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Mitigating Cotton Revenue Risk Through Irrigation, Insurance, and Hedging

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Author Info

  • Barham, E. Hart Bise
  • Robinson, John R.C.
  • Richardson, James W.
  • Rister, M. Edward

Abstract

This study focuses on managing cotton production and marketing risks using combinations of irrigation levels, put options (as price insurance), and crop insurance. Stochastic cotton yields and prices are used to simulate a whole-farm financial statement for a 1,000 acre furrow irrigated cotton farm in the Texas Lower Rio Grande Valley under 16 combinations of risk management strategies. Analyses for risk-averse decision makers indicate that multiple irrigations are preferred. The benefits to purchasing put options increase with yields, as they are more beneficial when higher yields are expected from applying more irrigation applications. Crop insurance is strongly preferred at lower irrigation levels.

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File URL: http://purl.umn.edu/117946
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Bibliographic Info

Article provided by Southern Agricultural Economics Association in its journal Journal of Agricultural and Applied Economics.

Volume (Year): 43 (2011)
Issue (Month): 04 (November)
Pages:

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Handle: RePEc:ags:joaaec:117946

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Web page: http://www.saea.org/jaae/jaae.htm
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Related research

Keywords: cotton; crop insurance; irrigation; options; puts; risk; simulation; stochastic efficiency with respect to a function; Farm Management; Risk and Uncertainty; D81; Q12; Q15;

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References

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  1. Richardson, James W. & Klose, Steven L. & Gray, Allan W., 2000. "An Applied Procedure For Estimating And Simulating Multivariate Empirical (Mve) Probability Distributions In Farm-Level Risk Assessment And Policy Analysis," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(02), August.
  2. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports 34081, United States Department of Agriculture, Economic Research Service.
  3. Power, Gabriel J. & Robinson, John R.C., 2009. "Cotton Futures Dynamics: Structural Change, Index Traders and the Returns to Storage," 2009 Conference, April 20-21, 2009, St. Louis, Missouri 53044, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  4. Coble, Keith H. & Heifner, Richard G. & Zuniga, Manuel, 2000. "Implications Of Crop Yield And Revenue Insurance For Producer Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(02), December.
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Cited by:
  1. Lyman, Nathaniel & Nalley, Lawton Lanier, 2013. "Stochastic Valuation of Hybrid Rice Technology in Arkansas," 2013 Annual Meeting, February 2-5, 2013, Orlando, Florida 142505, Southern Agricultural Economics Association.

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