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Developing a Risk Managment Plan Presentation Modules

Public & Private Partnership Understanding Agriculture's Risk
Funded by: USDA Risk Management Education Initiative
Cooperative State Research Education and Extension Service
USDA Risk Management Agency
Commodity Futures Trading Commission
USDA Office of Outreach

Learning materials and decision tools for Agricultural Risk Management:
Managing Financial, Production, and Price Risk.

"Available to Download"

Chapter 3

Table of Contents

1. Instructor Guidelines
2. Price Risk Modules
	a. Developing a Risk Management Plan
	b. Developing and Implementing a Marketing Plan
	c. Marketing Alternatives to Manage Price Risk: Advantages & Disadvantages
	d. A Primer on Using Futures and Options in Grain Marketing
	e. How Cash Price and Basis Affects Hedging Outcomes
3. Profit Farms Wheat Marketing Case Study: Version 1.2
	a. Background and Support Material for Instructor
	b. Profit Farm Case Study
	c. Wheat Marketing Ledger
	d. Crop Market and Weather Situation Reports
	e. Crop Sales Summary Sheet
	f. Income Statement
4. Appendix A: Glossary of Terms
5. Appendix B: Grain Futures Contracts Currently Traded on US Exchanges

The objective of Chapter Three, Price Risk, is to provide agricultural producers with the ability to incorporate risk management into their commodity marketing activities. The chapter includes five modules, and a marketing case study based on the Profit Farms case farm.

Modules 1 through 3 take an overview orientation, and are designed to introduce the concept of risk management as it relates to marketing. Module 1, Developing a Risk Management Plan, is designed to communicate the idea that risk management should be a planned activity and fit within the overall farm plan. Risk is defined in a probability context using price risk examples. Alternatives for managing various types of risk are introduced. Module 2, Developing and Implementing a Marketing Plan, focuses on marketing as an important part of the management activity. Marketing activities are compared to production activities to illustrate the probabilistic nature of marketing decisions. An essential point is that market uncertainty means planning becomes more critical. Marketing plans must be custom designed for each individual’s operation to reflect variations in risk bearing capacity, and different business goals. The essential elements of a marketing plan are also introduced. Module 3, Marketing Alternatives to Manage Price Risk: Advantages and Disadvantages, provides an introduction to commodity marketing alternatives. Criteria for evaluating marketing alternatives are suggested. Each marketing alternative is defined, and evaluated relative to its strengths and weaknesses. Five alternatives using the cash market, and two alternatives using futures and options are presented.

Modules 4 and 5 are more specific and focus on understanding and implementing marketing strategies. Module 4, A Primer on Using Futures and Options in Grain Marketing, introduces futures and options on agricultural commodities. The focus is on essential terminology and understanding the concept of trading commodity futures and options on futures. Module 5, How Cash Price and Basis Affect Hedging Outcomes, incorporates futures and options into grain marketing strategies. Examples of obtaining downside price protection using hedging with futures are presented. Option-based examples are presented for both puts (establishing a minimum price) and calls (speculating on price increases).

The Profit Farms Marketing Case Study provides an active learning opportunity for evaluating the implementing commodity marketing alternatives. The case study is based upon Profit Farms (Chapter Eight), and simulates outcomes for marketing alternatives over a one-year marketing period. A price scenario of relatively flat commodity prices is presented. Instructions for facilitators and participants are included with the case study.