Managing Producer Risk introduction to the Client Portfolio Manager Fall, 2012
who we areAn affiliate of the Silveus Insurance GroupBased in Chicago with branch offices in Indiana and anagent network across the USA online at www.silveusfinancial.com
what we do• Work exclusively with producers and commercials• Help clients understand and utilize agricultural risk management products• Provide brokerage for listed futures and options and structured OTC products• Work with clients’ banks and OTC dealers to arrange for margin financing and credit lines• Monitor client positions, send periodic risk reports, and suggest strategies as market conditions change
how we do it• We have a proprietary approach that is disciplined and analytical• We stay focused on post harvest profits and the risks across multiple dimensions Profit = Yield x Price – Input Costs• We take a portfolio approach to managing risk• We overlay alternatives: insurance, futures and options, and OTC structured products• We invest in tools and technology that facilitates management of the entire portfolio
our tools Client Portfolio ManagerWe track everything a producer does or believes that canaffect his end of year profits across all his crops: • Acres planted and input cost per acre • Insurance bought • Bushels sold forward • Futures and options trades executed • OTC Accumulators entered into • Assumptions about yields and basisWe aggregate all the above together and focus on his netoverall P&L across two dimensions of risk: • Actual yield at harvest (bushels/acre) • Harvest price ($s/bushel)
Client Portfolio Mgr Example: Producer in Ohio (Corn & Beans) xxxxxxxx xxxxxxxx Acres planted Insurance purchased We keep a chronology of everything our producer clientYield and basis has done or believes with expectations respect to his farm and his crops that could affect his P&L at harvest. Futures and options traded
Client Portfolio Mgr Net Position for Cornxxxxxxxxxxxxxxxx We net everything down by crop and use current futures prices and options volatilities to place a “mark-to-market” value on each open item.
Client Portfolio Mgr P&L Matrixxxxxxxxxxxxxxxxx Yield Harvest Price We stay focused on the P&L post-harvest across two dimensions of risk.
Client Portfolio Mgr Farm P&L Matrix for Corn xxxxxxxx xxxxxxxx Note the potential for significant losses if no risk managementThe P&L from products are incorporated. his crop ishighly variablegiven different price/yield points.
Client Portfolio Mgr Net Insurance P&L xxxxxxxx xxxxxxxx Premium paid w/no payout That’s why we always recommendcrop insurance. The insurancepays just where Insurance it’s needed. kicks in
Client Portfolio Mgr Farm + Insurance P&L xxxxxxxx xxxxxxxx With the appropriate insurance But a hugepolicies in place, upside bias to the chance for corn prices loss can be remains. eliminated.
Client Portfolio Mgr Risk Reduction with Options xxxxxxxx xxxxxxxx We can use Calls sold to futures and generate income options to offset some ofthis bias to corn prices Put spreads bought provide profits to the downside
Client Portfolio Mgr P&L when including *Everything* xxxxxxxx xxxxxxxx When we look at everything together as a portfolio, the P&L is now comfortably balanced across a Even if yields wide range offall and prices price/yield soar, the P&L outcomes.is known and sizable.
Client Portfolio Mgr Re-Centered Matrix after Drought xxxxxxxx xxxxxxxxSure enough, despite thedrought and heat wave changing everything, overall P&L Price and yieldremains just re-calibrated what was to new expected. realities
Client Portfolio Mgr Re-Centered Matrix after Drought xxxxxxxx xxxxxxxxThe expected profits areattractive but in this case there’s now We always risk again to think ahead corn pricesheading back “what should down! we do now?”
Client Portfolio Mgr Testing New Hedges in the Matrix xxxxxxxx xxxxxxxx The CPM allows us to test out different hedging alternatives. Here, we areconsidering selling 15 futures to hedge the risk that prices may fall and profits drop.
Client Portfolio Mgr P&L from the Proposed Hedgexxxxxxxxxxxxxxxx By selling some futures, we can offset some of the profit drop if corn prices move back down.
Client Portfolio Mgr Overall P&L if Hedge Executedxxxxxxxxxxxxxxxx The end result is a nicely balanced P&L profile with little profit variance across a wide range of yields and prices!
why work with us?• We educate, inform, and consult - not sell• Access to a complete set of risk management products and strategies• Deeper and more comprehensive understanding of your overall risks• Superior tools and technology• Provide individualized portfolio analysis
getting started• Fill and fax back the “Getting Started” form• We verify details and enter into the CPM• Schedule a one-on-one online meeting to go over risks to your profitability• Jointly examine various hedging alternatives• Two ways to work with us: ① Open accounts and let us broker hedges ② Straight risk consulting arrangement