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How strong is the “natural hedge”? The effects of crop acreage and aggregation levels

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  • Finger, Robert

Abstract

The level of natural hedge, i.e. the (negative) correlation between price and yield levels, is an important determinant for farmers’ income risks and their demand for risk management instruments. The natural hedge is often approximated with correlations observed at more aggregated levels, e.g. the county level. This induces biases because the natural hedge at the farm-level is smaller than on more aggregated levels. In this paper, we put this idea one step forward and investigate the empirical relationship between price-yield correlations and the underlying crop acreage, using farm-level data for 5 crops in Switzerland. We find that, for instance, a 1% increase in area under maize and intensive barley leads to a change in the correlation by -0.02 and -0.08, respectively. Thus, larger farms have a stronger natural hedge. Using a revenue insurance example, we show that this information can be used to adjust insurance premiums for each farm.

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  • Finger, Robert, 2012. "How strong is the “natural hedge”? The effects of crop acreage and aggregation levels," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122538, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaa123:122538
    DOI: 10.22004/ag.econ.122538
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    Cited by:

    1. Lehmann, Niklaus & Finger, Robert, 2012. "Optimizing whole-farm management considering price and climate risks," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122533, European Association of Agricultural Economists.
    2. Walters, Cory, 2015. "Managing Net Income Risk with Crop Insurance, Farm Bill, and Hedging," Cornhusker Economics 306939, University of Nebraska-Lincoln, Department of Agricultural Economics.
    3. Briner, Simon & Finger, Robert, 2012. "Bio-economic modelling of decisions under yield and price risk for suckler cow farms," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122547, European Association of Agricultural Economists.
    4. El Benni, Nadja & Finger, Robert, 2014. "Where is the risk? Price, yield and cost risk in Swiss crop production," Revue d'Etudes en Agriculture et Environnement, Editions NecPlus, vol. 95(03), pages 299-326, September.
    5. ZGAJNAR, Jaka, 2016. "Simulation Model Based On Iacs Data; Alternative Approach To Analyse Sectoral Income Risk In Agriculture," Review of Agricultural and Applied Economics (RAAE), Faculty of Economics and Management, Slovak Agricultural University in Nitra, vol. 19(1), pages 1-9, April.

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