Risk Management

[TOM4CWB]

Charlie;

I was reading thru my "Production Insurance" contract and was interested to see the following;

(Variable Price Benefit) "but subject to a maximum increase capped at fifty percent (50%)."

With such low beginning Production Insurance numbers, If a major drought occurs, easily we could be capped out of covering the cost of replacement for hedged grain.

Brazil tells a story many learn't here in 2002... Capping adds this risk back to us;

DTN;

"With harvest approaching the half-way mark, the Brazilian farmer's main concern is to determine the real size of production loss, caused either by weather problems or Asian rust, and to determine how much of the crop he will have left to market in 2004. By March 26, 55 percent of the projected crop was already sold, according to the latest survey by Celeres, the analytical firm from Uberlandia.

Accordingly, the pace of soybean sales has been slow in the main growing regions. Farmers are concerned about fulfilling contracts they made earlier in the season, so fresh deals have been quite limited. In short, the local farmers are selling hand to mouth.

Especially in areas where production problems have been more pronounced, as in the north-central parts of Mato Grosso (excess of rains), in southern Mato Grosso do Sul (dry) and Goias (Asian rust), the farmers are facing a great difficulty to harvest enough soybeans to meet their obligations from forward contracts assumed with the input dealers and trading companies.

In addition, it's important to note that many farmers, during August and September of 2003, sold a significant portion of the production at prices well below current levels. At that time, there were many sales near $167/MT in Goias, $158/MT in the south of Mato Grosso and $192/MT in the west of Parana. At that time, those prices looked good because production was expected to be at normal levels. However, right now in the harvest season, the farmers are receiving for spot soybeans $284/MT in Goias, $276/MT in the south of Mato Grosso and $306/MT in the west of Parana."

These numbers are well over a 50% increase;

With Canola @ $310/t, Bly @ $115/t, and CPS @ $122/t... a dry year could easily take us up over 50%.

Could you also explain what the relationship between the Spring price of (for example) CPS @ $122/t and the revenue coverage number of $135/t means?

I think it means a $13/t payment already... 50% payable to the policy holder... or does the SPE pay insurance holders 100% of this loss?

[rodb]

Tom4cwb
The SPE only works when the price drops 10%or more from the coverage price. The Variable price that is in your premium already will work if we see significant price improvements. If levels stay where there at or increase, we will see increased coverage if you are in a position to collect. At least that is what I was lead to believe when I did mine.

[rodb]

Tom
I should read everything first. The SPE gives you half of the difference if it goes over the RIC floor price. CPS wheat is the one that looks to have some benefit, it might pay your premium for the SPE.

[charliep]

Notes.

1) Assuming todays wheat prices were maintained till next fall, the price of CPS wheat used in crop insurance prices would be in the $140 to $150/tonne range.

2) 2CPS wheat would have to drop below $110/tonne to qualify for an SPE payment.

3) Prices below $135/tonne but above $110/tonne would qualify for revenue insurance with the program paying out 50 % of the difference. As a note, if prices drop below $110/tonne, you would get the difference between the crop insurance value set this winter ($122/tonne) and the fall calulation in full plus a revenue insurance payment on the difference between $135/tonne and the current crop insurance price ($122/tonne).

4) If the calculated 2CPS price is between $122 and $135/tonne, you still qualify for a revenue insurance payment (provided you paid the SPE premium).

5) The question comes down to what is the probability 2CPS prices will be below $135/tonne this fall (using the fall calculations - means MGE December futures under $4.00/bu versus current levels of $4.40 to $4.50/bu). What is the cost of SPE at the level of crop insurance coverage you have selected? Are there other tools that do a more effective job of handling this risk (buy MGE/KCBT puts)?

How are others approaching this?

[TOM4CWB]

Charlie;

You wrote;

"As a note, if prices drop below $110/tonne, you would get the difference between the crop insurance value set this winter ($122/tonne) and the fall calulation in full...

plus...

a revenue insurance payment on the difference between $135/tonne and the current crop insurance price ($122/tonne)."

What is the logic behind paying twice on the same loss... or did I read this wrong?

[TOM4CWB]

Charlie;

I see it now, not paid twice... just half of the difference between $135/t and $122/t.

Why did you say MGE for CPS is used, when the CWB uses KCBT to price CPS?

[TOM4CWB]

AB Crop Insurance tightening up...

One must assume the worst... I saw this on DTN this morning;

"Outlook 2004: Volatility Rules

03/31 10:20
U.S. Crop Weather 2004

By Bryce Anderson DTN Ag Meteorologist

OMAHA (DTN) -- Low available stocks of grain and oilseeds, not only in the United States but internationally, make 2004 a "bellwether year" for crop weather, according to Mike Palmerino, agricultural meteorologist at Meteorlogix in Lexington, Mass....

"In the near 25 years that I've been in this business, I have a hard time recalling a year when weather will be so important in so many areas," Palmerino said.




..."TROUBLE SPOTS FIRST

In Palmerino's outlook, the most difficult crop weather pattern this year will be in the northern and western Plains. This area is battling a multi-year drought.

"If you were writing a story about this drought, you'd have to say that the 'once upon a time' phrase refers to the Canadian Prairie," he said. "This was very important for the beginning of the drought. This drought began four years ago in the Canadian Prairie and it's never really let up. The drought followed a year of record or near-record yields in Alberta province back in 1999. In 2000, we began the drought."...

How strong is the drought pattern? It's very similar to the drought pattern that gripped the Plains and Midwest from 1932-1938.

Palmerino is very skeptical about widespread, long-lasting favorable crop weather in the Great Plains, the western and northern Midwest, Rockies, Interior West, and north into the Canadian Prairie. ...

Even in such states as Iowa, Minnesota and Missouri, which have seen more moisture during the winter and early spring, Palmerino is cautious.

"If there is one general statement to make, it's this -- live in the present. Be thankful for moisture that you have seen, but don't extrapolate an active pattern in late winter into something that will lead to good crops this growing season," he said. "This pattern has the ability to turn dry at a moment's notice."

[charliep]

On the payout, you have got it right on the second comment. Assuming $109/tonne (making sure the 10% is triggered), you would get a payment of $13/tonne from the spring price endorsement and $6.50/tonne from revenue insurance. Not indicating this will happen in 2004 (unlikely) but this is the mechanics.

On why not use KCBT rather than MGE adjusted for PRO spreads, the question came down to where there is least basis risk. Looking at things, there seems to be a more consistent basis in the CWRS class/MGE versus CPS/KCBT. With another year of data, this may change in 2005/06.