Welcome to the Farming is Risky Business workshop, where you will learn about fundamental risk and risk management concepts.
We'll also explore the availability and operation of key Federal crop insurance programs in and across the U.S.
The workshop will revolves around a simulated farming operation that you will own and manage, making operating and risk management decisions that can result in profits or losses.
3A. Farming is Risky Business workshops are funded by the USDA’s Risk Management Agency, or RMA. RMA oversees the nation’s Federal crop insurance program, which covers over $110 billion in crop value across the U.S.
3B. RMA’s Regional Office serves producers in .
3C. The RMA website provides valuable information and tools to help farmers and ranchers make good decisions about risk management and participation in Federal crop insurance programs.
The RMA website offers information and tools to help producers make better decisions about managing risk and using Federal crop insurance programs.
Farming is Risky Business workshops are interactive, with each participant using a browser to make decisions and provide input. Now, please look at your device and answer Question 1, which is a simple diagnostic question to see what you know about risk management.
Your selected answer will turn dark green; until the instructor presses “Lock Answers”, you can change your answer. Once all answers are locked in, the instructor will press “Display”, and we’ll review your responses.
You can see how the group responded to the question. The correct answer is
Now, let’s answer Question 2, which is another diagnostic question.
“In what crop is covered by the largest total dollar value (total covered liabilities) of Federal crop insurance?”
Please look at your device and answer Question 2.
Again, your selected answer will turn dark green; until the instructor presses “Lock Answers”, you can change your answer.
Once all answers are locked in, the instructor will press “Display”, and we’ll review your responses.
The correct answer is .
Let’s click the Reveal button and review the top four crop insurance programs for .
9a. What is Risk? Let’s get some definitions from the participants.
9b. A very simple definition of risk requires only two words: “Chance” and “Bad”. Risk is the chance of something bad happening.
Of course, if there is a chance of bad, there must also be a chance of good. If an action has no chance of good, and you do it anyway, that’s not risky; that’s just dumb.
9c. Golfing at Big Sky, MT, near Yellowstone. “You don’t have to outrun the bear”.
9d. This does not happen every game or even every season, but it does happen.
If he would have known, he would not have played that day, or left his mask on. That’s the problem with risk, you don’t know in advance.
Think “Chance” and Think “Bad”
Chance Bad
Chance Bad
14a. Taking risks in agriculture can result in rewards, such as monetary rewards or the opportunity to be involved in production agriculture as a career and lifestyle.
14b. Sometimes agricultural risks don’t work out, and we’re left with losses. No one is getting paid in these pictures.
Rewards
Losses
There are five types of agricultural risk that farmers and ranchers work to manage. These same risks apply to nearly every type of business or occupation.
Production risk means “Can I grow (or produce) my crops?” Yields can vary due to weather events, diseases, pests, and other perils. For a doctor, production risk is “Can I diagnose and treat the illness?” For a welder, it’s “Can I fabricate and/or repair the metal?”
Market risk means, “Can I sell my crops (at a price where I make money)?” Markets can be quite unpredictable, and producers usually have little influence over the price received for their crops. For a doctor or welder, market risk is summed up as, “Will people pay me enough for my services to justify my training and business expenses?”
Farmers and ranchers work daily to manage their production and market risks. The remaining risks, Financial, Human, and Legal, while important, are not usually given day-to-day management attention like production and market risks.
Production Risk
Market (Price) Risk
Financial Risk
Human Risk
Legal Risk
16a. Risk management is defined as “Balancing Risk and Reward”. High risk, high reward; low risk, low reward. The captain of the Costa Concordia cruise ship chose to take a huge risk with a $2 billion ship and 4,000 passengers. He attempted to show off his skills by performing a Salute Pass whereby he piloted the massive ship very close to the shoreline at a high rate of speed.
16b. Clearly, the gamble did not pay off. The ship was destroyed, and 32 people were killed. The risk - $2 billion and 4,000 lives – was far out of proportion to the reward, which, best case, was some impressed onlookers. Captain Schettino did a poor job of balancing risk and reward. (https://en.wikipedia.org/wiki/Costa_Concordia).
16c. There are many ways of balancing risk and reward in agriculture. Management practices involve decisions to expend resources (e.g., money, time) with the thought that the benefits will outweigh the costs.
For example, a rancher might vaccinate his calves, or a farmer might invest in an irrigation system. A welding shop owner might invest in safety equipment, reasoning that safety equipment is less costly than the injury or death of a worker.
Diversification is summed up by the phrase, “Don’t put all your eggs in one basket”. Sometimes the poor production and/or market results from one crop can be at least partially offset by good results from another crop.
Transferring risk can be done through a variety of financial and contractual arrangements. Insurance is a very common example of transferring risk to someone else.
Farm financial benchmarking involves the comparison of a farm’s performance against other farms to look for improvement opportunities.
16d. Farm financial benchmarking involves careful recordkeeping to document a farm’s production and marketing results. The farm’s performance results can then be compared to other farms, with management changes being considered and implemented where practica
Choosing to Balance Risk and Reward
Choosing to Balance Risk and Reward
We will now start our simulation, wherein you now own the RULazy2. You will run the operation for four years, making four decisions related to operations, marketing, and crop insurance.
Your profitability will vary dramatically depending on 1) the risks you choose to take and 2) uncontrollable chance (luck).
Here are the numbers to consider in your decision.
With cows, in a great year, you could make over $40K in a single year, while a great year with wheat could make you around $28K.
Next, look at the bad years. A bad year with cows (-$26K) is much worse than a bad year with wheat (-$16K). Your average production and price numbers are displayed in the table in blue.
For cows, production is measured by your average calf weight (450#). In great years, your calves are heavier; in bad years, they are lighter.
For wheat, production is measured by bushels per acre, with an average of 55bu/ac, again with good years higher and bad years lower.
Next, let’s look at prices. For cows, prices average $1.00/pound, with a wide range as shown in the table. For wheat, the average price is $4.75/bushel, with a similar range. Remember those average production and price numbers, as they will help you understand why you made or lost money each year as we move through the game.
So, your year one choices are All Cows, All Wheat, or 50/50. Again, all cows is the riskiest and most rewarding option. All wheat is less risky, but also less rewarding.
Any of the three choices can win the game, and any of the three choices could leave you bankrupt.
Here’s a final look at expected profits/losses for bad, average, and great years for the three options.
Please wake up your devices, because you’ll input your choice on the next page.
Please make your Year 1 choice. Your selection will turn to a dark green color. You can change your selection by choosing a different option.
Once all names are removed from the Awaiting Answers list, we’ll lock the answers and click Display to view your responses.
The chart shows a summary of your Year 1 responses, which we can briefly review.
Now, we’ll click in Calculate to obtain our Year 1 results, which will be displayed both on the main screen and on your individual devices.
The table shows the class’s Year 1 results, sorted by rank/ending balance. The table can be sorted up or down by any heading. Individual results are shown on the students’ devices.
Consider the Year 1 cattle and wheat prices relative to the $1.00/pound and $4.75/bushel average prices.
Each student should review their individual production results relative to the 450# (calves) and 55bu (wheat) average production values.
As expected, farms with higher production values made more money than farms with lower production values.
| Rank | Student | Farm | Cattle Head |
Calf Weight |
Cattle Price |
Wheat Acres |
Wheat Yield |
Wheat Price |
Beg. Balance |
Year's Profit |
Flags | End. Balance |
|---|
For Year 2, you have the opportunity to contract your prices with Mary, a cattle buyer who also buys and sells grains such as corn, barley, and wheat. On June 1, Mary offers to buy your cows/wheat/both for delivery on November 1.
If you sign the contract, you are locked into the offered prices of $1.00/pound for your calves and $4.75/bushel for your wheat; those prices are decent – they happen to be the long-term average prices.
By signing the contract you’re certain to avoid the loss that could come from a market downturn over the six-month period; however, you’ll also walk away from the reward that could be realized if the market moves upward from June to November.
This decision and risk management approach is extremely common in agriculture, as well as other businesses.
Please make your Year 2 decision. Again, your selection will turn to a dark green color, and you can change your selection by choosing a different option.
Once all names are removed from the Awaiting Answers list, we’ll lock the answers and click Display to view your responses.
The chart shows a summary of your Year 2 responses, which we can briefly review.
Now, we’ll click in Calculate to obtain our Year 2 results, which will be displayed both on the main screen and on your individual devices.
The table shows the class’s Year 2 results, added to your previous balance, and again sorted by rank/ending balance.
The table can be sorted up or down by any heading. Individual results are shown on the students’ devices.
Consider the Year 2 cattle and wheat prices relative to the $1.00/pound and $4.75/bushel average prices.
Prices vary by student depending on whether a student contracted all, none, or half.
Each student should also consider their individual production results relative to the 450# (calves) and 55bu (wheat) average production values.
Note that farm profitability varies based on both production results and realized prices.
| Rank | StudentID | Farm | Cattle Head |
Calf Weight |
Cattle Price |
Wheat Acres |
Wheat Yield |
Wheat Price |
Beg. Balance |
Year's Profit |
Flags | End. Balance |
|---|
Your Year 3 decision is critical, as it stays with you for the rest of the game.
You are thinking about selling your farm and buying a new farm.
The new farm has better soil and is more profitable than your farm on average.
However, during drought years, which happen every seven to eight years, the new farm does especially poorly, probably among the worst in the county.
For a tough decision like this one, you really need to look at the numbers.
The table shows a comparison between the current and new farms for bad, average, and great years.
Clearly, you can make more money on the new farm in the great years.
However, the bad years are a lot worse on the new farm compared to the old farm.
Please wake your devices. Also, remember that risk and reward go up and down together.
Please make your Year 3 decision. Again, your selection will turn to a dark green color, and you can change your selection by choosing a different option.
Once all names are removed from the Awaiting Answers list, we’ll lock the answers and click Display to view your responses.
The chart shows a summary of your Year 3 responses, which we can briefly review.
Now, we’ll click in Calculate to obtain our Year 3 results, which will be displayed both on the main screen and on your individual devices.
The table shows the class’s Year 3 results, added to your previous balance, and again sorted by rank/ending balance.
The table can be sorted up or down by any heading. Individual results are shown on the students’ devices.
Consider the Year 3 cattle and wheat prices relative to the $1.00/pound and $4.75/bushel average prices.
Each student should also consider their individual production results relative to the 450# (calves) and 55bu (wheat) average production values.
You might notice a wider range of yield results for students who moved to the new farm.
Students can see a yearly comparative view by clicking on the summary tab in the upper left corner of their screens.
| Rank | StudentID | Farm | Cattle Head |
Calf Weight |
Cattle Price |
Wheat Acres |
Wheat Yield |
Wheat Price |
Beg. Balance |
Year's Profit |
Flags | End. Balance |
|---|
You can find more information about crop insurance programs for producers by clicking the first link.
Crop insurance policies can only be purchased through local crop insurance agents, a list of which can be found using the second link.
Or, contact a Local Crop Insurance Agent.
Returning to our simulation exercise, We’re now at Year 4, and you can use USDA/RMA’s Livestock Risk Protection (LRP) Program to help you manage your market (price) risk on your cattle. The LRP program, now available in all states, is also available to lamb and swine producers.
For Year 4, you can buy an LRP policy to protect against a decline in cattle prices.
LRP insurance costs $2,000 if you’re all cattle and $1,000 if you’re 50/50.
You LRP insurance policy guarantees you $0.95/pound for your cattle price, with unlimited upside.
So, any price below $0.95 (like $0.60, $0.70, or $0.80) is brought up to $0.95.
However, for any price above $0.95 (like $1.10, $1.20, or $1.30), you get that higher price.
Clearly, LRP works differently from contracting with the cattle buyer, where she gets all the upside and also takes all the downside risk.
In fact, the cattle buyer shows up again in Year 4 with a new offer of $1.05/pound for calves and $5.00/bushel for your wheat – no upside no downside – that’s your price.
NOTE: if a farm is all wheat, you should choose either number 2 or number 3, as you don’t own any cows.
Please wake your devices.
*Premium is $2,000 if ‘all cattle’ and $1,000 if ‘50/50’
Please make your Year 4 decision. Again, your selection will turn to a dark green color, and you can change your selection by choosing a different option.
Once all names are removed from the Awaiting Answers list, we’ll lock the answers and click Display to view your responses.
The chart shows a summary of your Year 4 responses, which we can briefly review.
Now, we’ll click in Calculate to obtain our Year 4 results, which will be displayed both on the main screen and on your individual devices.
The table shows the class’s Year 4 results, added to your previous balance, and again sorted by rank/ending balance.
The table can be sorted up or down by any heading. Individual results are shown on the students’ devices.
Consider the Year 4 cattle and wheat prices relative to the $1.00/pound and $4.75/bushel average prices. Remember, the LRP insurance brings any cattle price lower than $0.95 up to $0.95.
If the cattle market came in above $0.95, you received the higher price.
If you contracted with the cattle buyer, you received $1.05/pound and $5.00/bushel regardless of the market result.
Each student should also consider their individual production results relative to the 450# (calves) and 55bu (wheat) average production values. Again, students can see a yearly comparative view by clicking on the summary tab in the upper left corner of their screens.
| Rank | StudentID | Farm | Cattle Head |
Calf Weight |
Cattle Price |
Wheat Acres |
Wheat Yield |
Wheat Price |
Beg. Balance |
Year's Profit |
Flags | End. Balance |
|---|
Thanks for participating!
Please visit www.RMA.USDA.gov for more information about Federal crop insurance programs.
Note: Students will need to rejoin at FRBWeb.com with the new Workshop code
