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

  • Finger, Robert

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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File URL: http://purl.umn.edu/122538
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Paper provided by European Association of Agricultural Economists in its series 123rd Seminar, February 23-24, 2012, Dublin, Ireland with number 122538.

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Date of creation: 23 Feb 2012
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Handle: RePEc:ags:eaa123:122538
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  1. Artavia, Marco & Deppermann, Andre & Filler, Gunther & Grethe, Harald & Haeger, Astrid & Kirschke, Dieter & Odening, Martin, 2010. "Ertrags- Und Preisinstabilität Auf Agrarmärkten In Deutschland Und Der Eu," 50st Annual Conference, Braunschweig, Germany, September 29-October 1, 2010 93956, German Association of Agricultural Economists (GEWISOLA).
  2. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports 34081, United States Department of Agriculture, Economic Research Service.
  3. Conradt, Sarah & Bokusheva, Raushan & Finger, Robert & Kussaiynov, Talgat, 2012. "Yield trend estimation in the presence of non-constant technological change and weather effects," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122541, European Association of Agricultural Economists.
  4. Oliver Musshoff & Martin Odening & Wei Xu, 2009. "Management of climate risks in agriculture-will weather derivatives permeate?," Applied Economics, Taylor & Francis Journals, vol. 43(9), pages 1067-1077.
  5. Skees, Jerry R. & Harwood, Joy L. & Somwaru, Agapi & Perry, Janet E., 1998. "The Potential For Revenue Insurance Policies In The South," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 30(01), July.
  6. Finger, Robert, 2007. "Evidence of slowing yield growth – the example of Swiss cereal yields," MPRA Paper 9475, University Library of Munich, Germany.
  7. Daniele Simone Torriani & Pierluigi Calanca & Martin Beniston & Jürg Fuhrer, 2008. "Hedging with weather derivatives to cope with climate variability and change in grain maize production," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 67-81, September.
  8. Olivier Mahul, 2003. "Hedging price risk in the presence of crop yield and revenue insurance," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 30(2), pages 217-239, June.
  9. Finger, Robert & El Benni, Nadja, 2011. "Farmers’ Adoption of Extensive Wheat Production - Determinants and Implications," 122nd Seminar, February 17-18, 2011, Ancona, Italy 98979, European Association of Agricultural Economists.
  10. Anton, Jesus & Kimura, Shingo, 2009. "Farm Level Analysis of Risk, and Risk Management Strategies and Policies: Evidence from German Crop Farms," 2009 Conference, August 16-22, 2009, Beijing, China 51729, International Association of Agricultural Economists.
  11. Stokes, Jeffrey R., 2000. "A Derivative Security Approach To Setting Crop Revenue Coverage Insurance Premiums," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(01), July.
  12. Carlo Cafiero & Fabian Capitanio & Antonio Cioffi & Adele Coppola, 2007. "Risk and Crisis Management in the Reformed European Agricultural Policy," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 55(4), pages 419-441, December.
  13. Dismukes, Robert & Coble, Keith H., 2006. "Managing Risk With Revenue Insurance," Amber Waves, United States Department of Agriculture, Economic Research Service, November.
  14. Robert Finger & Werner Hediger, 2008. "The Application of Robust Regression to a Production Function Comparison – the Example of Swiss Corn," IED Working paper 08-02, IED Institute for Environmental Decisions, ETH Zurich.
  15. El Benni, Nadja & Finger, Robert & Mann, Stefan, 2012. "The effect of agricultural policy change on income risk in Swiss agriculture," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122532, European Association of Agricultural Economists.
  16. Finger, Robert, 2012. "Nitrogen use and the effects of nitrogen taxation under consideration of production and price risks," Agricultural Systems, Elsevier, vol. 107(C), pages 13-20.
  17. Hanson, Steven D. & Myers, Robert J. & Hilker, James H., 1999. "Hedging With Futures And Options Under A Truncated Cash Price Distribution," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 31(03), December.
  18. Price, T. Jeffrey & Wetzstein, Michael E., 1999. "Irreversible Investment Decisions In Perennial Crops With Yield And Price Uncertainty," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(01), July.
  19. Coble, Keith H. & Dismukes, Robert & Thomas, Sarah E., 2007. "Policy Implications of Crop Yield and Revenue Variability at Differing Levels of Disaggregation," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9759, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  20. Meuwissen, Miranda P.M. & Van Asseldonk, Marcel A.P.M. & Pietola, Kyosti & Hardaker, J. Brian & Huirne, Ruud B.M., 2011. "Income insurance as a risk management tool after 2013 CAP reforms?," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114649, European Association of Agricultural Economists.
  21. Ronald I. McKinnon, 1967. "Futures Markets, Buffer Stocks, and Income Stability for Primary Producers," Journal of Political Economy, University of Chicago Press, vol. 75, pages 844.
  22. Marra, Michele C. & Schurle, Bryan W., 1994. "Kansas Wheat Yield Risk Measures And Aggregation: A Meta- Analysis Approach," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(01), July.
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