AFM Risk Management & Crop Production Strategies 2 — Questions and Answers
Question 1: A corn farmer wants to lock in a price for next season's harvest before planting. Which tool best accomplishes this objective?
- Buying a put option on corn futures
- Selling corn futures contracts (Correct answer)
- Purchasing crop revenue insurance
- Entering a forward cash contract with an elevator
Correct answer: Selling corn futures contracts
Selling futures contracts locks in a selling price for a future delivery date, protecting against price declines before harvest.
Question 2: Which crop rotation practice best reduces the risk of soybean cyst nematode buildup in continuous soybean production?
- Rotating soybeans with corn every other year (Correct answer)
- Using foliar fungicide applications
- Increasing seeding rates each cycle
- Adding sulfur fertilizer to suppress nematodes
Correct answer: Rotating soybeans with corn every other year
Rotating soybeans with a non-host crop like corn interrupts the nematode life cycle and reduces soil population levels.
Question 3: A farm manager purchases an area yield insurance policy. Under this plan, an indemnity is triggered when:
- The individual farm's yield falls below 75% of its APH
- The county average yield falls below the coverage trigger (Correct answer)
- Commodity prices drop below the projected price
- The farm suffers a named peril such as hail or fire
Correct answer: The county average yield falls below the coverage trigger
Area yield (group risk) policies pay indemnities based on county-level yield shortfalls, not individual farm losses.
Question 4: Integrated Pest Management (IPM) contributes to risk management primarily by:
- Eliminating all pesticide costs from the budget
- Reducing input costs while maintaining acceptable pest control (Correct answer)
- Guaranteeing zero crop losses from insects
- Replacing the need for crop insurance
Correct answer: Reducing input costs while maintaining acceptable pest control
IPM balances economic thresholds and multiple control tactics to minimize unnecessary pesticide use while protecting yield.
Question 5: Which federal crop insurance product pays an indemnity based solely on the number of prevented planting or qualifying loss days, regardless of actual yield outcome?
- Yield Protection (YP)
- Rainfall Index (RI) (Correct answer)
- Revenue Protection (RP)
- Whole-Farm Revenue Protection (WFRP)
Correct answer: Rainfall Index (RI)
Rainfall Index insurance uses NOAA precipitation data for a geographic grid and pays when rainfall falls below a coverage level, independent of actual farm yield.
Question 6: A farm manager diversifies into specialty vegetables alongside row crops. The primary risk management benefit of this diversification is:
- Concentrating revenue into fewer, higher-value crops
- Reducing correlation between income streams to lower overall revenue volatility (Correct answer)
- Eliminating production risk entirely
- Qualifying for higher federal subsidy rates
Correct answer: Reducing correlation between income streams to lower overall revenue volatility
Diversification across crops with low price correlation smooths total revenue because losses in one enterprise may be offset by gains in another.
Question 7: When using a basis contract to price grain, the farmer is exposed to which remaining risk after signing?
- Futures price risk
- Basis risk between local cash and futures prices (Correct answer)
- Currency exchange rate risk
- Federal loan rate risk
Correct answer: Basis risk between local cash and futures prices
A basis contract fixes the futures component but leaves the final price subject to basis fluctuations until pricing is complete.
AFM Risk Management & Crop Production Strategies 2
A corn farmer wants to lock in a price for next season's harvest before planting.
Which tool best accomplishes this objective?