«Price, Yield and Enterprise Revenue Risk Management Analysis Using Combo Insurance Plans, Futures and/or Options Markets Authors: Duane Griffith, ...»
Figure 36. Add a Call option as a risk management strategy to protect against yield losses and high prices at harvest.
Scenario #19: Our last scenario simulates the revenue protect provided by the RP Combo plan by purchasing the YP coverage plan and a Call option. Start with the variable values as shown in Figure 37. None of the marketing options are active. As you might expect for this scenario, the RP Combo plan provides the highest indemnity at $130.40 per acre. This is due to the upside price protection provided with the RP plan. There is a way to simulate the RP coverage by using a Call option to provide protection against rising prices. To illustrate this, uncheck the RP-HPE and RP combo columns so they are not active. Leave the YP column checked. Now click the check box to activate the Call option column. Figure 38 shows the results of this risk management strategy. The net income per acre for the RP plan is $130.40, Figure 37. The net income per acre for the YP and Call option strategy is $168.90, Figure 38. In this particular scenario, combining YP and a Call option provides more coverage than just the Combo RP plan.
This scenario looks attractive because of the RMA Harvest Price, $12.00, is above the Call Strike, $10.00 price. However, this strategy does not pay a higher indemnity if the RMA Harvest Price is below the Call Strike price, but above the RMA Projected Harvest Price. It leaves a gap in coverage where RP does pay indemnities.
Figure 37. Simulated the yield and price protection provided by RP using YP and a Call option.
Figure 38. Simulated results for price and yield coverage offered by RP with YP and Call options.
Scenario #20: The coverage levels for price and yield have been held constant at 100% and 70% respectively throughout these scenarios. Work through each scenario with different price and yield election levels of your choice. This will require you to visit the RMA Cost Estimator located on the web at: https://ewebapp.rma.usda.gov/apps/costestimator/ This is web based software that estimates your premiums for each combination of insurance plan, crop, location and coverage level you wish to evaluate. See the appendix in this publication for further details.
Scenario #21: The number of futures or options contracts was held constant at eight for all of the scenarios provided. Typically, producers will not have a situation where expected production exactly matches actual production and an even number of contracts. In these instances, using futures and options puts the producer in an over hedged or under hedged position. In either of these positions, profits or losses from a hedge, when prorated over actual yield, can either help or hurt the cash position. Even if a perfect match for production existed, producers will not usually hedge 100% of their expected production. Work back through some of the scenarios presented using a number of contracts more or less than the eight contracts used to examine the effects of over or under hedging.
Appendix Appendix Figures 1 through 7 are screen captures of the RMA Cost Estimator. This online tool provides premium estimates for commodities by location. The example shown here is an estimate for Winter Wheat in Montana grown in Hill County under summer fallow conditions.
Cropped acres is 1,000 with an ownership factor of 100% = 1.0. Approved Yield and Rate Yield are both 40 bushels. A 100% price election and 70% yield election are shown. The RMA Projected Harvest Price for this commodity, determined prior to the September 30, 2010 sales closing date was $7.15 per bushel.
Appendix Figures 8 through 10 are screen captures of the RMA Information Browser and the RMA Actuarial Browser. The information browser is a general purpose information browser covering a wide array of topics. The actuarial browser provides information about selected insurance products. This browser is an excellent source of detailed information about individual insurance products.
Appendix Figure 1. RMA Cost Estimator located at: https://ewebapp.rma.usda.gov/apps/costestimator/
Appendix Figure 2. The first screen in the Quick Estimate series which is not yet completed.
Appendix Figure 3. The second screen in the Quick Estimate series with all values completed.
Appendix Figure 4. The third screen in the Quick Estimate series showing summary results.
From this screen, you can click on the word “Worksheets” in the lower right corner to get detailed or summary results and the premium costs estimate for the crop, location, practice type, yields, ownership, etc. you have entered.
Appendix Figure 5. This screen shows summary results (Producer Worksheet) for a 70% yield election for Revenue Protection (RP) Appendix Figure 6. This screen shows summary results (Producer Worksheet) for a 70% yield election for RP with the Harvest Price Exclusion (HPE) or RP-HPE.
Appendix Figure 7. This screen shows summary results (Producer Worksheet) for a 70% yield election for the Yield Protection Plan.
Appendix Figure 8. RMA Information Browser located at: http://www.rma.usda.gov/tools/ The screen capture shown below is a partial list of information sources provided by RMA.
Appendix Figure 9. Completed initial screen for the RMA Actuarial Browser located at:
http://webapp.rma.usda.gov/apps/actuarialinformationbrowser/ Appendix Figure 10. Sample report generates by the RMA Actuarial Browser.