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The joint effect of government crop insurance and loan programmes on the demand for futures hedging

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  • Keith H. Coble

Abstract

This research re-evaluates producer risk management decisions regarding the choice of forward pricing strategies when governmentally subsidised crop insurance designs and price supports are available. An analytical model is developed to illustrate the substitution of loan programmes for hedging. In particular, we find that this relationship is conditioned on yield levels. Also, a numerical analysis is conducted that incorporates futures prices, basis and yield variability. Three alternative crop insurance designs are evaluated. Optimal futures hedge ratios are derived for expected utility-maximising soybean farmers. Our results suggest that government programme levels profoundly alter the farmer's optimal strategy. We also find that apparently speculative behaviour is risk-minimising when high loan rates and revenue insurance are combined. Copyright 2004, Oxford University Press.

Suggested Citation

  • Keith H. Coble, 2004. "The joint effect of government crop insurance and loan programmes on the demand for futures hedging," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 31(3), pages 309-330, September.
  • Handle: RePEc:oup:erevae:v:31:y:2004:i:3:p:309-330
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    Cited by:

    1. Zhang, Rui (Carolyn) & Houston, Jack E. & Vedenov, Dmitry V. & Barnett, Barry J., 2008. "Impacts of government risk management policies on hedging in futures and options:LPM2 hedge model vs. EU hedge model," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37610, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    2. Coble, Keith H., 2007. "Federal Crop Insurance and Farm Programs: Will WTO or Budget Concerns Shape the Debate? (Paper and PowerPoint)," Agricultural Outlook Forum 2007 8041, United States Department of Agriculture, Agricultural Outlook Forum.
    3. Joshua D. Woodard & Bruce J. Sherrick & Gary D. Schnitkey, 2010. "Revenue Risk-Reduction Impacts of Crop Insurance in a Multicrop Framework," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(3), pages 472-488.
    4. Woodard, Joshua D. & Garcia, Philip, 2008. "Weather Derivatives, Spatial Aggregation, and Systemic Risk: Implications for Reinsurance Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 33(01), April.
    5. Carpentier, Alain & Gohin, Alexandre & Sckokai, Paolo & Thomas, Alban, 2015. "Economic modelling of agricultural production: past advances and new challenges," Revue d'Etudes en Agriculture et Environnement, Editions NecPlus, vol. 96(01), pages 131-165, March.
    6. Nicholas D. Paulson & Gary D. Schnitkey & Bruce J. Sherrick, 2010. "Rental arrangements and risk mitigation of crop insurance and marketing: Impacts in the Corn Belt," Agricultural Finance Review, Emerald Group Publishing, vol. 70(3), pages 399-413, November.
    7. Yang, Xi & Miao, Ruiqing & Khanna, Madhu, 2014. "Contracting in the Presence of Insurance: The Case of Bioenergy Crop Production," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170188, Agricultural and Applied Economics Association.
    8. Ricome, Aymeric & Chaib, Karim & Ridier, Aude & Kephaliacos, Charilaos & Carpy-Goulard, Francoise, 2012. "The role of cash crop marketing contracts in the adoption of low-input practices in the presence of risk and income supports," 126th Seminar, June 27-29, 2012, Capri, Italy 126222, European Association of Agricultural Economists.
    9. Ricome, Aymeric & Chaib, Karim & Ridier, Aude & Kephaliacos, Charilaos & Carpy-Goulard, Francoise, 2016. "The Role of Marketing Contracts in the Adoption of Low-Input Production Practices in the Presence of Income Supports: An Application in Southwestern France," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 41(3), September.
    10. Walters, Cory G. & Preston, Richard, 2013. "Revenue Risk, Crop Insurance and Forward Contracting," 2013 AAEA: Crop Insurance and the Farm Bill Symposium, October 8-9, Louisville, KY 156821, Agricultural and Applied Economics Association.

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