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Crop Insurance and Price Risk Management Evaluation Tool

Todd Davis, Tyler Mark, and Jonathan Shepherd

Summary

The Crop Insurance and Price Risk Management Evaluation Tool developed by the University of Kentucky is used to help grain farmers evaluate their pre-harvest risk management alternatives. The decision spreadsheet calculates the return over inputs, land costs, overhead, and family living expenses for various harvest time prices and yields. Managers can evaluate how revenue protection or yield protection insurance can reduce risk in combination with price risk management products. The decision tool allows managers to evaluate how cash forward contracts, hedging, put options, and basis contracts can be used with crop insurance in a portfolio of risk management products. Managers can evaluate the returns numerically in a data table and in a graph to help those who prefer to visualize the effect of price and yield variability on returns.

This deterministic spreadsheet helps managers identify the price and yield levels where costs are not covered even with the use of risk management products for corn, soybeans, and wheat. Each crop’s risk management plan is aggregated into a whole-farm profitability table and graph. Managers can perform sensitivity analysis on yields for the three crops to evaluate the impact on the farm’s return over budgeted costs.

This spreadsheet is being used in day-long risk management workshops across Kentucky. Extension agents involved in testing the spreadsheet provided positive feedback on the usefulness in illustrating the impact of lower prices and yields on profitability and how pre-harvest marketing can reduce risk as compared to selling at harvest.

Details

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