IDEAS home Printed from https://ideas.repec.org/a/bla/canjag/v54y2006i1p121-137.html
   My bibliography  Save this article

Insuring Eggs in Baskets: Should the Government Insure Individual Risks?

Author

Listed:
  • Chad E. Hart
  • Dermot J. Hayes
  • Bruce A. Babcock

Abstract

The vast majority of crop and revenue insurance policies sold in North America 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 one's eggs in a single basket. This paper examines the construction of a whole‐farm crop revenue insurance program to include livestock price risk. The results show that at coverage levels of 95% or lower, the fair insurance premiums for this product on a well‐diversified Iowa 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. The potential income transfer from crop insurance is also examined. We find that the income transfer due to the subsidization of single‐commodity policies is greater than the total premium for whole‐farm policies. La grande majorité de polices d'assurances de récolte et de revenu agricole vendues en Amérique du nord sont des polices de récolte individuelle qui assurent contre des rendements faibles ou bas revenu pour chaque récolte cultivée par une ferme particulière. Cette pratique de n'assurer une récolte à la fois fonctionne à l'opposé de la pratique traditionnelle de gestion des risques par la diversification à travers plusieurs entreprises pour éviter de mettre tous ses oeufs dans un seul panier. Cet article examine la construction d'un programme d'assurance agricole pour l'ensemble des récoltes produites par une ferme y compris le bétail évalue le risque. Les résultats montrent qu'aux niveaux d'assurance plus petits ou égaux à 95 pourcents, les primes d'assurance justes pour ce type de police pour une ferme bien diversifiée de l'Iowa sont bien inférieures aux primes justes pour une police de simple couvrant le maïs et ce pour la même ferme. Le calcul des taux de prime pour une police couvrant l'ensemble des récoltes est dérivé d'une méthode pour imposer des corrélations originalement proposée par Iman et Conover en 1982. Le transfert potentiel de revenu à partir de l'assurance de récolte agricole est également examiné. Nous trouvons que le transfert de revenu dûà la subvention des polices pour récolte singulière est plus grand que la prime entière pour une police couvrant l'ensemble des récoltes.

Suggested Citation

  • Chad E. Hart & Dermot J. Hayes & Bruce A. Babcock, 2006. "Insuring Eggs in Baskets: Should the Government Insure Individual Risks?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(1), pages 121-137, March.
    • Handle: RePEc:bla:canjag:v:54:y:2006:i:1:p:121-137
    DOI: 10.1111/j.1744-7976.2006.00041.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1744-7976.2006.00041.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1744-7976.2006.00041.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chad E. Hart & Bruce A. Babcock & Dermot J. Hayes, 2001. "Livestock Revenue Insurance," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(6), pages 553-580, June.
    2. 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, vol. 78(2), pages 439-447.
    3. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
    4. Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(3), pages 377-389, September.
    5. Levy, Edmond, 1992. "Pricing European average rate currency options," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 474-491, October.
    6. Babcock, Bruce A. & Blackmer, Alfred M., 1992. "The Value Of Reducing Temporal Input Nonuniformities," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(2), pages 1-13, December.
    7. Richard E. Just & Quinn Weninger, 1999. "Are Crop Yields Normally Distributed?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(2), pages 287-304.
    8. Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
    9. Olivier Mahul & Brian D. Wright, 2003. "Designing Optimal Crop Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 580-589.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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, vol. 29(2), pages 1-22, August.
    2. Pudenz, Christopher C. & Schulz, Lee, 2020. "Quantifying the U.S. Market Response to the African Swine Fever Outbreak in China," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304298, Agricultural and Applied Economics Association.
    3. Rubin, Ofir David, 2010. "Equilibrium pricing in electricity markets with wind power," ISU General Staff Papers 201001010800002361, Iowa State University, Department of Economics.
    4. Singerman, Ariel & Hart, Chad E. & Lence, Sergio H., 2012. "Revenue Protection for Organic Producers: Too Much or Too Little?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(3), pages 1-20.
    5. 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 25421, International Association of Agricultural Economists.
    6. Sengupta, Sanchita, 2010. "Three Essays in Environmental and Agricultural Issues," ISU General Staff Papers 201001010800002848, Iowa State University, Department of Economics.
    7. 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, vol. 34(1), pages 1-15, April.
    8. 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 49262, Agricultural and Applied Economics Association.
    9. 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, vol. 37(1), pages 1-12, April.
    10. Ghahremanzadeh, Mohammad & Mohammadrezaei, Rassul & Dashti, Ghader & Ainollahi, Moharram, 2018. "Designing a whole-farm revenue insurance for agricultural crops in Zanjan province of Iran," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 17(02), January.
    11. Rubin, Ofir D. & Babcock, Bruce A., 2013. "The impact of expansion of wind power capacity and pricing methods on the efficiency of deregulated electricity markets," Energy, Elsevier, vol. 59(C), pages 676-688.
    12. 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, vol. 104(9), pages 671-678.
    13. Singerman, Ariel, 2011. "Price Analysis, Risk Assessment and Insurance for Organic Crops," ISU General Staff Papers 201101010800001065, Iowa State University, Department of Economics.
    14. Paulson, Nicholas David, 2004. "Insuring uncertainty in value-added agriculture: ethanol," ISU General Staff Papers 2004010108000018198, Iowa State University, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chad E. Hart & Bruce A. Babcock & Dermot J. Hayes, 2001. "Livestock Revenue Insurance," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(6), pages 553-580, June.
    2. Ghahremanzadeh, Mohammad & Mohammadrezaei, Rassul & Dashti, Ghader & Ainollahi, Moharram, 2018. "Designing a whole-farm revenue insurance for agricultural crops in Zanjan province of Iran," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 17(02), January.
    3. Ashok Mishra & Barry Goodwin, 2006. "Revenue insurance purchase decisions of farmers," Applied Economics, Taylor & Francis Journals, vol. 38(2), pages 149-159.
    4. María Bielza & Alberto Garrido & José M. Sumpsi, 2004. "Revenue insurance as an income stabilization policy: an application to the Spanish olive oil sector," Post-Print hal-01201063, HAL.
    5. Paulson, Nicholas David, 2004. "Insuring uncertainty in value-added agriculture: ethanol," ISU General Staff Papers 2004010108000018198, Iowa State University, Department of Economics.
    6. Chen, Xiaomei & Wang, H. Holly & Makus, Larry D., 2007. "Production Risk and Crop Insurance Effectiveness: Organic Versus Conventional Apples," SCC-76 Meeting, 2007, March 15-17, Gulf Shores, Alabama 9381, SCC-76: Economics and Management of Risk in Agriculture and Natural Resources.
    7. Singerman, Ariel & Hart, Chad E. & Lence, Sergio H., 2012. "Revenue Protection for Organic Producers: Too Much or Too Little?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(3), pages 1-20.
    8. Calum G. Turvey & Jeffrey R. Stokes, 2008. "Market Structure and the Value of Agricultural Contingent Claims," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 56(1), pages 79-94, March.
    9. Bhaskar, Arathi & Beghin, John C., 2007. "Decoupled Farm Payments and the Role of Base Updating Under Uncertainty," Working Papers 7350, Iowa State University, Department of Economics.
    10. 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, Cambridge University Press, vol. 37(1), pages 51-62, April.
    11. Bruce A. Babcock & Chad E. Hart & Dermot J. Hayes, 2004. "Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(3), pages 563-575.
    12. Mason, Charles Edwin, IV, 2000. "Estimation and attenuation of reinsurance risk in the crop insurance market," ISU General Staff Papers 2000010108000013703, Iowa State University, Department of Economics.
    13. María Bielza & Alberto Garrido & José M. Sumpsi, 2004. "Revenue insurance as an income stabilization policy: an application to the Spanish olive oil sector," Cahiers d'Economie et Sociologie Rurales, INRA Department of Economics, vol. 70, pages 5-27.
    14. Bielza, María & Garrido, Alberto & Sumpsi, José M., 2004. "Revenue insurance as an income stabilization policy: an application to the Spanish olive oil sector," Cahiers d'Economie et de Sociologie Rurales (CESR), Institut National de la Recherche Agronomique (INRA), vol. 70.
    15. Banterle, Alessandro & Vandone, Daniela, 2013. "Price Volatility and Risk Management: The Case of Rice," 2013 International European Forum, February 18-22, 2013, Innsbruck-Igls, Austria 164766, International European Forum on System Dynamics and Innovation in Food Networks.
    16. Singerman, Ariel, 2011. "Price Analysis, Risk Assessment and Insurance for Organic Crops," ISU General Staff Papers 201101010800001065, Iowa State University, Department of Economics.
    17. Agarwal, Sandip Kumar, 2017. "Subjective beliefs and decision making under uncertainty in the field," ISU General Staff Papers 201701010800006248, Iowa State University, Department of Economics.
    18. Sengupta, Sanchita, 2010. "Three Essays in Environmental and Agricultural Issues," ISU General Staff Papers 201001010800002848, Iowa State University, Department of Economics.
    19. Heidelbach, Olaf, 2007. "Efficiency of selected risk management instruments: An empirical analysis of risk reduction in Kazakhstani crop production," Studies on the Agricultural and Food Sector in Transition Economies, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), volume 40, number 92323.
    20. Hennessy, David A. & Saak, Alexander E. & Babcock, Bruce A., 2003. "Fair Value Of Whole-Farm And Crop-Specific Revenue Insurance," 2003 Annual meeting, July 27-30, Montreal, Canada 21988, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:canjag:v:54:y:2006:i:1:p:121-137. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/caefmea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.