Farm-Level Risk Management Using Irrigation and Weather Derivatives

Lin, Shanshan; Mullen, John D.; Hoogenboom, Gerrit

doi:10.1017/s1074070800023774

Cited by 16 publications

(20 citation statements)

References 15 publications

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“…Irrigation strategies are commonly viewed as yield enhancing, but they are also mitigating the risk of lower yield outcomes (Lin, Mullen, and Hoogenboom, 2008;Senft, 1992). Timing of irrigation applications and the amount of water administered have been two common research topics.…”

mentioning

confidence: 99%

“…Dalton concluded that irrigation strategies provide risk management benefits as risk aversion increases, and federal crop insurance programs were inefficient in reducing exposure to production risk from variable rainfall. The more recent paper by Lin, Mullen, and Hoogenboom (2008) used biophysical simulation to evaluate both risk efficient irrigation levels and the effectiveness of weather derivatives as a risk mitigation tool.…”

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confidence: 99%

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Mitigating Cotton Revenue Risk Through Irrigation, Insurance, and Hedging

Barham¹,

Robinson

Richardson

et al. 2011

J. Agric. Appl. Econ.

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This study focuses on managing cotton production and marketing risks using combinations of irrigation levels, put options (as price insurance), and crop insurance. Stochastic cotton yields and prices are used to simulate a whole-farm financial statement for a 1,000 acre furrowirrigated cotton farm in the Texas Lower Rio Grande Valley under 16 combinations of risk management strategies. Analyses for risk-averse decision makers indicate that multiple irrigations are preferred. The benefits to purchasing put options increase with yields, as they are more beneficial when higher yields are expected from applying more irrigation applications. Crop insurance is strongly preferred at lower irrigation levels.

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confidence: 99%

mentioning

confidence: 99%

Mitigating Cotton Revenue Risk Through Irrigation, Insurance, and Hedging

Barham¹,

Robinson

Richardson

et al. 2011

J. Agric. Appl. Econ.

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“…Agricultural producers have several methods available to them for hedging their weather-related risks, including insurance and weather derivatives (Turvey, 2001;Schintkey et al, 2003;Lin et al, 2008). Our H1 concerns grain producers' use of hedging instruments, which could include insurance and/or weather derivatives, to mitigate weather risk.…”

Section: Weather Risk Managementmentioning

confidence: 99%

Weather risk management by Saskatchewan agriculture producers

Khan

Rennie

Charlebois

2013

Agricultural Finance Review

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Purpose -The purpose of this research is to study the weather risk management practices of agriculture producers. In particular, the authors look at the extent to which farmers use weather derivatives to complement insurance. Unlike insurance, weather derivatives mitigate risk associated with low intensity, high probability events and therefore offer the potential of a more complete hedge than insurance alone. Design/methodology/approach -The authors conducted a survey of grain farmers in the province of Saskatchewan, Canada, a typical jurisdiction in which farmers tend to face weather events that are high in frequency but low in severity, to study the usage of weather derivatives compared to insurance and identify the hurdles to their usage. Findings -The authors find that fewer than 10 percent of their respondents use weather derivatives. Consistent with previous literature in other contexts, they identify participation costs, especially lack of awareness, to be the most significant hurdle to their usage. Research limitations/implications -A limitation of this study is that the data were collected using a survey methodology and are therefore subject to the usual risks of bias associated with that approach. Moreover, because the authors' survey was delivered online, it may have favoured the participation of farmers that were more comfortable with technology and some bias may have also been introduced into the data as a result. Practical implications -The authors' findings suggest that there is significant potential to improve farmers' ability to hedge weather risk and thereby improve economic outcomes if the major barriers to the usage of weather derivatives can be overcome. The study paves the way for further research to support the development of public policy strategies that could help farmers take advantage of weather derivatives as part of their inventory of risk management tools. Originality/value -To the authors' knowledge this is the first study that quantifies the usage of weather derivatives by agriculture producers and identifies the hurdles.

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“…This loss distribution is distinct from the empirical distribution used in as it only uses a subset of observations. Consequently following Lin et al (2008), g ( x ) is estimated using a nonparametric kernel density estimator. The payout rates are 70%, 80%, and 60% for tiers 2, 3, and 4 (Figure 1), 85%, 70%, and 0% are the cut offs for tiers 2, 3, and 4, respectively, while μ is the probability that a producer's PM is less than the RM.…”

Section: The Modelmentioning

confidence: 99%

AgriStability with Catastrophic Price Risk for Cow‐Calf Producers

Schaufele

Unterschultz

Nilsson

2010

Canadian J Agri Economics

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"AgriStability is the primary Canadian agricultural risk management program. Recent experience with bovine spongiform encephalopathy (BSE) in the cattle sector demonstrated that output prices are susceptible to both "normal" risk and sudden, "catastrophic" declines. This paper evaluates the AgriStability program for cow-calf producers when there is potential for catastrophic price risk. A simulation model is developed. Under a base case scenario, when there is no catastrophic price risk, AgriStability behaves more like an income support program than a risk management tool. Risk-neutral producers see a 12.1% increase in certainty equivalent wealth compared to 12.5% for moderately risk-averse producers. Introducing catastrophic price risk increases risk-averse producers' expected benefits to 21.8%. Actuarially fair program premiums and implied subsidies are also estimated. These results demonstrate that AgriStability is highly subsidized. Finally, benefits from supplementary catastrophic revenue insurance are calculated and discussed, along with several additional structural features of the program". Copyright (c) 2010 Canadian Agricultural Economics Society.

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Farm-Level Risk Management Using Irrigation and Weather Derivatives

Cited by 16 publications

References 15 publications

Mitigating Cotton Revenue Risk Through Irrigation, Insurance, and Hedging

Mitigating Cotton Revenue Risk Through Irrigation, Insurance, and Hedging

Weather risk management by Saskatchewan agriculture producers

AgriStability with Catastrophic Price Risk for Cow‐Calf Producers

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