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Price vs. weather shock hedging for cash crops: ex ante evaluation for cotton producers in Cameroon

  • Antoine Leblois

    ()

    (JRC, Ispra - Commission Européenne)

  • Philippe Quirion

    ()

    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - École des Ponts ParisTech (ENPC) - CNRS)

  • Benjamin Sultan

    (PARVATI - Processus de la variabilité climatique tropicale et impacts - LOCEAN - Laboratoire d'Océanographie et du Climat : Expérimentations et Approches Numériques - CNRS - UPMC - Université Pierre et Marie Curie - Paris 6 - MNHN - Muséum National d'Histoire Naturelle - Institut de recherche pour le développement [IRD] - INSU)

In the Sudano-sahelian zone, which includes Northern Cameroon, the inter- annual variability of the rainy season is high and irrigation scarce. As a consequence, bad rainy seasons have a detrimental impact on crop yield. In this paper, we assess the risk mitigation capacity of weather index-based insurance for cotton farmers. We compare the ability of various indices, mainly based on daily rainfall, to increase the expected utility of a representative risk-averse farmer. We first give a tractable definition of basis risk and use it to show that weather index-based insurance is associated with a large basis risk, whatever the index considered. It has thus limited potential for income smoothing, a conclusion which is robust to the utility function. Second, in accordance with the existing agronomical literature we find that the length of the cotton growing cycle, in days, is the best performing index considered. Third, we show that using observed cotton sowing dates to define the length of the growing cycle significantly decreases the basis risk, compared to using simulated sowing dates. Finally we find that the gain of the weather-index based insurance is lower than that of hedging against cotton price fluctuations provided by the national cotton company. This casts doubt on the strategy of supporting weather-index insurances in cash crop sectors selling at international market prices without recommending any price stabilisation scheme.

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Date of creation: 2014
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Publication status: Published in Ecological Economics, Elsevier, 2014, pp.42. <10.1016/j.ecolecon.2014.02.021>
Handle: RePEc:hal:journl:halshs-00967313
DOI: 10.1016/j.ecolecon.2014.02.021
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00967313
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