Browsing by Subject "crop insurance"
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Item Applications of Copulas to Analysis of Efficiency of Weather Derivatives as Primary Crop Insurance Instruments(2012-10-19) Filonov, VitalyNumerous authors note failure of private insurance markets to provide affordable and comprehensive crop insurance. Economic logic suggests that index contracts potentially may have some advantages when compared with traditional (farm based) crop insurance. It is also a matter of common knowledge that weather is an important production factor and at the same time one of the greatest sources of risk in agriculture. Hence introduction of crop insurance contracts, based on weather indexes, might be a reasonable approach to mitigate problems, associated with traditional crop insurance products, and possibly lower the cost of insurance for end users. In spite of the fact that before the financial crisis of 2008-09 market for weather derivatives was the fastest growing derivatives market in the USA, agricultural producers didn?t express much interest in application of weather derivatives to management of their systematic risk. There are several reasons for that, but the most important one is the presence of high basis risk, which is represented by its two major components: technological (i.e. goodness of fit between yield and weather index) and geographical basis. Majority of the researchers is focusing either on pricing of weather derivatives or on mitigation of geographical basis risk. At the same time the number of papers researching possible ways to decrease technological basis is quite limited, and always assumes linear dependency between yields and weather variables, while estimating the risk reducing efficiency of weather contracts, which is obviously large deviation from reality. The objective of this study is to estimate the risk reducing efficiency of crop insurance contracts, based on weather derivatives (indexes) in the state of Texas. The distributions of representative farmer?s profits with the proposed contracts are compared to the distributions of profits without a contract. This is done to demonstrate the risk mitigating effect of the proposed contracts. Moreover the study will try to account for a more complex dependency structures between yields and weather variables through usage of copulas, while constructing joint distribution of yields and weather data. Selection of the optimal copula will be implemented in the out-of-sample efficient framework. An effort will be done to identify the most relevant periods of year, when weather has the most significant influence on crop yields, which should be included in the model, and to discover the most effective copula to model joint weather/yield risk. Results suggest that effective insurance of crop yields in the state of Texas by the means of proposed weather derivatives is possible. Besides, usage of data-mining techniques allows for more accurate selection of the time periods to be included in the model than ad hoc procedure previously used in the literature. Finally selection of optimal copula for modeling of joint weather/yield distribution should be crop and county specific, while in general Clayton and Frank copula of Archimedean copula family provide the best out-of-sample metric results.Item Effects of federal risk management programs on investment, production, and contract design under uncertainty(Texas A&M University, 2006-04-12) Seo, SangtaekAgricultural producers face uncertain agricultural production and market conditions. Much of the uncertainty faced by agricultural producers cannot be controlled by the producer, but can be managed. Several risk management programs are available in the U.S. to help manage uncertainties in agricultural production, marketing, and finance. This study focuses on the farm level economic implications of the federal risk management programs. In particular, the effects of the federal risk management programs on investment, production, and contract design are investigated. The dissertation is comprised of three essays. The unifying theme of these essays is the economic analysis of crop insurance programs. The first essay examines the effects of revenue insurance on the entry and exit thresholds of table grape producers using a real option approach. The results show that revenue insurance decreases the entry and exit thresholds compared with no revenue insurance, thus increasing the investment and current farming operation. If the policy goal is to induce more farmers in grape farming, the insurance policy with a high coverage level and high subsidy rate is effective. In the second essay, a mathematical programming model is used to examine the effects of federal risk management programs on optimal nitrogen fertilizer use and land allocation simultaneously. Current insurance programs and the Marketing Loan Program increase the optimal fertilizer rate 2% and increase the optimal cotton acreage 119-130% in a Texas cotton-sorghum system. Assuming nitrogen is harmful to the environment and cotton requires higher nitrogen use, these risk management programs counteract federal environmental programs. The third essay uses a principal-agent model to examine the optimal contract design that induces the best effort from the farmer when crop insurance is purchased. With the introduction of crop insurance, the investor??s optimal equity financing contract requires that the farmer bear more risk in order to have the incentive to work hard, which is achieved by increasing variable compensation and decreasing fixed compensation.Item Mitigating cotton revenue risk through irrigation, insurance, and/or hedging(2009-05-15) Bise, Elizabeth HartTexas is the leading U.S. producer of cotton, and the U.S. is the largest international market supplier of cotton. Risks and uncertainties plague Texas cotton producers with unpredictable weather, insects, diseases, and price variability. Risk management studies have examined the risk reducing capabilities of alternative management strategies, but few have looked at the interaction of using several strategies in different combinations. The research in this study focuses on managing risk faced by cotton farmers in Texas using irrigation, put options, and yield insurance. The primary objective was to analyze the interactions of irrigation, put options, and yield insurance as risk management strategies on the economic viability of a 1,000 acre cotton farm in the Lower Rio Grande Valley (LRGV) of Texas. The secondary objective was to determine the best combination of these strategies for decision makers with alternative preferences for risk aversion. Stochastic values for yields and prices were used in simulating a whole-farm financial statement for a 1000 acre furrow irrigated cotton farm in the LRGV with three types of risk management strategies. Net returns were simulated using a multivariate empirical distribution for 16 risk management scenarios. The scenarios were ranked across a range of risk aversion levels using stochastic efficiency with respect to a function. Analyses for risk averse decision makers showed that multiple irrigations are preferred, and that yield insurance is strongly preferred at lower irrigation levels. The benefits to purchasing put options increase with yields, so they are more beneficial when higher yields are expected from applying more irrigation applications.