Facilitator Notes for Session 1

Facilitator Notes for Session 1: Introduction and Motivation

Learning Objectives

Session 1 is introductory to the remaining 7 content sessions. The primary intent is to stimulate interest in learning about risk management in general and dairy futures and options in particular.

Session 1 includes two participant exercises. The first is a risk attitude survey (compliments of Matt Glewen and Larry Swain(?)), which gives participants a better idea of how they personally approach risky events. The results can be used to appraise what kind of risk management strategy participants might generally employ.

The second exercise introduces the concepts of probability and probability distributions. The purpose of this exercise is to help participants understand when taking a futures position is advantageous relative to taking a chance on what the market might offer. It emphasizes the point that NOT managing risk is really speculation.

Slides #2-9

These slides provide an abbreviated synopsis of the entire curriculum. Use these to briefly introduce the subject matter that will be covered in subsequent sessions.

Slide #10

This is a summary of the Risk Attitude Assessment exercise. Participants INDIVIDUALLY take the short quiz (don’t let spouses work together – differences in scores can be revealing!) and calculate their scores. Review the four styles (participants will have the full write-ups in hand).

Implications for risk management:

 Whether to “insure” at all. (yes if Avoider; no if Daredevil; maybe if Adventuresome or Calculator)  How much to ensure (self-insurance versus purchased insurance; amount of deductible)  How soon to ensure (immediately if Avoider; after more information if Adventuresome or Calculator).  What kind of insurance (which risk management strategy to use). Slide #11

This slide illustrate the kinds of risks involved in agricultural production in a general context and the mechanisms that producers have available to them to deal with risks. Futures-based strategies are positioned in the context of other more widely used methods.

Slide #12

This slide highlights the magnitude of price risks that dairy farmers are currently facing, and leads to….

Slide #13

…which emphasizes that there are both benefits and costs associated with greater price volatility. Volatility is not all bad – it provides an opportunity for dairy farmers to achieve higher prices than would be possible under a highly-regulated regime. On the other hand, volatility can lead to problems, some very serious.

Slide #14

Brief explanation of why milk prices are more volatile – it’s the government!

Slide #15

This slide summarizes the results of the second exercise, in which participants are asked to compute frequency distributions (simple and cumulative) for 20 years of price data. Distribute worksheets with annual price data (M-W/BFP/Class III), 1985-2004, for February, July, and November. Participants break into three groups to collectively derive frequency distributions.

Correct results are entered on the Excel spreadsheet incorporated in this slide. Double- click on the slide while in PowerPoint mode (not slide show mode) to access the spreadsheet. The tabs denote the simple and cumulative distributions for the three months. Click on the tab for the distributions you want to illustrate and then click anywhere on the slide outside the spreadsheet to return to PowerPoint. You’ll need to restart the slide show, right-click and go to slide 15.

2 Points to emphasize:

 Based on what’s happened over the last 20 years, what is the probability of seeing a Class III price higher or lower than some specified level. For example, what are the odds of seeing a Class III price higher that $13.00 in February?

 Seasonality. Are the chances of seeing $13.00 better in February or November?