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An Insurance Approach to Risk Management in the Ethanol Industry

Listed author(s):
  • Paulson, Nicholas D.
  • Babcock, Bruce A.
  • Hart, Chad E.
  • Hayes, Dermot J.

The vast majority of crop and revenue insurance policies sold in the United States are single-crop policies that insure against low yields or revenues for each crop grown on the farm. But, increasingly, producer income is based more on the value of crops that have been converted into a value-added product such as ethanol. Moreover, the recent increases in energy and com-modity price levels and volatilities emphasize the importance of risk management to ethanol investors. This paper uses an insurance approach to outline a risk management tool which mimics the gross margin level of a typical corn-based ethanol plant. The gross margin, pre-mium, and indemnity levels are calculated on a per bushel basis to enable producers/investors to utilize the product based on their ownership share in the production facility. The fair pre-mium rates are shown to be quite sensitive with respect to corn and energy price levels and volatilities.

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Article provided by Cambridge University Press in its journal Agricultural and Resource Economics Review.

Volume (Year): 37 (2008)
Issue (Month): 01 (April)
Pages: 51-62

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Handle: RePEc:cup:agrerw:v:37:y:2008:i:01:p:51-62_00
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  1. Amani Elobeid & Simla Tokgoz & Dermot J. Hayes & Bruce A. Babcock & Chad E. Hart, 2006. "Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A Preliminary Assessment, The," Center for Agricultural and Rural Development (CARD) Publications 06-bp49, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  2. 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, 06.
  3. 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, 03.
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