Crop Insurance and Forward Pricing Linkages: Effects on Mean Income and Variance

Revenue was simulated for dryland wheat farms in Kansas using historical yields, prices, and estimated within-year yield variance for different crop insurance policies and pre-harvest hedging strategies. Crop insurance alternatives considered were no insurance, catastrophic insurance (CAT), multi-peril crop insurance (MPCI), and a new revenue insurance product, crop revenue coverage (CRC). Simulated revenue values were used to examine relationships between price and yield risk management tools as they relate to expected income and income variability. Average revenue was similar across insurance alternatives, but MPCI and CRC resulted in the least income variability as measured by both standard deviation and minimum revenue. The effects of pre-harvest hedging on relative risk reduction were small when comparing CAT and no insurance to MPCI and CAT. However, in comparing CRC to MPCI the relationship between CRC purchasing and pre-harvest hedging is perverse. That is, the advantage CRC has over MPCI, in terms of risk reduction, decreases as pre-harvest hedging increases implying the more a farm pre-harvest hedges the less likely its risk management strategy will include CRC.