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3. 2007 National Extension Risk Management Education Conference

EXPANDED RISK MANAGEMENT CASE FARM WORKSHOP

G. Art Barnaby, Jr.

Summary

KSU has been using the case study approach for teaching risk concepts to growers on how to combine crop insurance, futures/options, etc., and government programs to manage revenue risk. The case study now includes the recently offered group policies. Participants are asked to manage price and yield risk for the case farm in order to minimize risk and maximize profits. Participants may use any price strategy that leaves the case farm in a hedged position and they select a crop insurance strategy, including no insurance.

Effectively, the Group Risk Plan (GRP) is a “put option” on expected county yield and Group Risk Income Protection (GRIP) is a “put option” on expected county revenue and farmers must manage the yield basis risk. To simulate this, participants draw their individual farm yield out of a hat and an Excel created Monte Carlo model draws a county yield under the four different farm yield scenarios. This is not a totally random draw because the case farm’s yields are set up to be highly correlated with the county yield. There is a five percent chance of drawing a poor farm yield and a normal county yield and five percent for the reverse. Because it is theoretically possible for a GRIP/GRP insured farmer to have crop damage and no insurance claim, these two outcomes were included in the distribution of county yield draws. After the workshop farmers have a better understand of how the group policies transfer risk.

Details

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