Southwest Risk Management Southwest Risk Management Training for Priority Training for Priority

CommoditiesCommodities

by

Trent TeegerstromRussell TronstadUrsula Schuch

Dept of Ag. & Resource Economics and Plant SciencesThe University of Arizona, Tucson AZ

Arizona Risk Management WorkshopsArizona Risk Management Workshops

Topics Covered in WorkshopsTopics Covered in Workshops• Influence of Quality and Season on Hay

Market Decisions

• Ranch Restocking and Other Mgt Decisions

• Record Keeping / Financial Risk Management

• Hands On Computer Training: Some Basics for Any Business

• Basic Financial Statements

Example of Decision Tools Example of Decision Tools

• Crop Mix/Diversification

• Long Term Herd Evaluation

• Animal ID Systems

• Farm and Ranch Cash Flow

• Crop Insurance

Forage Example

Bulkiness of Alfalfa Relative to Bulkiness of Alfalfa Relative to Other Field Crops, 2003Other Field Crops, 2003

• 70% of hay is consumed on the 70% of hay is consumed on the farms & ranches where grown.farms & ranches where grown.

Hay Price = 100.319 + 12.205*ln(#dairy cows/#feedlot cattle) (3.694) (2.019)

R2 = 0.443standard error of coefficients in parentheses

Source: USDA/NASS

$0

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0 0.1 1 10 15

$/ton for 2003

# Dairy Cattle / # Feedlot Cattle

AL

AZ

AR

CA CO

CT DE

FL

GA

ID IL

IN

IA KS

KY

LA

ME

MD MA

MI

MN

MS

MO

MT

NE

NV

NH

NJ

NM

NY

NC

ND

OH

OK

OR

PA RI

SC SD

TN

TX UT

VT

VA

WA

WV WI

WY

• Location• Dairy Feed Demands• Quality

U.S. Hay Prices by State, 2003U.S. Hay Prices by State, 2003

Wtg. Avg. $92.9/ton

Alfalfa Prices, Yuma AZ, 1983-04Alfalfa Prices, Yuma AZ, 1983-04

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$160$/ton (2003 dollars)

High Quality

Low Quality

Off-Grade

Estimated Yuma Mean Price SeasonalityEstimated Yuma Mean Price Seasonality

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$140$/ton (2003 dollars)

High Quality

Low Quality

Off-Grade

Hay Price is a function of:• lagged prices • seasonality (polynomial w/ constraints)• simultaneous error structure

$127

$114

$99$87$75

$68

Yuma Price Seasonality & VarianceYuma Price Seasonality & Variance

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$140$/ton (2003 dollars)

High Quality

Low Quality

Off-Grade

0

10

20

30

40

50

60

70

80variance ($/ton)

High Quality

Low Quality

Off-Grade

2

Estimated Conditional CovariancesEstimated Conditional Covariances

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20

40

60

80

High Quality, Low Quality

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60

80

High Quality, Off-Grade

0

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60

80

Bi-Week of Time Period: 7= 1/2/1984 and 544= 5/18/2004

Low Quality, Off-GradeGreatest Substitution

• Substitution: dairy vs. feedlots/horses

• Prices below (above) long-term averages -- mean reverting

• Volatility after August (low & OG)

• Storing alfalfa in April has the lowest expected payout

• Lower price volatility by going for highest quality -- cost/risk??

Market ImplicationsMarket Implications

Livestock Example

Herd Planning

-- Multi-Year Restocking Path (5 yrs)

-- 20-year returns in current dollars

Multiyear Budgets

-- Cash production and management costs

Ranch Investments

-- Amortization of assets.

Restocking Worksheet Restocking Worksheet

lbs. / hd.

1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 19960

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

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Steer Price($/cwt.)

Avg. SteerWeight (lbs/hd)

Avg. Real Steer Prices: Gila County Sale Avg. Real Steer Prices: Gila County Sale

Inflation Adjusted Prices Declining --

Biological ProductivityBiological Productivity

Market PricesMarket Prices

Capital AvailableCapital Available

Restocking PathRestocking Path

Initial HerdInitial HerdBiological ProductivityBiological Productivity

Market PricesMarket Prices

Grazing CapacityGrazing Capacity

Cummulative Cummulative ReturnsReturns

Crop Example

Inputs: Yields, Prices, & CostsInputs: Yields, Prices, & Costs

YieldsPrices

Production Costs

Max Profit Subject to ConstraintsMax Profit Subject to Constraints

AcreageAcreage

CapitalCapital

Monthly Water & Labor ConstraintsMonthly Water & Labor Constraints

Water FlowWater Flow

Annual Water LimitAnnual Water Limit

Water UseWater Use

Portfolio Risk on Revenues & AcresPortfolio Risk on Revenues & Acres

RevenuesRevenues

AcreageAcreage

Absolute Dollar Risk ExposureAbsolute Dollar Risk Exposure

Dollars at RiskDollars at Risk

Crop InsuranceCrop Insurance

Solver to Maximize SolutionsSolver to Maximize Solutions

Acreage Mix of 3 ScenariosAcreage Mix of 3 Scenarios

Profitability of 3 ScenariosProfitability of 3 Scenarios

Work To Date!Work To Date!• 12 Workshops and Presentations Across

Arizona

• 1299 Individuals Attended Workshops and Presentations

• 694 of the 1299 Were Producers

• 120 Individuals Received Hands-on Computer Training

Western Centers Risk Mgt Project

• Extended our Focus to Labor Mgt Issues in the Arizona Nursery and Landscape Industries

Nursery Work

Topics Covered in WorkshopsTopics Covered in Workshops• Nursery marketing decisions

• Reducing risk associated with musculo-skeletal disorders (WMSDs)

• Heat stress management in the workforce

• Communication between supervisers/foreman/workers

Roles and Responsibilities of an Agricultural Employer

Need to Be a Manager * Functions of Management * Types of Activity in Managerial Roles

Managers’ TheoriesRecognizing and Managing RisksManaging for Compliance and BeyondEssentials for the ManagerGetting up and Keeping up as a Manager of People

Convention Demonstrations

Work To DateWork To Date• Published and distributed bookmarks on Heat

Stress Informational in English and Spanish

• Heat Stress article in the American Nurseryman (national trade magazine)

• Five Conference Presentations

• Over 375 individuals receiving materials and training

Questions and Comments?