Top Producer Intercontinental Hotel Chicago, IL

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1 Top Producer Intercontinental Hotel Chicago, IL January 22, 2009 Risk Management with Crop Insurance JAMIE WASEMILLER & CHRIS McCRAY STRATEGIC MARKETING SERVICES, INC. SILVEUS INSURANCE GROUP 1

2 Early Time Periods for Risk Management After Harvest January USDA Supply & Demand February 6: USDA Baseline Projections Feb. & March: USDA Supply & Demand Private Analysts Acreage Reports March 15: Deadline to select insurance coverage March 30: USDA Acreage Report

3 Exports down 34%, feed down 6% odds good more reductions in further USDA Reports. Corn can afford to lose 2 3 mil ac next year, increase all categories of usage, and still leave ending stocks adequate. What price will equal new fundamental value?

4 China accounts for 50% of US export sales to date other nations lagging. When China done buying, and S Am Crop Quantified, Prices could have significant downside risk. A 550 mil bu carryover suggest a $2 $3 risk! Corn/soybean price relationship key going into planting (Apr/May).

5 Jan 12 USDA Report Increased Corn Ending Stocks by nearly 350M bushels to billion bushels Decreased Supply by 85M and still RAISED soybean ending stocks by 20M bushels to 225 million bushels We will NOT run out of corn before harvest 2009 and most likely won t run out of Soybeans! The threat of losing corn acres to beans is no longer a price threat. Downside risk of $1 in corn and $2 $3 in beans.

6 Risk Management for the Farm Create a Workable Cash Flow Analysis for your Farm. Expected Yield, Basis, Futures Price, Costs Do this side by side for each crop to determine net profit Is Crop Rotation in my best interest this year? Crop Insurance Analysis Types of Insurance Policies: Yield based vs. Revenue based Levels of coverage: 75%, 80%, 85%, 90% Understand insurance discounts (EU, Biotech, Non HRO) Risk Management using Futures & Options Used to manage the risk that insurance does not Take advantage of current price volatility Protect against price declines in the field Should be managed on a daily basis (track all hedging/sales)

7 Yld Basis Futures Revenue Cost Net Double Crop Wheat SRW 80 -$1.30 $5.75 $ $ $ HRW 55 -$0.85 $6.02 $ $ $51.35 SPG 45 $0.25 $6.39 $ $ $65.80 Corn 200 -$0.70 $4.29 $ $ $ $0.70 $4.29 $ $ $71.50 Beans 60 -$0.75 $9.54 $ $ $ $0.75 $9.54 $ $ $ Double 30 -$0.50 $9.54 $ $ $38.20 Cotton $6.00 $48.70 $ $ $78.35 Corn Wheat Beans Anhydrous $950 $92.00 $46.00 Corn Wheat Beans Dap $62.00 $32.00 $32.00 Machinery/Fuel $55.00 $35.00 $35.00 Potash $50.00 $25.00 $25.00 Taxes/Rent $0.00 $0.00 $0.00 Seed $95.00 $25.00 $50.00 Misc $6.00 $4.00 $4.00 Chemical $42.00 $36.00 $37.00 Insurance $65.00 $30.00 $50.00 Total B4 Land $ $ $233.00

8 Compare Crop Insurance Revenue based Crop Insurance RA, CRC, GRIP Protects producer against revenue loss & yield loss Higher premiums Premiums affected by volatility Yield based Crop Insurance GRP, APH Protects producer against yield loss Lower premiums Do not forget to factor in our downside risk in price

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11 Futures & Options to Manage Risk Futures Long Futures Profit increase as market rises Loss increases as market falls Profit or Loss is based strictly on the difference between the exit price and the entry price. Short Futures Profit increase as market falls Loss increases as market rises Profit or Loss is based strictly on the difference between the entry price and the exit price.

12 Futures & Options to Manage Risk Options (Buys time to make a right decision) Long Call Profit increases as market rises Loss limited to amount paid for option Short Call Profit limited to premium received Loss potential is open ended as market rises Long Put Profit increases as market falls Loss limited to amount paid for option Short Put Profit limited to premium received Loss potential is open ended as market falls

13 Futures & Options to Manage Risk Spreads (Can be used to help offset cost) Bull Call Spread Buy the call with a lower exercise price and sell the call with the higher exercise price Net result is a DEBIT Spread Bull Put Spread Buy the put with the lower exercise price and sell the put with the higher exercise price Net result is a Credit Spread If you think the market will go up, but with limited upside

14 Futures & Options to Manage Risk Spreads Bear Put Spread Sell the put with the lower exercise price and buy the put with the higher exercise price Net result is a Debit Spread Bear Call Spread Sell the call with the lower exercise price and buy the call with the higher exercise price Net result is a Credit Spread If you think the market will go down but with limited downside

15 2008 Corn 2008 Soybeans Date Action Price % Date Action Price % Cash Cash 11/9/07 Sold Cash Corn 431 3/4 7% 9/6/07 Sold Cash Beans % 11/12/07 Sold Cash Corn 424 8% 11/12/07 Sold Cash Beans % 2/7/08 Sold Cash Corn 523 1/2 10% 2/7/08 Sold Cash Beans /2 15% Total Cash Hedged 25% 3/14/08 Sold Cash Beans % Futures Total Cash Hedged 40% 1/12/09 Sold CZ /4 20% Futures 1/13/09 Sold CZ % Total Futures Hedged 30% Options Total Futures Hedged 0% 1/12/09 Sold CN9 430 Calls vs 55% of inv. 35 0% Options Total Options Hedged 0% 1/12/09 Sold SN9 1060c vs 60% inv. 80 0% Total Hedged 55% Total Options Hedged 0% 2009 Corn Total Hedged 40% Date Action Price % Cash 2009 Soybeans 9/10/08 Sold CN % Date Action Price % Total Cash Hedged 7% Futures Futures 1/12/09 Sold CZ /4 20% 1/13/09 Sold CZ % Total Futures Hedged 0% Total Futures Hedged 30% Options Options 1/12/09 Sold SN9 1060c vs. 20% prod. 80 0% 1/12/09 Sold CN9 430 Calls against 33% prod. 35 0% Total Options Hedged 0% Total Options Hedged 0% Total Hedged 0% Total Hedged 37%

16 Risk Management Know and Understand Your Risk Formulate a Plan to Best Lower that Risk Stretch Your Comfort Zone Don t Underestimate the Markets Take Advantage of Insurance Associate Yourself with Smart People Always Keep an Eye on Next Years Crops

17 Questions? Please call or if you have any questions. Jamie Wasemiller Strategic Marketing Services Cell