AFM Risk Management & Crop Production Strategies 4 — Questions and Answers
Question 1: A livestock-grain farm uses on-farm grain storage after harvest. The primary risk management advantage of this strategy is:
- Eliminating basis risk entirely
- Allowing grain to be sold when prices are more favorable rather than at harvest lows (Correct answer)
- Qualifying for higher loan rates under the Marketing Assistance Loan program
- Reducing the need for futures hedging
Correct answer: Allowing grain to be sold when prices are more favorable rather than at harvest lows
On-farm storage provides flexibility to delay sales beyond harvest, when prices often recover from seasonal lows caused by harvest-time supply pressure.
Question 2: Which characteristic of a multi-peril crop insurance (MPCI) policy makes it different from a named-peril policy?
- It only covers drought and flood events
- It covers yield losses from virtually all weather and disease causes rather than specific listed perils (Correct answer)
- It is based on area-wide losses rather than individual farm losses
- It is only available for specialty crops
Correct answer: It covers yield losses from virtually all weather and disease causes rather than specific listed perils
MPCI policies like APH-based products cover loss from any insurable cause of loss, while named-peril policies limit coverage to specific listed events.
Question 3: A crop producer's Actual Production History (APH) yield is calculated using up to how many consecutive crop years of yield data?
- 3 years
- 5 years
- 10 years (Correct answer)
- 15 years
Correct answer: 10 years
APH is calculated from a minimum of 4 and maximum of 10 consecutive years of actual or assigned yields to establish the producer's approved yield.
Question 4: Enterprise risk management (ERM) on a farm differs from single-risk hedging because ERM:
- Focuses exclusively on futures market hedging tools
- Considers interrelated risks across production, price, financial, legal, and human dimensions holistically (Correct answer)
- Replaces the need for crop insurance on the operation
- Is only applicable to large commercial farming operations
Correct answer: Considers interrelated risks across production, price, financial, legal, and human dimensions holistically
ERM takes a comprehensive view of all risk categories and their interactions, unlike single-tool approaches that address only one risk dimension.
Question 5: Which soil health practice most directly reduces the risk of topsoil loss during heavy rainfall events in row crop production?
- Increasing nitrogen fertilizer applications
- Adopting no-till or reduced tillage systems (Correct answer)
- Using higher-population seeding rates
- Applying foliar micronutrients
Correct answer: Adopting no-till or reduced tillage systems
No-till and reduced tillage leave crop residue on the soil surface, dramatically reducing water erosion by slowing runoff and protecting soil aggregates.
Question 6: When a farm operator uses a put option to manage price risk, the maximum loss the operator can incur is:
- Unlimited if prices fall below the strike price
- The premium paid to purchase the option (Correct answer)
- The difference between the strike price and the futures price
- Equal to the basis risk in the local market
Correct answer: The premium paid to purchase the option
A long put option limits downside risk to the premium paid, since the buyer is not obligated to exercise if the market moves favorably.
Question 7: Succession planning is classified under which category of farm risk?
- Production risk
- Price and market risk
- Human risk (Correct answer)
- Institutional risk
Correct answer: Human risk
Human risk encompasses events related to people, including death, disability, divorce, and succession or transition of the farm business.
AFM Risk Management & Crop Production Strategies 4
A livestock-grain farm uses on-farm grain storage after harvest.
The primary risk management advantage of this strategy is: