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Insuring Eggs In Baskets

Author

Listed:
  • Hart, Chad E.
  • Hayes, Dermot J.
  • Babcock, Bruce A.

Abstract

The vast majority of crop and revenue insurance policies sold in the United States are single-crop policies that insure against low yields or low revenues for each crop grown on a particular farm. This practice of insuring one crop at a time runs counter to the traditional risk management practice of diversifying across several enterprises to avoid putting all of ones eggs in a single basket. This paper examines the construction of whole-farm crop revenue insurance programs to include livestock. The whole-farm insurance product covers crop revenues from corn and soybeans and livestock revenues from hog production. The results show that at coverage levels of 95 percent or lower, the fair insurance premiums for this product on a well-diversified Iowa hog farm are far lower than the fair premiums for the corn crop alone on the same farm. The calculation of premium rates for the whole-farm insurance product is derived from a method for imposing correlations first proposed by Iman and Conover in 1982.

Suggested Citation

  • Hart, Chad E. & Hayes, Dermot J. & Babcock, Bruce A., 2003. "Insuring Eggs In Baskets," Hebrew University of Jerusalem Archive 18497, Hebrew University of Jerusalem.
    • Handle: RePEc:ags:hebarc:18497
    DOI: 10.22004/ag.econ.18497
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    References listed on IDEAS

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    1. Babcock, Bruce A. & Blackmer, Alfred M., 1992. "The Value Of Reducing Temporal Input Nonuniformities," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(2), pages 1-13, December.
    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, June.
    3. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
    4. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1996. "Modeling Farm-Level Crop Insurance Demand with Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 439-447.
    5. Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(3), pages 377-389, September.
    6. Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
    7. Levy, Edmond, 1992. "Pricing European average rate currency options," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 474-491, October.
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    2. Valvekar, Mayuri & Chavas, Jean P. & Gould, Brian W. & Cabrera, Victor E., 2011. "Revenue risk management, risk aversion and the use of Livestock Gross Margin for Dairy Cattle insurance," Agricultural Systems, Elsevier, vol. 104(9), pages 671-678.
    3. Brester, Gary W. & Marsh, John M. & Atwood, Joseph A., 2004. "Distributional Impacts of Country-of-Origin Labeling in the U.S. Meat Industry," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(2), pages 1-22, August.
    4. Cabrera, Victor E. & Gould, Brian W. & Valvekar, Mayuri, 2009. "Livestock Gross Margin Insurance for Dairy Cattle: An Analysis of Program Performance and Cost under Alternative Policy Configurations," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49262, Agricultural and Applied Economics Association.
    5. Paulson, Nicholas David, 2004. "Insuring uncertainty in value-added agriculture: ethanol," ISU General Staff Papers 2004010108000018198, Iowa State University, Department of Economics.
    6. Singerman, Ariel & Hart, Chad E. & Lence, Sergio H., 2012. "Revenue Protection for Organic Producers: Too Much or Too Little?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(3), pages 1-20.
    7. Bielza, Maria & Garrido, Alberto, 2006. "Evaluating the Potential of Whole-Farm Insurance Over Crop-Specific Insurance Policies," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25421, International Association of Agricultural Economists.
    8. Anderson, John D. & Harri, Ardian & Coble, Keith H., 2009. "Techniques for Multivariate Simulation from Mixed Marginal Distributions with Application to Whole-Farm Revenue Simulation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 34(01), pages 1-15, April.

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