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Crop insurance and marketing tools are among the basic building blocks of
most strategies to manage production and price risk. They can be evaluated in an
easy-to-use spreadsheet program, which can be downloaded from http://www.ag.ndsu.nodak.edu/aginfo/farmmgmt/docs/RiskMGT.xls The program is called the "Insurance and Marketing Simulator" and requires the
use of Microsoft Excel. It was developed by Matthew Diersen, South Dakota State University
Extension Service, and Andrew Swenson, North Dakota State University Extension Service.
The
first step in using the model is to decide how the simulation results should be viewed.
They can be viewed in several ways: base, multiple and grid. Base results show total
revenue and its sources for one specified yield and price at harvest. Multiple results
show total revenue and its sources for nine yields and futures prices at harvest. Grid
results show revenue for 70 price and yield scenarios.
The desired view determines which of three spreadsheets to use. There is one
spreadsheet for base results, one for multiple and one for grid. Select the spreadsheet
and specify the information needed for insurance products and marketing tools. The
multiple spreadsheet is suggested as a starting point.
The simulator can be used to evaluate popular insurance products: Multi Peril Crop
Insurance (MPCI) and Crop Revenue Coverage (CRC). The simulator can also be used to
evaluate a third product, Revenue Assurance with the Harvest Option (RA-HO), because it is
essentially the same as CRC.
The following is insurance information for some crops. Producers should visit with
their Crop Insurance Agent about the many other crops covered by insurance.
For 2002, the MPCI price is $3.15 per bushel for spring wheat, $3.05 per bushel for
durum, $1.95 per bushel for barley, $2.00 per bushel for corn, $4.92 per bushel for
soybeans, $9.30 per hundredweight for oil sunflowers and canola, and $13.60 per
hundredweight for confectionery sunflowers. The CRC base price is $3.18 per bushel for
spring wheat, $2.32 per bushel for corn and $4.50 per bushel for soybeans.
The RA price can be specified in the simulator where it calls for a CRC base price. The
RA-HO base price is $1.95 per bushel for barley, $7.10 per hundredweight for sunflowers,
and $9.20 per hundredweight for canola. Other RA-HO base prices are the same as for CRC.
Other information that needs to be specified in the simulator is the loan rate,
expected harvest basis and actual production history (APH) yield. Your local elevator
manager should be able to help you determine an appropriate harvest basis. The loan rate
is needed to determine a loan deficiency payment.
The simulator has a table to specify yield and price percentage elections and the
premiums for MPCI and CRC (or RA-HO). In that same table, you indicate if you want to use
MPCI or CRC (RA-HO) in the analysis. You can not do both at the same time. You need to get
results from using one product and then from the other.
A marketing table permits you to sell futures, buy puts and buy calls. Selling futures
can be used to represent a hedge-to-arrive elevator contract. A marketing tool is
activated by specifying the percentage of the APH yield to sell using that tool. This
would be equivalent to specifying a percentage of the expected crop. You need to specify
the futures price for selling, and the strike prices and premiums for the options. All
three of the tools can be used simultaneously.
The final step is to specify the expected futures price and harvest yield. For multiple
and grid results, increments in prices and yields must also be specified. |
