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Insuring Eggs in Baskets

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Abstract

The vast majority of crop and revenue insurance policies sold in the United States are single-crop policies that insure against low yields or low revenues for each crop grown on a particular farm. This practice of insuring one crop at a time runs counter to the traditional risk management practice of diversifying across several enterprises to avoid putting all of ones eggs in a single basket. This paper examines the construction of whole-farm crop revenue insurance programs to include livestock. The whole-farm insurance product covers crop revenues from corn and soybeans and livestock revenues from hog production. The results show that at coverage levels of 95 percent or lower, the fair insurance premiums for this product on a well-diversified Iowa hog farm are far lower than the fair premiums for the corn crop alone on the same farm. The calculation of premium rates for the whole-farm insurance product is derived from a method for imposing correlations first proposed by Iman and Conover in 1982.

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Bibliographic Info

Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 03-wp339.

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Date of creation: Jul 2003
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Handle: RePEc:ias:cpaper:03-wp339

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Keywords: correlations; diversification; livestock; volatilities; whole-farm revenue insurance.;

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  1. Bruce A. Babcock & Joseph A. Herriges, 1994. "Input Demand Under Yield and Revenue Insurance," Center for Agricultural and Rural Development (CARD) Publications, Center for Agricultural and Rural Development (CARD) at Iowa State University 94-wp127, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  2. Babcock, Bruce A. & Blackmer, Alfred M., 1992. "The Value Of Reducing Temporal Input Nonuniformities," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, Western Agricultural Economics Association, vol. 17(02), December.
  3. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance, The," Center for Agricultural and Rural Development (CARD) Publications, Center for Agricultural and Rural Development (CARD) at Iowa State University 97-wp180, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  4. Olivier Mahul & Brian D. Wright, 2003. "Designing Optimal Crop Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 85(3), pages 580-589.
  5. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1996. "Modeling Farm-Level Crop Insurance Demand with Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 78(2), pages 439-447.
  6. Levy, Edmond, 1992. "Pricing European average rate currency options," Journal of International Money and Finance, Elsevier, Elsevier, vol. 11(5), pages 474-491, October.
  7. Richard E. Just & Quinn Weninger, 1999. "Are Crop Yields Normally Distributed?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 81(2), pages 287-304.
  8. Hart, Chad E. & Babcock, Bruce A. & Hayes, Dermot J., 2001. "Livestock Revenue Insurance," Staff General Research Papers, Iowa State University, Department of Economics 1932, Iowa State University, Department of Economics.
  9. Babcock, Bruce A. & Blackmer, A. M., 1992. "Value of Reducing Temporal Input Nonuniformities (The)," Staff General Research Papers, Iowa State University, Department of Economics 10587, Iowa State University, Department of Economics.
  10. Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 26(03), pages 377-389, September.
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Cited by:
  1. Bielza, Maria & Garrido, Alberto, 2006. "Evaluating the Potential of Whole-Farm Insurance Over Crop-Specific Insurance Policies," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia, International Association of Agricultural Economists 25421, International Association of Agricultural Economists.
  2. Singerman, Ariel & Hart, Chad E. & Lence, Sergio H., 2011. "Revenue Protection for Organic Producers: Too Much or Too Little," Staff General Research Papers, Iowa State University, Department of Economics 33912, Iowa State University, Department of Economics.
  3. Cabrera, Victor E. & Gould, Brian W. & Valvekar, Mayuri, 2009. "Livestock Gross Margin Insurance for Dairy Cattle: An Analysis of Program Performance and Cost under Alternative Policy Configurations," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin, Agricultural and Applied Economics Association 49262, Agricultural and Applied Economics Association.
  4. Anderson, John D. & Harri, Ardian & Coble, Keith H., 2009. "Techniques for Multivariate Simulation from Mixed Marginal Distributions with Application to Whole-Farm Revenue Simulation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, Western Agricultural Economics Association, vol. 34(1), April.
  5. Paulson, Nicholas D. & Babcock, Bruce A. & Hart, Chad E. & Hayes, Dermot J., 2008. "An Insurance Approach to Risk Management in the Ethanol Industry," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, Northeastern Agricultural and Resource Economics Association, vol. 37(1), April.
  6. Brester, Gary W. & Marsh, John M. & Atwood, Joseph A., 2004. "Distributional Impacts of Country-of-Origin Labeling in the U.S. Meat Industry," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, Western Agricultural Economics Association, vol. 29(02), August.
  7. Valvekar, Mayuri & Chavas, Jean P. & Gould, Brian W. & Cabrera, Victor E., 2011. "Revenue risk management, risk aversion and the use of Livestock Gross Margin for Dairy Cattle insurance," Agricultural Systems, Elsevier, Elsevier, vol. 104(9), pages 671-678.

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