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Natural Hedge Effects on Revenue Stability and Crop Insurance Decisions

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  • Motamed, Mesbah
  • O'Donoghue, Erik

Abstract

The natural hedge is a familiar concept in the agricultural risk literature, but little work has formally examined its size and effect on producer outcomes. In this paper, we systematically measure the impact of the natural hedge on revenue stability over the period 1960-2014. We also test its effect on present-day insurance uptake decisions. As part of the analysis, we propose an alternative measure of the natural hedge that is not subject to the simultaneity of price and yield outcomes. As an initial attempt, we correlate prices with rainfall to obtain a more "natural" natural hedge. From our results, the natural hedge exerts a stabilizing effect on long-run producer revenues, but its impact on insurance decisions is less consistent.

Suggested Citation

  • Motamed, Mesbah & O'Donoghue, Erik, 2016. "Natural Hedge Effects on Revenue Stability and Crop Insurance Decisions," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235547, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea16:235547
    DOI: 10.22004/ag.econ.235547
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    Keywords

    Production Economics; Risk and Uncertainty;

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