$ taking charge of managing risk on your farm march 12, 2002 moonraker restaurant marshall
Post on 17-Jan-2016
217 Views
Preview:
TRANSCRIPT
$
Taking Charge of ManagingRisk on Your Farm
March 12, 2002
Moonraker Restaurant Marshall
$
Let’s start by testing how you think Let’s start by testing how you think about risk:about risk:
Which would you prefer?Which would you prefer?
A. 80% chance you will win $4,000
20% chance you get $0
B. Win $3,200
$
How about a downside choice:How about a downside choice:
Which would you prefer?Which would you prefer?
C. Lose $3,200
D. 80% chance you will lose $4,00020% chance you lose nothing.
$
Summary:Summary:
A. 80% chance you will win $4,000; 20% Zero
B. Win $3,200
C. Lose $3,200
D. 80% chance you will lose $4,000; 20% Zero
Most people answer B and D
$
• In the 1st “lottery,” the average was the same for both choices: + $3,200.
80% x $4,000 + 20% x $0 vs $3,200 for sure
• In the 2nd “lottery,” the average was the same for both choices: (- $3,200).
80% x (- $4,000) + 20% x $0 vs (- $3,200) for sure
• Most respondents were willing to give up upside potential. But, they kept downside risk.
$
We tend to be inconsistent in our risk We tend to be inconsistent in our risk perceptions and choices:perceptions and choices:
• On one hand, many overreact to eye-catching, low probability events.
• On the other hand, we tend to ignore unlikely, low probability price and yield events when making plans. It won’t happen to me!
$
Research SuggestsResearch Suggests::
• We tend to spend too much on more routine “hits” that, while unpleasant, can be coped with ...
• But we often don’t pay enough enough attention to protecting against big hit, low probability events.
$
Summary:Summary:• How we “frame” information and choices tends
to keep us from making pricing and insurance choices that are as good as they can be.
• The consequences of these biases can be significant!
• Biases are normal. One focus of this workshop is designed to help you keep them from getting in the way of making good decisions.
$
• Do you have written goals for your farming Do you have written goals for your farming
operation?operation?
• Are you meeting your Goals?Are you meeting your Goals?
Decision Making Environment
$
Basic Goals Include...Basic Goals Include...
• Generating sufficient net income to support a comfortable “family income draw” from the farm business
• Ensure the financialsurvival and profitability of the farm business
$
And, ...And, ...
• Have high level of satisfaction from the farm business
• See growth in farm business net worth
• Maintain financial ability to take advantage of business opportunities
$
But, farms must contend with ...But, farms must contend with ...
• Ups and downs in the economic climate
• Lousy weather … that reduces yield, quality, or the ability to get in the field
• Changes in the USDA safety net
$
• Let’s review some recent history
• Are there lessons that we can draw?
$
Corn futures: the long viewCorn futures: the long view
$
Reality Check IReality Check I
• Did the $5.00 spike in corn prices cloud your neighbors judgement in pricing 1998 corn? 1999? 2000? 2001?
• Did your neighbor “bet” on a drought in Iowa and Illinois in 1998? On drought in the western corn belt in 1999? On the “Drought of 2000”?
$
What did the market say in What did the market say in March ‘98?March ‘98?
• 50-50 bet was CBOT harvest futures contract on corn at $2.70 / bu
• One chance in 3 of $2.50 or less
• One chance in 12 of $2.10 or less
$
On the up side:On the up side:
• One chance in 3 of CBOT corn futures at harvest exceeding $2.90 /bu
• One chance in 5 of corn exceeding $3.10
• One chance in 12 of corn over $3.50
$
Summary of the market’s estimate of price risk Summary of the market’s estimate of price risk exposure in early March ‘98exposure in early March ‘98
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1.70
1.90
2.10
2.30
2.50
2.70
2.90
3.10
3.30
3.50
3.70
Dec '98 Futures @ hvst
Ch
an
ces
ou
t o
f 10
0 p
rice
wil
l b
e l
ess
th
an
…
$
What did the market do 1998?What did the market do 1998?
$
Were There Lessons From 1999?Were There Lessons From 1999?
What About 2000 and 2001?What About 2000 and 2001?
2002 ?2002 ?
$
Reality check IIReality check II
• Are yields more or less variable than annual average prices?
• Do farmers responses match what their records show?
• For most farms, yield risk exposure is real
$
Chances of alternative corn yields: a review Chances of alternative corn yields: a review of the last 50 years for a Gratiot Co. Farmof the last 50 years for a Gratiot Co. Farm
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
10 28 46 64 82 100 118 136 154 172
Yield/planted acre
Ch
an
ces
in 1
00
$
Reality check IIIReality check III
• On the average, over the last 27 years, there has been a 5¢ to 15¢ premium for pricing in the late spring-early summer weather market
• But, I don’t pre-harvest price because of yield risk, contract delivery exposure
$
Check?Check?
• Is the yield risk exposure large enough to keep you from selective pre-harvest pricing?
• Are there other ways to get around yield risk exposure concerns?
$
Changes...Changes...
• USDA no longer attempts to balance supply and demand with Acreage Reduction Programs
• Grain stock holding decisions are now in the private sector
• But, LDP’s may effect farmer’s timing of sales.
$
How do prices respond to ending How do prices respond to ending stocks?stocks?
2
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3
3.1
3.2
3.3
3.4
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Stocks-to-Use Ratio
De
c F
utu
res
$/b
u
95
97 9396
91
90
94
92
$
Taking Charge of Taking Charge of Managing Your Risks:Managing Your Risks:
Goal = Increase Profitability and Ensure Financial Survival
$
Today’s workshop will...Today’s workshop will...
• Help you identify and clarify how to manage your financial risk exposure
• Develop options that could improve your profitability and reduce the risk exposure in your operation
$
Today’s workshop will...Today’s workshop will...• Help you structure your information on:– Your capacity to bear risk
– Revenues, required to cover:
• Cash flow requirements
• Maintain current level of equity
• Review the risk control tools that are available
• Use these “tools” in a “hand’s-on” case study – so you can use them on your farm
$
END
top related