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Risk Management Education for Wyoming Livestock Producers. Custom Ag Solutions Brett Crosby Casey Crosby January 10, 2005. Custom Ag Solutions. Established in 2004 Based in Cowley, Wyoming Previous Experience Focus on Agricultural Finance Risk Management Feasibility Valuation - PowerPoint PPT Presentation
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Risk Management Education for Wyoming Livestock Producers
Custom Ag Solutions
Brett Crosby
Casey Crosby
January 10, 2005
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Custom Ag Solutions
• Established in 2004• Based in Cowley, Wyoming• Previous Experience• Focus on Agricultural Finance
– Risk Management– Feasibility– Valuation– Technology Applications
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Custom Ag Solutions
• Casey Crosby– BS in Animal Science;– 8 Years Ag Production Experience– 2 Years Ag Finance Consulting
• Brett Crosby– BS in Animal Science; MBA– 16 Years Ag Production Experience– 8 Years Ag Finance Consulting
• Other Key Employees
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• USDA Agency• Created in 1996 to Administer the Federal
Crop Insurance Program• Three Divisions
– Insurance Services– Research & Development – Risk Compliance
• RMA Quick Facts– Over 500 Employees– Ten Regional Offices – Main Offices in Kansas City and Washington, DC
Risk Management Agency (RMA)
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RMA’s Vision: To serve America’s agricultural producers through effective, market-based risk management solutions.
RMA’s Mission: Promote, support, and regulate sound risk management solutions to preserve and strengthen the economic stability of America’s agricultural producers.
Risk Management Agency (RMA)
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RMA’s Approach:• Partner with Public and Private
Organizations to Develop New Risk Management Programs.
• Partner with Private Insurance Companies to Deliver Risk Management Products (e.g., crop insurance, LRP).
• Partner with Public and Private Organizations to Provide Risk Management Education.
Risk Management Agency (RMA)
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What is Risk?
Think “Chance”
Think “Bad”
and
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“Chance” and “Bad”
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What is Risk Management?
Think “Risk”
Think “Reward”
and
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“Risk” and “Reward”
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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“Risk” and “Reward”
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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“Risk” and “Reward”
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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“Risk” and “Reward”
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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“Risk” and “Reward”
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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What is Chance?
Know The Odds
Heads Tails
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A “Fifty – Fifty” Chance
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A One-in-Five Chance
Five Doors
One Good Result
Choose a Door 1 2 3 4 5
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How Often Do We Know the Chance of a Given Outcome?
How Can We “Know the Odds” in Agriculture and Livestock Production?
Know The Odds
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Information– Experience– Education– Data Collection
Analysis– Summaries– Statistics– Decision Support Tools
Know The Odds
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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Section II
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Let’s Check Your Risk Management Skills
• Start with $5.00.
• Make four decisions.
• If you lose all of your money at any time, you are out.
• The person with the most money after four decisions wins.
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Decision #1
Earn $5.00 (Net +$1.00)
Risk $4.00
For an 80% Chance to
+
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1 2 3 4 5 6 7 8 9 10
Decision #1
Risk $4.00 for an 80% Chance to Earn $5.00 (Net +$1.00)
Avoid the Big X … X
XX
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Decision #1
Earn $5.00 (Net +$1.00)
Risk $4.00
For an 80% Chance to
+
XX
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Decision #1 Analysis
Outcome GOOD BAD
Value of Outcome + 1.00 - 4.00
Probability of Outcome 80% 20%
Expected Value + .80 - .80
Total Expected Value + 0.00
RULE 1. Don’t Risk a Lot for a Little!
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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Decision #2
Earn $25.00 (Net +$20.00)
Risk $5.00
For a 25% Chance to
+
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Decision #2 Analysis
Outcome GOOD BAD
Value of Outcome
Probability of Outcome
Expected Value
Total Expected Value
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Decision #2 Analysis
Outcome GOOD BAD
Value of Outcome + 20.00 - 5.00
Probability of Outcome 25% 75%
Expected Value
Total Expected Value
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Decision #2 Analysis
Outcome GOOD BAD
Value of Outcome + 20.00 - 5.00
Probability of Outcome 25% 75%
Expected Value + 5.00 - 3.75
Total Expected Value
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Decision #2 Analysis
Outcome GOOD BAD
Value of Outcome + 20.00 - 5.00
Probability of Outcome 25% 75%
Expected Value + 5.00 - 3.75
Total Expected Value + 1.25
RULE 2. Don’t Risk More Than You Can Afford to Lose!
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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Decision #3
20% Chance of Loss
Pay $3.00
Or Risk Losing $15.00
X
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Decision #3 Analysis
Outcome PayNo Pay – No Loss
No Pay – Yes Loss
Value of Outcome - 3.00 0.00 - 15.00
Probability of Outcome 100% 80% 20%
Expected Value - 3.00 0.00 - 3.00
Total Expected Value - 3.00 - 3.00
Don’t Risk More Than You Can Afford to Lose
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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Decision #4
Making or Losing
$25.00
Receive $5.00
Or take a 50% Chance of X
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Decision #4 Analysis
Outcome Take $5Risk – Good
Risk – Bad
Value of Outcome + 5.00 + 25.00 - 25.00
Probability of Outcome 100% 50% 50%
Expected Value + 5.00 + 12.50 - 12.50
Total Expected Value + 5.00 - 0.00
Rule 3. Know the Odds
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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Know the OddsUnderstand the Odds
The Odds are Against You When You Gamble.
What is the Difference Between Investing and Gambling?
The Odds Should be with You When You Invest.
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Playing for Keeps
• Each of you now has $1.00.
• You may keep your dollar, or risk it in the next two decisions.
• Depending on your decisions and chance, you may – Double your money, – Lose your entire dollar, or– Land somewhere in the middle.
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Decision A
Losing $1.00
Pay 25 Cents
Or Take a 33% Chance of
X
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Decision A Analysis
Outcome Pay .25Risk – Good
Risk – Bad
Value of Outcome - .25 + 0.00 - 1.00
Probability of Outcome 100% 67% 33%
Expected Value - .25 0.00 - .33
Total Expected Value - .25 - .33
Rule 3. Know the Odds
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Decision BReceive 25 Cents
For a 40% Chance of
Or Risk 75 Cents
Earning $2.75 (Net +$2.00)
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Decision B Analysis
Outcome Get .25Risk – Good
Risk – Bad
Value of Outcome + .25 + 2.00 - 0.75
Probability of Outcome 100% 40% 60%
Expected Value + .25 + 0.80 - .45
Total Expected Value + .25 +.35
Risk vs. Reward…
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Risk: “Chance” and “Bad”
• Investing is Not Gambling; Keep the Odds in Your Favor.
• Regardless of the Odds, When Risk Exists, You may Realize a Loss.
• Greater Risks Require Greater Rewards.
Greater Risk Should Have Greater Reward
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1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can Afford to Lose.
3. Know the Odds.
The Three Rules ofRisk Management
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