non-Irrigated Alfalfa Counties In Which Insurance Coverage For Non-Irrigated Alfalfa Hay Is Available For 2006
Forage: Irrigated Alfalfa Counties In Which Insurance Coverage For Irrigated Alfalfa Hay Is Available For 2006
Forage Production Insurance Eligibility • Only forages planted for harvesting are insurable (not those planted for grazing) • Three types of forages • Alfalfa • Alfalfa/Grass • Grass/Alfalfa • These are distinguished based on the number of living alfalfa plants per square foot
Stand Requirements Minimum Number Of Living Alfalfa Plants Per Square Foot, By Type
Forage Production Insurance • Forages can be winter-grazed • Basic, optional, or enterprise units • Must establish an APH • Sometimes difficult • Weigh bales on certified scales • Take pictures of stacks • Need records by unit, type