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Risk-Reducing Effectiveness of Revenue versus Yield Insurance in the Presence of Government Payments

  • Vedenov, Dmitry V.
  • Power, Gabriel J.

Government farm support programs such as Loan Deficiency Payments (LDP) and Counter-Cyclical Payments (CCP) have payoff structures that effectively make them costless price insurance instruments. A combination of these payments with yield insurance may provide a viable alternative to revenue insurance. This paper finds that, contrary to expectations, the revenue product analyzed is uniformly superior to yield insurance under both current (2002) and proposed (2008) Farm Bill structures of government payments. Given minor adjustments, however, yield insurance combined with government payments can provide more effective risk management than revenue insurance in production areas with low yield–price correlation.

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

Volume (Year): 40 (2008)
Issue (Month): 02 (August)
Pages:

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Handle: RePEc:ags:joaaec:46982
Contact details of provider: Web page: http://www.saea.org/jaae/jaae.htm

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  1. 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.
  2. 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.
  3. repec:jaa:jagape:v:30:y:1998:i:1:p:47-61 is not listed on IDEAS
  4. Shiva S. Makki & Agapi Somwaru, 2001. "Farmers' Participation in Crop Insurance Markets: Creating the Right Incentives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 662-667.
  5. 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 97-wp180, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  6. Schnitkey, Gary D. & Sherrick, Bruce J. & Irwin, Scott H., 2002. "Evaluation of Risk Reductions Associated with Multi-Peril Crop Insurance Products," Proceedings: 2002 Regional Committee NC-221, October 7-8, 2002, Denver, Colorado 132375, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
  7. Bruce J. Sherrick & Peter J. Barry & Paul N. Ellinger & Gary D. Schnitkey, 2004. "Factors Influencing Farmers' Crop Insurance Decisions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(1), pages 103-114.
  8. Vedenov, Dmitry V. & Miranda, Mario J. & Dismukes, Robert & Glauber, Joseph W., 2004. "Economic Analysis of the Standard Reinsurance Agreement," 2004 Annual meeting, August 1-4, Denver, CO 20345, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  9. Alan P. Ker & Barry K. Goodwin, 2000. "Nonparametric Estimation of Crop Insurance Rates Revisited," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(2), pages 463-478.
  10. Babcock, Bruce A. & Choi, E. Kwan & Feinerman, Eli, 1993. "Risk And Probability Premiums For Cara Utility Functions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(01), July.
  11. Robert J. Hauser, 2004. "Relationships among government payments, crop insurance payments and crop revenue," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 31(3), pages 353-368, September.
  12. Skees, Jerry R. & Harwood, Joy L. & Somwaru, Agapi & Perry, Janet E., 1998. "The Potential For Revenue Insurance Policies In The South," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 30(01), July.
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