Module 15

The Managing Risks and Profits Software Program

E. Dean Baldwin, Ohio State University
E. Neal Blue, Ohio State University
Robert N. Wisner, Iowa State University

Topics

• Introduction
• Example Analysis with MRP Software
• Installing Software Using Two Floppy Disks
• Installing the Software From the CD-ROM
• ACTIVATING THE PROGRAM
• Control Screen
• 1. Saving the Data
• 2. Opening a File or Retrieving Data
• Support Data
• 1. NEW CROP:
• TABLE 1. ITEMIZATION OF COSTS AND CASH FLOWS
• A. Entering Corn Data for Home Farm
• B. Entering Corn Data for Share Rent Farm
• Table 2. Process to Input Data into the New Crop Input Screen (Figure 8) to Capture Differences in Percentage of Costs that must be Paid by the Renter
• C. Summaries of Variable Cost Data
• 2. GENERAL OVERHEAD COSTS
• A. Machinery Costs
• Table 3. Machinery Cost Data Entries
• B. Labor Costs
• Table 4. Labor Cost Data Entries
• C. Land Costs
• Table 5. Land Cost Data Entries
• D. Living Expenses
• Table 6. Living Expenses Data Entries
• E. Payments
• F. Miscellaneous Costs
• G. Summaries of Fixed Costs and Payments
• H. Entering Cost Data by Category Rather than by Individual Unit
• 3. GRAIN ASSETS
• A. Farm Storage for Corn
• B. Consult Storage Expert
• C. Elevator Storage of Corn and Wheat and Farm Storage of Soybeans
• Table 7. Storage Data (Grain Assets) for Corn, Soybeans and Wheat
• D. Feeding Grain
• 4. MARKETING ALTERNATIVES
• A. Forward Contract (Priced) Sale
• B. H-T-A Priced Sales
• Table 8. Marketing Alternative Entry Data for Contract Types and Grains
• C. Hedged and Put Sales
• D. Speculation
• E. Summary for Marketing Corn via Marketing Alternatives
• F. Summary for Marketing Wheat via a Marketing Alternative
• G. Summary for Marketing Soybeans via a Marketing Alternative
• 5. INSURANCE PRODUCTS
• A. Multi-Peril Crop Insurance
• B. Impact of Corn Crop Failure: Simulation Example
• C. Crop Revenue Insurance
• D. Partial Soybean Crop Failure
• 6. MISCELLANEOUS
• A. Short Term Investments
• 7. YIELD FUTURES
• SUMMARY DATA
• Risk Position
• 1. Net Long Positions for Corn and Soybeans
• 2. Fair Payments for Corn and Soybeans
• 3. Break-Even Price for Corn and Soybeans
• 4. Cash Flow Break-Even for Corn and Soybeans
• 5. Cash Flow Risk Ratio for Corn and Soybeans
• 6. Average Price Received for Corn and Soybeans
• PROJECTED NET FARM INCOME
• LIQUID ASSETS AND FAMILY LIVING COSTS
• Projected Cash Flows and Receipts
• 1. New Crop
• 2. Grain Assets (storage)
• 3. Speculation
• 4. Crop Insurance
• 5. Margin
• New Crop Position
• REPORTS
• CONCLUSIONS
• End of Module

Since this software is in a beta test mode, please send suggestions for change to E. Dean Baldwin, 223 Agricultural Administration Building, Ohio State University, 2120 Fyffe Rd., Columbus, Ohio, 43210. His e-mail address is Baldwin.4@osu.edu.

Introduction

The Managing Risks and Profits (MRP) educational program focuses on new global agricultural policies and changes in the global environment. MRP helps grain farmers and agribusiness persons understand contemporary risks associated with crop yields and marketing alternatives. Authors from eight North Central Land Grant universities wrote 14 chapters that explore crop insurance and marketing choices, legal interpretations, financial considerations, cash flow analysis, profit potentials, and methods for creating a farm production and marketing plan. These chapters are on the CD-ROM that you received, are available via the Data Transmission Network, or are available through traditional educational channels.

To use the subject matter to create a unique personalized marketing plan for a farm business, Miller and Associates of Metamora, Illinois were employed to write an MRP software package. This Windows 3.1 or 95 Managing Risks and Profits (MRP) software program is designed to enable the user to apply what is being learned in individual Managing Risks and Profits modules to the user’s farm business. This software can be used directly by a farmer; or county agents, insurance companies, and other agribusinesses can enter the data for the farmer to create a personalized marketing and production plan. Variable costs or support data are entered for producing new crop grains and for storing grains into the following crop year. Overhead or fixed costs are entered for the farm. Different marketing alternatives and insurance products can be selected to limit price and production risks and to manage cash flow obligations. Other sources of income and liquid assets are included and may be used to offset cash flow short falls. Risk position summaries, per bushel breakeven costs and cash flows, net open (short or long positions) grain positions, and profits or losses are reported for each crop enterprise. Projected incomes and costs are also reported for the farm.

Applications and the results may vary depending upon the user’s financial position. Individuals with high debt-to-asset ratios and/or significant cash flow requirements may need to use insurance products and marketing alternatives to manage crop yields, price risks and profits. Those who are financially secure may also choose to use these risk management tools or they may elect to self-insure. Realizing that one risk management program does not fit the needs of all producers, this software program is designed to help individual farmers design a risk management plan that best fits their unique risk management and profit objectives. This software is not intended to be used as a precise farm accounting system or for income tax computations, but as a tool for evaluating marketing and production risks.

Once a user is familiar with this foundation software program, customized financial and marketing reports can be prepared for the farm. The logic and process for this program will not change as later versions of the program are developed to reflect the introduction of new insurance products, marketing alternatives, public policies, probability distributions and dairy and livestock enterprises. Learning this foundation program will prepare and orient the user to quickly learn updated releases of this software which will reflect changes in policy and economic environment. Changes will also be incorporated based on suggestions by end users.

Example Analysis with MRP Software (or go to Topics )

Before using this computer model, consider reading the MRP modules. As a minimum, read and/or be familiar with the information that is presented by Dr. William Edwards in Module 3, "Financial Considerations in Managing Risks and Profits." The logic, terminology, and formulae from this module are used to create the MRP software program. Module 9 on crop insurance alternatives, and modules discussing pricing alternatives and basis behavior also are helpful in understanding how to use this software

To help grain producers, educators, and agribusiness persons understand how to use this software, this manual was written as a case study farm for Mr. and Mrs. Peter and Pat Producer. The Producers are farming 1200 acres. Since 200 acres are farmed on a 50:50 share basis, the Producer’s input costs and financial returns are based on 1100 acres. The costs and returns for the landlord’s 100 acres are not included as inputs or outputs in this software program.

This document is a step-by-step approach that begins with data entry and progresses to reading and understanding the reports. Each input and report screen is reproduced as a figure so that the data can be entered as the user proceeds and all reports can be interpreted. Except for the Producer’s name and identification number, all entry screens are initially blank. For teaching purposes or for other uses, all data entries and reports for this case farm are included on the CD-ROM in a file called MRPDATA. To load, read the section of the manual Opening a File or Retrieving Data.

Installing Software Using Two Floppy Disks (or go to Topics )

MRP will run on either 3.1 or Windows 95 software. If a Windows 95 operating system is being used, insert MRP disk number 1 in the external (A) drive. Using the mouse, place the cursor on the start button. Click the right hand mouse button. When the pull up screen appears, place the cursor on Explore and click the left hand mouse button. The root directory will appear. Using the mouse, move the directory to the top of the screen and select the External (A) drive icon. That is, click, using the left hand mouse button, on that icon. This action will display all of the files that are on the MRP disk 1. Using the mouse, move through the files until the Setup Application file is found. Click on Setup to begin installing the program. Thereafter, follow the instructions on the screen. At the appropriate time and as instructed, insert disk number 2 in the external A drive. When installation is complete, use the mouse to turn off the Explore screen. To do this, click on the [X] close button in the upper right hand side of screen. Using the mouse, click and drag the MRP icon onto the Windows front page and close the MRP box.

If the operating system is Windows 3.1, insert MRP disk number 1 in the external (A) drive. Using the mouse, select File Manager. In the upper right hand corner of the screen, use the mouse to select external (A) drive. This action will display all of the files that are on the MRP disk 1. Using the mouse, move through the files until the Setup Application file is found. Click on Setup to begin installing the program. Thereafter, follow the instructions on the screen. At the appropriate time and as instructed, insert disk number 2 in the external A drive. When installation is complete, use the mouse to turn off the File Manager and drag the MRP icon onto the front page of Windows.

Installing the Software From the CD-ROM (or go to Topics )

If the program is installed from the CD-ROM, use the file manager to list the files that appear on the CD-ROM. Use the mouse to click on the INSTALL MRP shortcut and follow the instructions that appear on the screen. When the installation process is complete, drag the MRP icon from the MRP dialog box onto the main Windows screen.

ACTIVATING THE PROGRAM
(or go to Topics )

After the software is installed, use the mouse to click on the Managing Risks and Profits icon that appears on the computer screen. The Managing Risk and Profits front page or Figure 1 appears. The 2.1 in the upper left hand corner of the screen identifies the version of this program. It is possible that a different or higher version number may appear on the screen. There are six choices on the upper bar, CONTROL SCREEN, SUPPORT DATA, SUMMARY DATA, REPORTS, ABOUT, AND QUIT. Before using this program, use the mouse to click on the menu choice, ABOUT. In this section, the authors, the MRP educational program, and the programmer are identified. Read the Disclaimer statement before beginning to use the MRP software. Thereafter, begin working with the program by clicking on the menu choice, CONTROL SCREEN.

Control Screen (or go to Topics )

This screen or Figure 2 is used to enter the producer name or to identify the farm. Using the mouse, move the cursor to the Producer field. Clicking the left hand button on the mouse will highlight the Producer field in blue. The name (Peter and Pat Producer), the I.D. Number 1 and the Date have already been entered. Use the Tab key on the keyboard to move to the ID Number field and then to the Date field. Hereafter, the program will assign all current data entries to this record using the ID number one (1). (THE TAB KEY IS USED ON ALL SCREENS TO MOVE FROM ONE FIELD TO ANOTHER. TO RETURN TO A PRIOR FIELD OR TO BACK UP, PRESS THE SHIFT KEY AND THE TAB KEY. THE BACKWARD ARROW KEY CAN ALSO BE USED TO MOVE BACKWARDS. FINALLY, ONE CAN RETURN TO A PRIOR FIELD BY CLICKING THE MOUSE ON THE DESIRED FIELD.

Notice that the individual can select the type of grains (crops) that are grown on this farm. Since Peter and Pat Producer grow corn, soybeans and soft-red winter wheat, use the mouse to click on each of these crops. It is now specified that Peter and Pat Producer are operating a grain farm consisting of corn, soybeans and SRW wheat. Other grains are not being produced.

1. Saving the Data (or go to Topics )

As data are entered, the data are automatically stored within the program for future use. The user may exit the program with the assurance that upon re-entering the program, the prior data entries will appear in both the input and summary screens. Three limitations exist, however. (1) If the user enters new data or revises the program, the old records are lost. (2)The user cannot access these data for use in other software programs. (3) If the system were to crash, the data would be lost because it would not be backed up or stored on other sub-directories or disks. To overcome these limitations, the program is designed to allow the user to store the data to other sub-directories or disks. This is accomplished by clicking on the SAVE PLAN button on the CONTROL SCREEN (Figure 2). The SAVE button is analogous to the SAVE or SAVE AS function that appears on most Windows based programs.

To save the Name (Producer), the I D. Number (1) and the Date (05/04/1998), use the mouse to click on the SAVE PLAN button. After clicking on the SAVE button, a SELECT DIRECTORY screen appears, Figure 3. Use the mouse to identify the DRIVE and subdirectory where the data will be stored. In this example, the data are being saved to disk drive A. By clicking on the arrow in the DRIVE box, other drive choices appear, such as C, B, and/or D. If a sub-directory needs to be defined or made, exit the MRP program and make the subdirectory using the Window’s software. Then, return to the MRP program, select the drive and sub-directory and store the data by clicking on the SELECT button. The CANCEL button terminates this procedure.

Ten files will be stored by ID number and date. The first file in this example is identified as C0001805.dat. (To see a listing of the files, exit the MRP program and select the directory and subdirectory where the files were stored, or use the mouse to select OPEN FILE on the CONTROL SCREEN. The file is read in the following way: C always appears and is fixed, the number 01 equals the user ID Number for Peter and Pat Producer, the number 8 equals 1998, the number 05 equals May, and DAT equals data file. The date 05/98 is tied to the date that is generated by the computer. When saved by the user, the current date that is in the user’s computer will be assigned to this record. As data are entered into the respective screens, (SUPPORT DATA screen for example) return to the CONTROL SCREEN and use the SAVE PLAN feature to save the entries to prevent loss of data. If records are being maintained for more than one farm or for a group of farmers, save the data for a farm to a separate external disk or to separate subdirectories on the hard drive. Always back up all saved files.

2. Opening a File or Retrieving Data (or go to Topics )

The OPEN PLAN button that appears on the CONTROL screen (Figure 2) is analogous to the OPEN function (open an existing document or set of files) that appears on most Window’s programs. To illustrate the data retrieving function, use the Tab key to return to the Producer, I.D. Number and Date fields. Use the Delete key on the keyboard to remove these entries from the CONTROL screen. To open or access the file containing the Producer’s name, I.D. Number and prior date, use the mouse key to click on OPEN PLAN button. The OPEN screen appears, Figure 4. Select the drive and subdirectory to find the data. If all files are to be retrieved, check the ALL FILES box, click on a data file (c0001805.dat for example), and then click on SELECT. All data files will be loaded. The Producer’s name, I.D. Number and the Date are again displayed on the CONTROL screen.

If an individual file is being retrieved, click on the desired files and click on the SELECT button. The ALL FILES box would be turned off; that is, select the c00018052.dat file, for example, and then click on SELECT. To download other individual files, use the mouse to highlight a file name and then use the mouse to activate the SELECT button.

If data are being maintained for more than one farm, each set of farm data should be saved to a separate disk or to a separate sub-directory on the hard drive or disk. This procedure avoids confusion when opening or retrieving data. To retrieve the saved data for a specific farm, click on the open button and access the disk or subdirectory where the data are located.

The UPDATE plan button on Figure 2 is used to revise the current plan. Revising the plan will be discussed after all data for the following examples are entered. The CLOSE button closes the CONTROL SCREEN (Figure 2) returning the user to the main menu (Figure 1).

Support Data (or go to Topics )

On the main menu (Figure 1), use the mouse to click on SUPPORT DATA to get a pull down screen, Figure 5. This set of input screens is used to enter new crop data, grain assets or grain that is in storage, as well as fixed or general overhead costs, marketing alternatives, insurance products, and miscellaneous or financial records. Yield futures will be added at a later time. Each label on the pull down screen (NEW CROP, GRAIN ASSETS, GENERAL OVERHEAD COSTS, MARKETING ALTERNATIVES, INSURANCE PRODUCTS and MISCELLANEOUS) is discussed in succession. Begin by using the mouse to click on NEW CROP.

1. NEW CROP: (or go to Topics )

This screen or Figure 6 is used to enter grain production and variable cost data. By definition, variable costs are "out of pocket" expenditures that would not be paid if a crop was not planted. All variable costs are included in cash flow obligations and as total costs (Table 1). Although the importance of costs and cash flow obligations is not discussed here, it is important for the reader to note that all variable costs are reported on the RISK POSITION report as operating costs (Figure 14). The variable costs also are included as one facet in the new crop cash flow/bu field on Figure 14. On the PROJECTED NET FARM INCOME screen, all variable costs are summed and are reported as new crop costs in the OPERATING AND INSURANCE COST field(Figure 52). The RISK POSITION and PROJECTED NET FARM INCOME reports will be discussed thoroughly in succeeding sections of this manual.

Variable costs may be entered for the Producer’s farm, for a number of different farms that are operated by Peter and Pat Producer, or for a number of fields on the Producer’s farm. If the Producers were farming a piece of land that they owned, a second rented for cash, and a third rented on the shares, the data should be entered separately for all three farms. Alternatively, if different fields have different production capacities, costs, and risks, all data could be entered by field. After the data are entered, the software program sums all entries and keeps all corn data together. That is, entering corn data for three different farms or for three different fields is possible because the program sums all the corn data together for the Producer’s farm business.

Before creating a new data set, select the DELETE button on the NEW CROP screen (Figure 6). Clicking the mouse on the DELETE button deletes any data that are in this file. If a new plan is being developed, always delete the old data. If, on the other hand, the plan is being revised, do not delete existing data. Clicking on the NEXT and PREVIOUS buttons reveals whether there are data in this database. After all data are deleted, clicking on the NEXT button generates the statement "end of file" and clicking on PREVIOUS button generates the statement "beginning of file." When these statements appear in the upper left hand corner of the NEW CROP screen and zeroes (0) appear in all fields, the screen is void of all data.

IMPORTANT: To begin entering data, use the mouse to click on the ADD button on the NEW CROP screen, Figure 6. Before entering data into any of these screens, one must first select the ADD button. (If this procedure is not followed, the data will not be correctly entered into the database). Selecting the ADD button highlights the Farm/Field Name field in blue.

A. Entering Corn Data for Home Farm (or go to Topics )

In this example, data will be entered for two farms. It is assumed that the Producers grow corn on their home farm and on a share-rent farm. Soybeans and wheat will be grown only on the home farm. To begin entering the data for corn, enter Home Farm in the highlighted Farm/Field Name field (Figure 7). Selecting the Tab key on the keyboard highlights the Grain field. Use the mouse to click on the GRAIN button. A pull down screen appears. The crop names that appear were identified on the CONTROL SCREEN. In this example, corn, soybeans and SRW wheat are the three crops grown by the Producers.

Use the mouse to click on corn and then select the Tab key which highlights the Farm/Field Acreage field. Enter 500 acres into this field and select the Tab key. This highlights the Production Share % field. In this field, enter the share of production that the Producers will receive. In this example, 100% is entered representing that 100% of the production will be received by Peter and Pat Producer. Striking the Tab key highlights the Expected Bu. Yield/Acre field. The Producers base their yield estimate on a five or 10 year moving average for their farm or field. If crop yield data are not available for your farm, selected county data and yield probability distributions may be obtained from a second software program, AgRisk. This program is included on the CD ROM. For this example, enter 130 bushels and select the Tab key. The software program calculates that 65,000 bushels are expected (Total Farm/Field Bushels) and the Normal Yield/Acre field is highlighted. (Note: If a crop failure is expected or occurs and/or there is a need to estimate the indemnity payment from an insurance policy, reduce the estimated bushels in the Expected Bu. Yield/Acre. To simulate a complete crop failure, one would enter zero (0) in the Expected Bu. Yield/Acre field. The payout from a crop failure will be discussed in more detail when the INSURANCE PRODUCT screen is examined). For this example, enter 130 bushels in the Normal Yield/Acre field and select the Tab key. This highlights the Seed field in the Expenses/Acre variable cost section. Enter the following variable cost data into each field, seed $24/acre, fertilizer & lime $70, herbicide $19, insecticide $0.00, custom hire $5, drying cost $15 and fuel and lube $15/acre. In this section, the drying cost is the expense to dry corn to the 15% moisture level. If corn is stored, the additional drying costs are reported in the GRAIN ASSETS section of the program.

Since the Producers are owners and are receiving 100% of the production share, they also must pay 100% of the cost share. ( If the Producers were farming on a 50:50 share basis, the Producers would enter 50% in this field). Based on the above entries, the software estimates Total Expenses or total variable cost at $74,000. Since the Expected Harvest Date is highlighted, enter 11/01/98 and select the Tab key. All corn data entries for the home farm are summarized in Figure 7.

After the corn production and cost data for the home farm are entered, add the corn data for the share rent farm and the soybean and wheat data for the home farm (these input data are recorded in Figures 8, 9, and 10). Before entering each set of data for each crop, use the mouse to click on the ADD button. Therefore, click on the ADD button before entering the corn share rent data, the soybean data and the wheat data.

B. Entering Corn Data for Share Rent Farm (or go to Topics )

A current assumption in this model is that all variable costs or expenses per acre will be split by the same percentage between the renter and the landlord. For example, in Figure 8, all expenses were split between the two parties by 50%. In that example, total variable costs to produce 200 acres of corn were $29,800 and the renter’s share of that cost was $14,900. Since agreements vary, all expenses may not be split by the same percentage. For example, the agreement could require that the renter pay 100% of all seed costs while all other expenses would be split 50:50. Future releases of the program will automatically permit percentages to vary by cost category.

In this release, the user must manually adjust the cost data if the renter is paying different proportions for the different variable costs. For example, assume that the renter will pay 100% of the seed cost, 30% of the fertilizer and lime, and 50% of all other variable costs to meet the obligations of this share crop agreement. Assume further that the data in Figure 8 reflects the total cost per acre to produce corn on this share rent farm. In Table 2, it is illustrated how to enter the data to reflect differences in the percentages of the cost that must be paid by the renter.

Since the renter must pay 100% of all seed cost, the total seed cost per acre must be doubled because the software program multiplies the total cost per acre by 50%, the percentage entry in the COST SHARE field . Therefore, entering $48.00 per acre and allowing the software program to multiply that number by 50% results in a payment by the renter of $24.00 per acre or 100% of the total seed cost.

For fertilizer and lime, the renter must pay only 30% of this $70.00 per acre cost or must pay $21.00 per acre ($70.00 * 30%). To adjust this entry, use the following proportion:

50% / $70.00 = 30% / (X)

0.5(X) = $21.00 ;

(X) = $42.00

When the $42.00 per acre is entered by the user and the software automatically multiplies that number by 50%, the renter pays $21.00 per acre or 30% of the $70.00 per acre fertilizer and lime expense.

In this example, the renter’s share of all variable costs would be $14,500 (Table 2). In the prior example where the renter paid 50% of all expenses, the renter’s share was $14,900 (Figure 8). Each of these totals is calculated by the software using the following formula:

total expenses = (expenses per acres * total acres) * cost share percentage.

The NEXT and PREVIOUS buttons that appear on the NEW CROP screens or Figures 7, 8, 9, and 10 are used to review all entries for each specific crop. After the wheat data are entered (Figure 10), click on the PREVIOUS button. The data that were entered for soybeans appears (Figure 9). Clicking on the PREVIOUS button a second and third time reveals all corn data (Figures 7 and 8). Use the NEXT button to move forward from the corn data to soybeans and finally to the wheat data.

The CALCULATE button on the NEW CROP screens is used to sum up the data that were entered. The calculation button is used when an entry is revised and the user does not Tab all the way through the screen. Tabbing through all of the entries on the screen automatically activates the calculation button.

The DISPLAY TOTALS button that appears on the NEW CROP screen reveals a spreadsheet summary of grain, Figure 11. This summary spreadsheet sums together the bushels of corn and variable costs for each field or farm that is listed. In this example, the Producers are expecting to produce 79,000 bushels of corn on the home place and share rent farms. The total variable cost is $88,900. The landlord’s share of production and cost are not displayed. Similar data are presented for the Producer’s wheat and soybeans (Figure 11). To exit this spreadsheet, use the mouse to click on the minimize button (negative sign, [-]) in the upper right corner of the NEW CROP SCREEN.

After all data are entered, the LIST GRAIN PRODUCTION button provides a spreadsheet summary of grains, total bushels, total costs, and harvest date by farm(s) and/or field(s), Figure 12. To exit this spreadsheet, use the mouse to click on the minimize button [-] in the upper right hand corner or the NEW CROP LIST screen.

Click on the EXIT button on the NEW CROP screen (Figure 7) to return to the main menu, Figure 1. Select the CONTROL SCREEN button and then save the data to the preferred drive and sub-directory by using the MRP CONTROL SCREEN, Figure 2 and by clicking on the SAVE PLAN button. After saving the data, close the CONTROL SCREEN to return to the main menu.

C. Summaries of Variable Cost Data (or go to Topics )

To view the summary of the production and variable cost data, use the mouse to click on the SUMMARY DATA button on the main Menu, Figure 1. A pull down screen is revealed and includes RISK POSITION, PROJECTED NET FARM INCOME, CASH FLOW, NEW CROP POSITION and PRICES AND YIELDS (Figure 13). Clicking on the RISK POSITION button reveals a RISK POSITION screen (Figure 14) for corn. The importance and usefulness of this screen will be discussed in more detail in a later section of this manual. For the moment, the screen is being examined to illustrate how the production and variable cost data are summarized.

In this example, the Producers expect to produce 79,900 bushels of corn. Since the storage data have not been entered, the total bushels for sale also equals 79,900 bushels. Operating or variable costs equaling $88,900 are reported in the Operating And Insurance Costs field. At this time, insurance costs have not been entered and are not included in this field. Since fixed costs have not been entered, Total Costs also equal variable costs. Variable or operating costs are also included as cash flow obligations and are one component of the New Crop Cash Flow/ Bu. ($1.13) and the New Crop Cash Flow Risk Ratio fields. When all data are entered, the importance of the ratio will be explained.

The Producers expect to plant 55% of the Total Acres or 600 acres of corn on the home place and share rent farms. The Cost per Acre is identified as $148. The only data entry that can be made on this screen is the New Crop Expected Price. Enter $2.50 in this field and press the tab key. The expected crop price is the producer’s best estimate of prices at harvest time. These estimates may be based on outlook information, localized futures prices (the harvest futures prices minus basis) and/or on the farmer’s own estimates. The importance of this price entry and the associated risk will be discussed later. To calculate the New Crop Cash Flow Risk Ratio, use the mouse to click on the CALCULATE button. The significance of the New Crop Cash Flow Risk Ratio (0.45) will also be discussed later.

The data for wheat and soybeans are summarized on separate RISK POSITION screens (Figures 15 and 16). To see these reports, use the mouse to click on the PREVIOUS or NEXT buttons, Figure 14). To acquire the Cash Flow Risk Ratios for wheat and soybeans, enter $3.55 in the New Crop Expected Price field for wheat and $6.50 in the New Crop Expected Price field for soybeans. On both screens, click on CALCULATE button to acquire the respective risk ratios. To exit the RISK POSITION screen, use the mouse to click on the EXIT button. This returns the user to the main MENU, Figure 1.

2. GENERAL OVERHEAD COSTS (or go to Topics )

To enter the fixed cost, cash flow living expenses, and payment data, use the mouse to click on the SUPPORT DATA button on the main menu (Figure 1). The pull down screen re-appears (Figure 5). Use the mouse to click on the GENERAL OVERHEAD COSTS button. The GENERAL OVERHEAD COSTS screen pops up (Figure 17).

In this program, fixed cost data are entered into MACHINERY, LABOR, LAND IMPROVEMENT, and MISCELLANEOUS categories. Cash flow LIVING EXPENSES and PAYMENTS including down payments for purchases, principal payments and FAIR payments from the federal government are entered here. All six of these categories are accessed in the Category Of Cost field. How each of these is accessed is discussed in the following paragraphs. But first, it is important to differentiate between fixed costs, living expenses, and payments and how these items are treated in this program.

Fixed costs are the costs that must be paid in the short run time period even if grain is not planted or produced. If the fixed costs are out of pocket expenses, they are also included in cash flow obligations. See Table 1 to identify which fixed cost items are included as cash flow obligations. Living expenses are the cash flow obligations that must be met to support the household. These include such items as food, housing, etc. The living expenses categories are based on the Bureau of Census recording system. Use your historic records or your best estimates to enter the data for each living expense category. If you want to compare your living expenses with averages and standard deviations, data are available from the Bureau of Census. All three items in the PAYMENT section, Down Payment, Principal Payment and FAIR payment are not costs but do affect cash flow. Down payments on depreciable assets and principal payments add to cash flow requirement while the FAIR payment decreases cash flow obligations. FAIR is an acronym for Federal Agricultural Improvement and Reform Act. Often referred to as the Freedom to Farm Act, this legislation was signed into law in the Spring of 1996. The amount of the FAIR payment to farmers will decrease annually and at this writing is scheduled to cease in the year 2002.

In this program, the user must identify what percent of total fixed costs and cash flows are allocated to the grain enterprises. Since this version of the software can only be used to analyze cash-grain (no livestock) farms, 100% is the default entry. Thus, the percentage share allocated to grains defaults to 100% on this screen. If part of the fixed costs are allocated to other enterprises such as livestock, the user may override the default entry in the % Allocated to Grains by entering a lower percentage.

The program also asks what percentage of living expenses are allocated to grain enterprises. Since living expenses can be covered from crop production, storage, non-grain enterprises, and off-farm employment and businesses, the entry here may vary from (0) zero to 100%. That is, if you need to cover 100% of all living expenses from crop production, enter 100%. On the other hand, if 40% of your living expenses are covered by off-farm employment, other farm businesses, and/or from storage, then only 60% would be entered in the % Allocated To Grains field.

The portion of your fixed costs and living expenses that must be covered by grain production will be allocated by the respective crops based on the percent of acreage that is planted to each crop. In this example, 600 acres are in corn, 300 are in soybeans, and 200 acres are in wheat. Thus, 55% of the general operating fixed costs, living expenses, and payments are allocated to corn, 27% to soybeans and 18% to wheat. This assumption may change in later releases of this software program when livestock enterprises are included.

A. Machinery Costs (or go to Topics )

To begin entering data into the GENERAL OVERHEAD COST screen (Figure 17), click the ADD button. Except for the name Peter and Pat Producer, there are no entries on the screen; however, the Description field is highlighted. Since machinery fixed cost data will be entered, type in tractor 1 and hit the Tab key. The Category Of Cost field is highlighted. Use the mouse to click on the arrow and then click on MACHINERY. Tab down to Type Of Cost field and use the mouse to click on REPAIR from the pull down screen. (Note that when entering the last entry for each Category of Costs, the Type of Cost label does not appear in its box until the Tab key is used to move to the next field. For example, Labor costs contains three entries, Wages Paid, Income Tax / Social Security, and Value of Unpaid Labor. Since Value of Unpaid labor is the last entry in the Labor Costs Category, the Unpaid labor label does not appear in its box until after the Tab key is pressed. Use the tab key to move to % Allocated To Grains field. Since it is assumed that 100% of all repairs will be allocated to grains, the default of 100% is accepted. (If part of this cost is to be allocated to livestock enterprises, a lower percentage could have been entered). Tab down to the Cost field and enter $700. The total Dollar Amount is $700 for tractor 1. Thus, $700 or 100% of the total will be allocated as a fixed cost to the grain enterprises (Figure 18).

Whether the data are entered for individual units or for the whole category will determine how the data are collected and entered into the individual sheets. In the above example, machinery costs were entered for one tractor. Alternatively, repair costs could be entered as a total for all machinery. In that case, one would enter all repairs in the Description field.

To enter all additional repair costs, click on the ADD button. Enter all repairs and the corresponding value of $5,000. Since it costs $700 to repair tractor 1 and all additional repairs are $5,000 (Figure 19), the total machinery (repair) cost is $5,700. By clicking on the LIST GENERAL COSTS button, a summary spreadsheet is generated, Figure 20. Notice that each repair is listed separately and in alphabetical order. The entries are not listed as they are entered..

By first selecting the ADD button on the GENERAL OVERHEAD COSTS screen, Figure 17, enter all remaining machinery cost data that appear in Table 3. Repairs for tractor 1 and all repairs have been entered. Therefore, the next entry is for depreciation.

The definitions for most of the types of machinery costs are self-explanatory. Except for depreciation and interest on equity, all other costs are "out of pocket"expenses and are included in the cash flow (Table 1). By definition, interest on equity is an opportunity cost for the investment in the machinery. If the Producers have $100,000 invested in machinery and expect to get an 8% return on their investment, interest on equity is $8,000. It, too, is not an "out of pocket" cost and is not included in the cash flow.

To see a listing of machinery costs, click on the LIST GENERAL COST button on Figure 19. This displays Figure 21, GENERAL OVERHEAD COST LIST for machinery. Minimize this screen (Figure 21) by clicking on the minimize button [-]. To see the total machinery cost of $86,700 or Figure 22, click on the DISPLAY TOTALS button on Figure 19. To view how these machinery data are summarized, exit the GENERAL OVERHEAD COSTS screen and click on the SUMMARY DATA button (Figure 1). When the pull down screen appears, click on the RISK POSITION. Since 55% of the acres are in corn, $47,290 of the $86,700 total machinery costs are allocated to the corn crop (Figure 23). Clicking on the NEXT button retrieves the wheat risk position where $15,763 of machinery costs are allocated to the wheat crop. Clicking on the NEXT key again reveals that $23,645 of the total machinery costs are allocated to the soybean crop. By clicking on the EXIT button and then the SUPPORT DATA button, return to the GENERAL OVERHEAD COST section.

B. Labor Costs (or go to Topics )

Use the process described above to enter the following labor data that are displayed in Table 4. Begin by clicking on the ADD button to enter the first set of data and then click on ADD for each additional type of labor cost data.

Wages paid and income tax and social security are cash flow obligations (Table 1). Value of unpaid labor is an opportunity cost (wages that could be earned from the next best employment opportunity) and is not included as a cash flow obligation. Click on DISPLAY TOTALS and LISTS GENERAL COSTS to see the summary spreadsheets.

C. Land Costs (or go to Topics )

Using the process described above, enter the following land improvement data that are displayed in Table 5. To enter the following data for land improvement, begin by clicking on the ADD button and click on ADD for each type of costs that is entered. Since cash rent is zero (0) in this example, it will not be entered.

Each of the categories is self-explanatory. Except for depreciation on improvements and interest on owner’s investments, all other land costs are cash flow obligations (Table 1). Interest on owner’s investment is an opportunity cost. It depends upon the estimated rate of return that could be earned from the next best investment. Click on DISPLAY TOTALS and LIST GENERAL COSTS to see the summary spreadsheets. The entries are listed in alphabetical order rather than in the order in which each was entered.

D. Living Expenses (or go to Topics )

Based on the data in Table 6, enter living expenses. It is assumed that only 50% of the living expenses are allocated to grains by the Producers. The remaining 50% is covered by off-farm income or revenues from other farm enterprises. To allocate only 50% of the living expenses to grain production, override the 100% default data in the % Allocated To Grains field by entering 50%. For example, entering 50% in the % Allocated To Grains field and $4,400 in the Cost field causes the program to allocate $2,200 to the grain enterprises. The $2,200 appears in the Dollar Amount field. All living expenses or costs are included as cash flow obligations. Remember to click on the ADD button before entering data for each category of cost (living expenses).

E. Payments (or go to Topics )

To enter payment data, click on the ADD button to select the Payment item in the CATEGORY OF COST pull down screen. Both the Down Payment and Principal Payment categories add to cash flow requirements while the FAIR Payment reduces cash flow obligations (Table 1). Include $10,000 as a down payment and $5,000 as principal payment, with the FAIR payment equaling $31,700.

F. Miscellaneous Costs (or go to Topics )

To include all other miscellaneous costs or payments, click on the ADD button to select the Miscellaneous item in the Category of Cost pull down screen. Miscellaneous income does not contribute to total cost or to cash flow. It is recorded on the PROJECTED NET FARM INCOME screen. Miscellaneous cost adds to total cost and to cash flow requirements. Thus, do not put a non-cash flow entry in the miscellaneous cost category. In this example, assume that the Producers earn $10,000 of miscellaneous income and have $5,000 of miscellaneous costs.

G. Summaries of Fixed Costs and Payments (or go to Topics )

Click on the LIST GENERAL COSTS button to see a summary of all entries. Since this is a pull down screen, all data cannot be seen at one time. Thus, drag the bar on the right hand side of the screen downward to see all data. Figure 24 displays the first set of data and Figure 25 displays the remaining general cost data. These data are listed in alphabetical order rather than in the order in which the data were entered. A summary of the GENERAL OVERHEAD COSTS by category is viewed by clicking on the DISPLAY TOTALS button. Figure 26 lists total costs and payments.

In the RISK POSITION under the SUMMARY DATA pull down screen, all cost data are now summarized, total cost per acre is calculated, and the breakeven price is presented. Figure 27 displays the data for corn. Using the next button, the wheat and soybean data may be viewed. For corn, the breakeven price is $2.35 per bushel. The cash flow per bushel obligation is $1.49 per bushel. At this point, the AgRisk program (on the CD-ROM) may be used to determine the probabilities that localized futures prices will cover the projected breakeven prices and cash flow obligations for corn and for the other respective grains. If you are not familiar with the AgRisk program, see Chapter 5 or Module 5 of the CD ROM. AgRisk also appears on the World Wide Web at the following address, http://www-agecon.ag.ohio-state.edu/agrisk/agrisk.htm

H. Entering Cost Data by Category Rather than by Individual Unit (or go to Topics )

Some users may prefer to enter all cost data by category rather than by individual unit. To save data collection and computer entry time, the user may prefer to enter the cost for machinery as a total cost for all machinery rather than entering individual costs for depreciation, insurance, interest on loans and equity, and repairs. This is an acceptable approach; however, the data must be accurately aggregated by category and classified by its impact on cash flow. That is, there must be an entry for those items that add to cash flow and an entry for those that are excluded from cash flow. For machinery, repairs, interest on loans, and insurance adds to cash flow obligations and must be entered as one entry. In the TYPE OF COST field, the cash flow costs may be labeled as repairs, interest on loans, or as insurance. The non-cash flow items, depreciation and interest on equity, must be added as a second machinery cost item. In the TYPE OF COST field, the non-cash flow items may be identified as either depreciation or interest on equity. For the machinery and other cost and payment categories, use the information in Table 1 to separate cash flow items from non-cash flow items.

3. GRAIN ASSETS (or go to Topics )

Grain Assets is a pull down screen from the SUPPORT DATA button on the main menu (Figure 1). Use the mouse to click on SUPPORT DATA and then click on GRAIN ASSETS. This entry screen (Figure 28) is used to manage and market grain in storage, calculate drying costs to store grain and to estimate storage costs including interest, and to feed grain. All of the buttons, NEXT, PREVIOUS, ADD, CALCULATE, DELETE, EXIT, DISPLAY TOTALS, and LIST GRAIN ASSETS perform the same functions as they performed in the previous input screens. Thus, each is not discussed here. To begin entering the data that appear in the following paragraphs, use the mouse to click on the ADD button. Except for the name, (Peter and Pat Producer) all fields are blank.

In this example, it is assumed that the Producers are storing corn at the farm and elevator. Soybeans and wheat are also stored at the farm. NOTE!! DELAYED PRICE GRAIN AND BASIS GRAIN WOULD NOT BE ENTERED IN THIS SECTION. ENTER ONLY GRAIN THAT IS BEING STORED FOR SALE!

A. Farm Storage for Corn (or go to Topics )

After clicking on the ADD button, the Description field is highlighted (Figure 29). Enter farm storage and hit the Tab key on the keyboard. This will highlight the Grain field. Use the mouse to select corn. Strike the Tab key again highlighting the Type field. Use the mouse to select on-farm storage.

Storage Start Date is the date that most of the corn was moved into farm storage. In this example, it is assumed that the corn was stored on the farm on October 15, 1997. If corn is stored at three different dates, October 15, November 1, and November 15 for example, three separate entries could be made. The program would manage all three entries. Before each individual entry is submitted by the user, the ADD button must be activated.

Storage Start Price is the local cash price (futures price minus basis, or the local cash bid) for the corresponding Storage Start Date. It is assumed that the local cash bid on October 15, 1997 was $3.00/bu. To enhance one’s understanding of the futures market, basis, and cash prices, read and study Modules 6 and 8 on the CD ROM.

Storage End Date is the expected or actual date at which time the corn is removed from storage for sale in the local market. In this example, it is assumed that the corn will be removed on May 1, 1998.

Storage End Price is the cash price at the end of the storage period. In this example, it would be the cash price on May 1, 1998. At the time grain is stored, this price is estimated from outlook information, a localized futures price (futures minus/plus basis), a forward contract price, or it may be the price that is needed to cover all storage costs and interest charges. The minimum price that is needed to cover storage cost is determined by the computer program; however, there is no guarantee that the market will achieve an equilibrium that will cover pending storage costs.

At the time the grain is removed from storage, the price actually received for storing grain is entered in this field. The final price may differ from the original estimate if the futures price or basis changes during the storage period. In this example, it is assumed that the minimum price that is needed to cover storage costs and interest charges will be entered into this field. Thus, use the tab key to move to the Bushel Quantity field to enter 10,000 bushels.

The Remove % Moisture field is the amount of additional moisture that must be removed to store the corn rather than selling it at harvest time. For example, number 2 yellow corn sold at harvest time contains 15.0% moisture. Reducing the moisture level to 15.0% to sell at harvest time is a part of production costs and was recorded as a drying cost in the NEW CROP section (Figures 7 and 8). If it is necessary to reduce the moisture level below 15.0% to store corn on farm, an entry would be made in the Remove % Moisture field. For this example, it is assumed that corn will be stored at the 13% moisture level. Thus, enter a two (2) in the Remove % Moisture field and strike the tab key.

When water is removed from grain, shrinkage occurs. Since most elevators shrink the grain volume by 1.4% for each 1% of water removed, a default value of 1.4% appears in the Shrink Per % field. The user may choose to override this default value. For this example, the 1.4% shrink is accepted. Notice that the quantity of dry corn available for sale is now 9,720 bushels. This figure appears in the Net Bushel Quantity field.

In the Dry Cost Per % field, the default value for removing 1% of moisture is $0.036. Again, the user may input a different entry. In this example, the default value is accepted.

The Base Storage Fee is the fixed cost of storage on farm or the fixed charge that is made by the commercial house. On-farm fixed costs include insurance on storage bins and equipment, interest, and depreciation. In this example, it is assumed that fixed costs are $0.01 per bushel. Since this is a fixed farm storage cost, the data entered into the Until field is the same as the storage date, 10/15/97. This implies that the variable cost of farm storage begins at the time the grain enters the bin. (In contrast, the fixed fee for storage at a commercial house often delays the monthly elevator charge fee for some time. Thus, monthly fees paid to the commercial house may not begin until 12/15/97, for example. If grain is stored in a commercial house and monthly fees are not paid until 12/15/97, this would be the date that is entered in the Until field).

The fixed cost for farm storage may or may not be entered into this program. If storage facilities are in place, the user must only cover variable cost of storage and interest charges to store grain in the short run time period. In that case, a zero (0) would be entered into the Base Storage Fee field. If the user is planning on investing in storage facilities and/or wants to know if all costs of storage are being covered in the long run, then a fixed cost entry is required. In contrast, the Base Storage Fee for commercial storage must always be included as this is a variable cost of storage.

The Monthly Fee Thereafter is the variable cost of storage for on-farm storage or is the monthly charge paid to the elevator or commercial house. On-farm variable costs include insurance on grain, electricity charges, rodent and insect control, quality deterioration, labor, and management charges. In this example, variable costs are paid monthly beginning with the Storage Start Date, 10/15/97. As indicated above, monthly storage fees paid to a commercial house may be delayed until 12/15/97, or later. In this example, it is assumed that the variable cost for storing grain at the farm is $0.015 per month.

Interest Cost is the foregone interest that could be earned if the grain was sold at harvest time and the funds were invested in a money market account or were used to pay off loans. The interest charge or cost could be as low as 5% for a money market account or as high as 18% if credit card bills are being paid. In this example, 8% is used. (Enter the percent as a whole number not as a decimal). The computer program multiplies the percentage times the storage start price and determines the cost based on the length of storage time. It is a daily calculation.

Based on these data entries, the Net Accumulated Cost to store corn on the farm from 10/15/97 to 05/01/98 is $3048.26 or $0.31361 per bushel. To cover these cost, the basis improvement plus the spreads must increase by $0.31 per bushel. Alternatively, the cash bid must increase relative to the Storage Start Price by $0.31. That is, by May 1, 1998, the cash bid must be $3.31 per bushel to cover the storage cost and interest charge. Enter the $3.31 in the Storage End Price field. Using the mouse, click in the Storage End Date field and then tab to the Storage End Price field, or press the shift and tab keys to move the cursor backward until the Storage End Price field is highlighted. Remember that outlook data or localized futures prices can be entered in the Storage End Price field in place of the price that is required to cover the cost of storage. Both outlook data and localized futures prices are forecasts.

Figure 29 lists the data that were entered for storing corn on the Producer’s farm. Click on LIST GRAIN ASSETS and DISPLAY TOTALS to see a summary of the data that have been entered.

To view how these storage data are summarized into the risk position, use the mouse to click on EXIT and move to RISK POSITION. Observe that the 9,720 bushels of corn are now entered in the Bushels On Farm Available For Sale field. Total bushels for sale or the net long position are 88,720 bushels. Notice that production costs for the new crop are not affected by these entries. The MRP program separates storage costs and returns from new crop production costs and returns. However, storage costs and total grain asset values appear in the PROJECTED NET FARM INCOME section. The PROJECTED NET FARM INCOME screen is summarized in the last section of this paper.

B. Consult Storage Expert (or go to Topics )

Return to the GRAIN ASSET screen (Figure 29) and use the mouse to select CONSULT STORAGE EXPERT. This section is designed to clarify the storage choices, risk exposure, and possible outcomes (Figure 30). The storage expert examines three choices, OPEN or a long speculation position, FORWARD CONTRACTING (a forward cash price with a commercial house), and HEDGING (selling a futures contract or accepting a short futures position with a broker). One-year non-roll Hedge-to-Arrive data may be entered in the forward contracting or hedging sections. If the basis is set in the non-roll Hedge-to-Arrive, then it is a forward contract. If, on the other hand, the basis is left open, the Hedge-to-Arrive contract includes basis risk and would be entered into the HEDGE section.

In the OPEN section, storage cost is summarized ($0.31361) and the break-even price bid is listed ($3.31). The risks that are being assumed also are identified (Figure 30). If a forward contract is a possible marketing alternative, enter the forward contract price in the Forward Contracting field. In this example, assume that the local elevator is offering at harvest time a $3.10 forward contract for delivery on May 1, 1998. Based on the cost data, this action would lock in a $0.21 per bushel loss. The signal is (1) either do not forward contract and store corn or (2) find a way to reduce storage cost by at least $0.21 per bushel. The associated risks are also identified. If hedging is an alternative, enter the futures price for the nearby futures month in the Hedging price field for this storage end date. Assuming that the nearby futures price on October 15, 1997 is $3.25, enter that price in the price field. In the Basis field, enter the expected basis. Assume that the expected basis during the first part of May is -$0.10 or is $0.10 under the futures. Enter these data. The expected loss for storing corn to May is $0.16/bushel. This loss could be offset if basis strengthens or by reducing storage costs. Other risks are identified. Close the STORAGE EXPERT screen to enter the remaining data into GRAIN ASSETS.

C. Elevator Storage of Corn and Wheat and Farm Storage of Soybeans (or go to Topics )

To complete this example and exercise, enter the following data into GRAIN ASSETS for corn stored at the elevator, soybeans stored on the farm, and wheat stored at the elevator (Table 7). Before entering the data for each grain, remember to click the ADD button.

After entering these data, review the summaries by clicking on LIST GRAIN ASSETS and DISPLAY TOTALS. Also review the data that have been transferred to the RISK POSITION screens. Use the NEXT and PREVIOUS buttons to move from screen to screen or from the corn risk position to the wheat risk to the soybean risk position.

D. Feeding Grain (or go to Topics )

If wheat or corn is fed to livestock, that entry would be identified in the Type field where the mouse would be used to click on feed. An entry here reduces the amount of grain that is available for sale on the RISK POSITION screen and the grain’s value is included as projected income on the PROJECTED NET FARM INCOME screen. Since it is assumed that the Producers are only selling grain, an entry is not made for feed in this example.

Total storage costs are reported on the PROJECTED NET FARM INCOME screen. To see the $9,185.67 cost for storing corn, soybeans, and wheat, click on Summary Data on the main screen and then click on PROJECTED NET FARM INCOME on the pull down screen. All entries on the PROJECTED NET FARM INCOME screen are discussed in a later section of this Manual.

All production and storage inputs and costs have been entered for the Producer’s grain farm. The remaining three choices on the SUPPORT DATA pull down screen are used to sell grain (MARKETING ALTERNATIVES), to buy insurance products (INSURANCE PRODUCTS), and to enter financial information (MISCELLANEOUS). YIELD FUTURES will be added as a choice in a future release or update of this program.

4. MARKETING ALTERNATIVES (or go to Topics )

Using the mouse, select MARKETING ALTERNATIVES from the SUPPORT DATA pull down screen. This screen (Figure 31) allows the user to sell new crop or stored grain via hedges, options contracts, and cash contracts. Although not advocated, the user can also speculate by using long futures positions and by buying a call. Buying a call in conjunction with a short hedge, H-T-A, or with a forward contract is recognized as a synthetic put. However, the call is treated as a speculative activity. Returns to all speculative activity are analyzed as speculative profits or losses on the PROJECTED NET FARM INCOME screen. The HELP button on the MARKETING ALTERNATIVE screen is used to define or explain each marketing alternative (Figure 32). The marketing alternatives are discussed in more detail in the CD ROM Modules 6, 7, 8, and 14.

The Producers may sell new crops or stored grain via cash sales (PRICED), forward contracts (PRICED), hedged to arrive (NON-ROLL H-T-A), minimum price contracts (MINIMUM PRICE), delayed price contracts (DP), basis contracts (BASIS), short hedge (SHORT FUTURE), and via an option (PUT). If a user selects a short hedge or a forward contract and a call, this is a synthetic put. However, the returns from the call are treated as returns to speculation and any gain or loss is not added or subtracted from the price of the grain. The user may elect to sell different quantities of grain via different contracts and at different times. The software program tracks these sales, manages the long and short positions, and records income earned.

A. Forward Contract (Priced) Sale (or go to Topics )

To begin selling grain for the Producers, use the mouse to click on the ADD button (Figure 33). The Contract Number field is highlighted in blue. The contract number could be the order in which grain is sold, the number from the scale ticket, or a forward contract brokerage account number. In this example, type the number one (1) and hit the Tab key. This action highlights the Grain field. Use the mouse to click on the arrow key, click on CORN, and select the Tab key. This highlights the Grain Source field. Use the mouse to click on the arrow key, select NEW CROP, and touch the tab key. This highlights the Contract Type field. Using the mouse, click on PRICED to forward contract grain for the Producers. (Note that for the PRICED selection to appear in the pull down screen, the user must click on the scroll down bar on the right hand side of the pull down screen). Again, select the tab key to highlight the Delivery Period field. Since this is a new crop, enter 10/15/98. This entry implies that this is a pre-harvest forward contract sale. Yield risks exist in that a crop failure would prevent delivery against this contract. Choices to minimize this outcome are discussed in the INSURANCE PRODUCT section.

Use the Tab key to highlight the Bu. Quantity field and enter 10,000 bushels. After the Contract Price field is highlighted, enter the forward contract price ($2.50) offered by the elevator. The Net Price is $2.50 and the Contract Value is recorded as $25,000. There are no premium or computed costs associated with a forward contract. These data entries are displayed in Figure 33. The fields and data entries will change as different marketing alternatives are selected. For example, when hedges are used, basis data requirements, fees, and margin requirements appear.

Exit the MARKETING ALTERNATIVE screen and move to the RISK POSITION screen. Note that the 10,000 bushels of grain are priced using the Open Priced Contracts. Also note that the Net Open (Long) position has been reduced by 10,000 bushels from 98,720 bushels for sale in the Total Bushels For Sale field to 88,720 bushels in the Net Open Position. Reducing the net open position limits some of the price risks. Minimum price contracts, short futures or hedges, H-T-A contracts, and puts also reduce the open position. DP contracts and basis contract sales do not reduce the open position as these contracts are also long open positions. Adding a long futures position or buying a futures contract, increases the net open position. Since the call is used to create a synthetic put, it is assumed that buying a call has a neutral effect on the open position. However, the returns to the call is considered returns to speculation and is not used to offset production or storage costs.

Remember that a long or open position is defined as one in which losses occur when prices decline. In most cases, producers are in long positions when grain is stored, is sold on DP or basis contracts, or is growing in the field and a hedge, forward contract, or options position is not in place. Losses occur whenever corn is in a long or open position and prices fall. If corn prices at the time of storage are $2.50 per bushel and later decline to $2.40, the producer loses $0.10 per bushel plus all storage costs. In contrast, a short position is defined as one in which losses occur when prices increase. In most cases, producers do not face short risk positions.

B. H-T-A Priced Sales (or go to Topics )

Return to the MARKETING ALTERNATIVE screen and enter data to sell and speculate on corn, wheat and soybeans using the different marketing alternatives (Table 8). Remember to click on the ADD button prior to entering data for each Contract Number and grain. Observe the data input requirements change on the MARKETING ALTERNATIVE screen as different CONTRACT TYPES are selected. View the changes that appear in the net open position, average price received, and the breakeven price for open position on the RISK POSITION screen.