Farmer Fickell farms 500 acres of corn. He has working capital of $100,000, and a total cash flow need per year of $350,000. His APH is 180 bu./acre, and a bad year for him is 140 bu/acre, whereas a good year is 200bu/acre. The planting time price is $5/bushel for corn. If the US has a bad year, then average harvest prices will be $7.25/bushel. If the US has a good year, average harvest prices will be $3.50 per bushel.
- Draw the revenue matrix for Farmer Fickell assuming that he sells all of his production at harvest. Circle the revenue in each scenario.
- What is Farmer Fickell's worst-case scenario? How much would he lose?
- If the probability of a poor/poor and a good/good year is each 40% and the probability of a poor/good and good/poor year is each 10%, then what is the expected revenue for Farmer Fickell?
- Recalculate Farmer Fickell's revenue matrix to show what would hap- pen if he forward contracts 50 bushels of corn at planting. What does this do to his maximum revenue? What does it do to his minimum revenue?
- Assume that Fickell has the chance to buy 75% RA insurance for $40/acre. Draw the matrix with only the insurance. Calculate the minimum and expected revenue.