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Optimal Allocation of Index Insurance Intervals for Commodities

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  • Diersen, Matthew
  • Gurung, Pratik
  • Fausti, Scott

Abstract

The objective of this research is to incorporate the relationship between forage yields and rainfall levels to find optimal weights on insurance intervals using Pasture, Rangeland, and Forage Rainfall Index (PRF-RI) insurance. Unlike earlier models, actuarial fairness of the insurance product is assumed. Historical rainfall index and hay yield data are used to calculate returns and generate an efficient frontier using Markowitz Portfolio Theory. Analysis of several counties in South Dakota demonstrates that the May-June and July-August intervals are important months for managing forage production risk. Sensitivity analysis included changing coverage levels, productivity factors, and the subsidy level. It is demonstrated that a producer enrolling in PRF-RI would earn higher returns per acre with lower risk compared to not using the subsidized insurance. Without the premium subsidy the mean returns from the optimal portfolio are lower, but the risk reduction remains.

Suggested Citation

  • Diersen, Matthew & Gurung, Pratik & Fausti, Scott, 2015. "Optimal Allocation of Index Insurance Intervals for Commodities," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196793, Southern Agricultural Economics Association.
    • Handle: RePEc:ags:saea15:196793
    DOI: 10.22004/ag.econ.196793
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    1. Nalley, Lawton Lanier & Barkely, Andrew & Watkins, Brad & Hignight, Jeffrey A., 2009. "Enhancing Farm Profitability through Portfolio Analysis: The Case of Spatial Rice Variety Selection," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(3), pages 1-12, December.
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    6. Nadolnyak, Denis & Vedenov, Dmitry, 2013. "Information Value of Climate Forecasts for Rainfall Index Insurance for Pasture, Rangeland, and Forage in the Southeast United States," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 45(1), pages 109-124, February.
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    Cited by:

    1. Davidson, Kelly A. & Goodrich, Brittney K., 2020. "Nudge to Insure: Can Informational Nudges Increase Enrollment in Pasture, Rangeland and Forage Rainfall Index Insurance?," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304550, Agricultural and Applied Economics Association.
    2. Brittney Goodrich & Jisang Yu & Monte Vandeveer, 2020. "Participation patterns of the rainfall index insurance for pasture, rangeland and forage programme," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(1), pages 29-51, January.

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