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

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

"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." Copyright 2006 Canadian Agricultural Economics Society.

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Article provided by Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie in its journal Canadian Journal of Agricultural Economics.

Volume (Year): 54 (2006)
Issue (Month): 1 (03)
Pages: 121-137

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Handle: RePEc:bla:canjag:v:54:y:2006:i:1:p:121-137
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  1. Levy, Edmond, 1992. "Pricing European average rate currency options," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 474-491, October.
  2. Bruce A. Babcock & Joseph A. Herriges, 1994. "Input Demand Under Yield and Revenue Insurance," Center for Agricultural and Rural Development (CARD) Publications 94-wp127, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  3. 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(02), December.
  4. 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.
  5. 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(03), pages 377-389, September.
  6. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1995. "Budgetary and Resource Allocation Effects of Revenue Assurance," Center for Agricultural and Rural Development (CARD) Publications 95-wp130, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  7. Hart, Chad E. & Babcock, Bruce A. & Hayes, Dermot J., 2001. "Livestock Revenue Insurance," Staff General Research Papers 1932, Iowa State University, Department of Economics.
  8. 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.
  9. Babcock, Bruce A. & Blackmer, A. M., 1992. "Value of Reducing Temporal Input Nonuniformities (The)," Staff General Research Papers 10587, Iowa State University, Department of Economics.
  10. 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.
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