AFM Risk Management & Crop Production Strategies 5 — Questions and Answers
Question 1: A farmer enters an Agricultural Risk Coverage – County (ARC-CO) contract. Payments are triggered when:
- Individual farm revenue falls below 86% of the benchmark revenue
- County benchmark revenue falls below 86% of the five-year Olympic average benchmark (Correct answer)
- National average price falls below the effective reference price
- The farmer's actual yield falls below 75% of APH
Correct answer: County benchmark revenue falls below 86% of the five-year Olympic average benchmark
ARC-CO uses county-level benchmark revenue and pays when actual county revenue falls below 86% of the five-year Olympic average, providing a shallow loss safety net.
Question 2: Which risk management strategy best addresses institutional risk, such as sudden changes in environmental regulations affecting a farm operation?
- Purchasing revenue protection insurance
- Active participation in farm organizations and staying informed about pending legislation (Correct answer)
- Selling futures contracts to lock in prices
- Increasing crop diversification on the farm
Correct answer: Active participation in farm organizations and staying informed about pending legislation
Institutional risk from regulatory changes is best managed through advocacy, awareness, and early adaptation rather than financial instruments.
Question 3: In grain marketing, a 'basis' that is stronger than expected at delivery benefits which party in a cash sale scenario?
- The buyer, who pays less than expected
- The seller, who receives a higher cash price than anticipated (Correct answer)
- Neither party, as basis changes affect only futures traders
- The elevator, which earns a wider margin
Correct answer: The seller, who receives a higher cash price than anticipated
A stronger (less negative or more positive) basis means the local cash price is higher relative to futures, benefiting the grain seller.
Question 4: A farm manager wants to reduce financial risk by matching debt repayment terms to asset life. For purchasing land, this means using:
- A short-term operating line of credit
- A long-term mortgage with a 20–30 year amortization (Correct answer)
- A seasonal inventory loan
- A medium-term equipment note of 5–7 years
Correct answer: A long-term mortgage with a 20–30 year amortization
Land is a long-lived asset and should be financed with long-term debt whose repayment schedule aligns with the asset's productive life and cash generation capacity.
Question 5: Which type of crop insurance endorsement allows a producer to insure a specific yield practice, such as irrigated versus non-irrigated acres, separately?
- Catastrophic (CAT) coverage
- Optional Units based on practice (Correct answer)
- Enterprise Unit coverage
- Whole-Farm Revenue Protection
Correct answer: Optional Units based on practice
Optional units allow producers to insure different practices, types, or fields separately, maintaining distinct APH and loss accounting for each.
Question 6: Precision soil sampling on a grid basis every 2.5 acres primarily helps reduce which category of crop production risk?
- Weather and climate risk
- Market price volatility risk
- Input cost and nutrient management risk (Correct answer)
- Legal and environmental liability risk
Correct answer: Input cost and nutrient management risk
Detailed soil sampling reveals nutrient variability, allowing precise fertilizer recommendations that reduce over- or under-application costs and associated yield risk.
Question 7: A farm operator hedges 60% of expected soybean production with futures contracts and leaves 40% unhedged. The unhedged portion represents:
- A speculative position subject to full price risk (Correct answer)
- A perfectly hedged position with no risk
- A forward contract obligating delivery at harvest
- An options position with limited downside
Correct answer: A speculative position subject to full price risk
The unhedged portion carries full exposure to market price movements and constitutes a speculative position because no offsetting transaction is in place.
AFM Risk Management & Crop Production Strategies 5
A farmer enters an Agricultural Risk Coverage – County (ARC-CO) contract.
Payments are triggered when: