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Price vs. weather shock hedging for cash crops: ex ante evaluation for cotton producers in Cameroon

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  • Antoine Leblois

    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - AgroParisTech, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

  • Philippe Quirion

    ()
    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - AgroParisTech)

  • Benjamin Sultan

    (LOCEAN - Laboratoire d'Océanographie et du Climat : Expérimentations et Approches Numériques - Institut de recherche pour le développement [IRD] - INSU - CNRS : UMR7159 - Université Pierre et Marie Curie (UPMC) - Paris VI - Muséum National d'Histoire Naturelle (MNHN))

Abstract

In the Sudano-sahelian zone, which includes Northern Cameroon, the inter-annual variability of the rainy season is high and irrigation is scarce. As a conse- quence, bad rainy seasons have a detrimental impact on crop yield. In this paper, we assess the risk mitigation capacity of weather index-based insurance for cotton farmers. We compare the ability of various indices, mainly based on daily rainfall, to increase the expected utility of a representative risk-averse farmer. We first give a tractable definition of basis risk and use it to show that weather index-based insurance is associated with a large basis risk. It has thus limited potential for income smoothing, whatever the index or the utility function. Second, in accordance with the existing agronomical literature we find that the length of the cotton growing cycle, in days, is the best performing index considered. Third, we show that using observed cotton sowing dates to define the length of the grow- ing cycle significantly decreases the basis risk, compared to using simulated sowing dates. Finally we found that the gain of the weather-index based insurance is lower than that of hedging against cotton price fluctuations which is provided by the national cotton company. This casts doubts on the strategy of international institutions, which support weather-index insurances in cash crop sectors while pushing to liberalisation without recommending any price stabilization schemes.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00796528.

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Date of creation: 04 Mar 2013
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Handle: RePEc:hal:wpaper:hal-00796528

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Related research

Keywords: Agriculture; weather; index-based insurance.;

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References

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  1. Paul MAKDISSI & Quentin WODON, 2004. "Price Liberalization and Farmer Welfare Under Risk Aversion: Cotton in Benin and Ivory Coast," Cahiers de recherche 04-09, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  2. Mobarak, A. Mushfiq & Rosenzweig, Mark, 2012. "Selling Formal Insurance to the Informally Insured," Working Papers 97, Yale University, Department of Economics.
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  6. Gunnar Breustedt & Raushan Bokusheva & Olaf Heidelbach, 2008. "Evaluating the Potential of Index Insurance Schemes to Reduce Crop Yield Risk in an Arid Region," Journal of Agricultural Economics, Wiley Blackwell, vol. 59(2), pages 312-328, 06.
  7. Gin, Xavier & Yang, Dean, 2009. "Insurance, credit, and technology adoption: Field experimental evidencefrom Malawi," Journal of Development Economics, Elsevier, vol. 89(1), pages 1-11, May.
  8. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, January.
  9. Claire Delpeuch & Antoine Leblois, 2011. "Sub-Saharan African Cotton Policies in Retrospect," Working Papers hal-00866412, HAL.
  10. Allan W. Gray & Michael D. Boehlje & Brent A. Gloy & Stephen P. Slinsky, 2004. "How U.S. Farm Programs and Crop Revenue Insurance Affect Returns to Farm Land," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 26(2), pages 238-253.
  11. Müller, Birgit & Quaas, Martin F. & Frank, Karin & Baumgärtner, Stefan, 2011. "Pitfalls and potential of institutional change: Rain-index insurance and the sustainability of rangeland management," Ecological Economics, Elsevier, vol. 70(11), pages 2137-2144, September.
  12. Francesca de Nicola, 2011. "The Impact of Weather Insurance on Consumption, Investment, and Welfare," 2011 Meeting Papers 548, Society for Economic Dynamics.
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  14. Hill, Ruth Vargas & Hoddinott, John & Kumar, Neha, 2011. "Adoption of weather index insurance: Learning from willingness to pay among a panel of households in rural Ethiopia," IFPRI discussion papers 1088, International Food Policy Research Institute (IFPRI).
  15. G Lien & JB Hardaker, 2001. "Whole-farm planning under uncertainty: impacts of subsidy scheme and utility function on portfolio choice in Norwegian agriculture," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 28(1), pages 17-36, March.
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