Transcript - QuantJox

Risk Management Education for
Wyoming Livestock Producers
Custom Ag Solutions
Brett Crosby
Casey Crosby
January 10, 2005
Custom Ag Solutions
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Established in 2004
Based in Cowley, Wyoming
Previous Experience
Focus on Agricultural Finance
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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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Risk Management Agency (RMA)
• 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
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Risk Management Agency (RMA)
RMA’s Vision:
To serve America’s agricultural
producers through effective, marketbased 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.
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Risk Management Agency (RMA)
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.
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What is Risk?
Think “Chance”
and
Think “Bad”
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“Chance” and “Bad”
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What is Risk Management?
Think “Risk”
and
Think “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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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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“Risk” and “Reward”
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The Three Rules of
Risk Management
1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can
Afford to Lose.
3. Know the Odds.
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Know The Odds
What is Chance?
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
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Know The Odds
How Often Do We Know the Chance
of a Given Outcome?
How Can We “Know the Odds” in
Agriculture and Livestock Production?
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Know The Odds
Information
– Experience
– Education
– Data Collection
Analysis
– Summaries
– Statistics
– Decision Support Tools
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What is Risk Management?
Risk Management Means
Balancing
Risk and Reward
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The Three Rules of
Risk Management
1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can
Afford to Lose.
3. Know the Odds.
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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
Risk $4.00
For an 80% Chance to
Earn $5.00
(Net +$1.00)
+
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Decision #1
Risk $4.00 for an 80% Chance to
Earn $5.00 (Net +$1.00)
Avoid the Big X …
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2
X
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X
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X
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Decision #1
Risk $4.00
For an 80% Chance to
Earn $5.00
(Net +$1.00)
X
X
+
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Decision #1 Analysis
Outcome
GOOD
Value of Outcome
BAD
+ 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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The Three Rules of
Risk Management
1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can
Afford to Lose.
3. Know the Odds.
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Decision #2
Risk $5.00
For a 25% Chance to
Earn $25.00
(Net +$20.00)
+
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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
Value of Outcome
+ 20.00
- 5.00
25%
75%
Probability of Outcome
BAD
Expected Value
Total Expected Value
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Decision #2 Analysis
Outcome
GOOD
Value of Outcome
+ 20.00
- 5.00
25%
75%
+ 5.00
- 3.75
Probability of Outcome
Expected Value
BAD
Total Expected Value
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Decision #2 Analysis
Outcome
GOOD
Value of Outcome
+ 20.00
- 5.00
25%
75%
+ 5.00
- 3.75
Probability of Outcome
Expected Value
Total Expected Value
BAD
+ 1.25
RULE 2. Don’t Risk More Than You
Can Afford to Lose!
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The Three Rules of
Risk Management
1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can
Afford to Lose.
3. Know the Odds.
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Decision #3
Pay $3.00
Or Risk Losing $15.00
20% Chance of Loss
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X
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Decision #3 Analysis
Outcome
Pay
Value of Outcome
- 3.00
100%
- 3.00
- 3.00
Probability of Outcome
Expected Value
Total Expected Value
No Pay –
No Loss
No Pay –
Yes Loss
0.00
- 15.00
80%
20%
0.00
- 3.00
- 3.00
Don’t Risk More Than You Can
Afford to Lose
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The Three Rules of
Risk Management
1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can
Afford to Lose.
3. Know the Odds.
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Decision #4
Receive $5.00
Or take a 50% Chance of
X
Making or Losing
$25.00
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Decision #4 Analysis
Outcome
Take $5
Value of Outcome
Probability of Outcome
Expected Value
Total Expected Value
+ 5.00
100%
+ 5.00
+ 5.00
Risk –
Good
Risk –
Bad
+ 25.00
- 25.00
50%
50%
+ 12.50
- 12.50
- 0.00
Rule 3. Know the Odds
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The Three Rules of
Risk Management
1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can
Afford to Lose.
3. Know the Odds.
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Know the Odds
Understand the Odds
What is the Difference Between
Investing and Gambling?
The Odds are Against You
When You Gamble.
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
Pay 25 Cents
Or Take a 33%
Chance of
X
Losing $1.00
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Decision A Analysis
Outcome
Pay .25
Value of Outcome
Probability of Outcome
Expected Value
Total Expected Value
- .25
100%
- .25
- .25
Risk –
Good
Risk –
Bad
+ 0.00
- 1.00
67%
33%
0.00
- .33
- .33
Rule 3. Know the Odds
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Decision B
Receive 25 Cents
Or Risk 75 Cents
For a 40% Chance of
Earning $2.75
(Net +$2.00)
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Decision B Analysis
Outcome
Get .25
Value of Outcome
Probability of Outcome
Expected Value
Total Expected Value
+ .25
100%
+ .25
+ .25
Risk –
Good
Risk –
Bad
+ 2.00
- 0.75
40%
60%
+ 0.80
- .45
+.35
Risk vs. Reward…
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Greater Risk Should Have
Greater Reward
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.
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The Three Rules of
Risk Management
1. Don’t Risk a Lot for a Little.
2. Don’t Risk More Than You Can
Afford to Lose.
3. Know the Odds.
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