REDUCING THE SOCIAL COST OF FEDERAL CROP INSURANCE: A ROLE FOR US GOVERNMENT HEDGING WITH WEATHER DERIVATIVES
1
조회
0
다운로드
1
인용
0
참고문헌
키워드
초록
Previous studies have shown that weather derivatives are an effective means of hedging agricultural production risk. Yet, it is still unclear what role weather derivatives will play in agriculture as a risk management tool as compared with existing crop insurance programs which depend highly on government subsidies. This study compares the hedging cost and effectiveness of weather options and crop insurance for soybean in southern Minnesota. Our results show that the hedging effectiveness of weather options is limited at the farm level while the effectiveness increases as the level of aggregation increases. Thus, individual farmers will continue to prefer the federal crop insurance program to weather derivatives for their production risk management. However, the US government as an insurer, which currently does not hedge its risk exposures taken from farmers in the federal crop insurance program, could reduce the implied social cost in the form of un-hedged risk exposure by use of the weather options in the financial market.
Abstract
Previous studies have shown that weather derivatives are an effective means of hedging agricultural production risk. Yet, it is still unclear what role weather derivatives will play in agriculture as a risk management tool as compared with existing crop insurance programs which depend highly on government subsidies. This study compares the hedging cost and effectiveness of weather options and crop insurance for soybean in southern Minnesota. Our results show that the hedging effectiveness of weather options is limited at the farm level while the effectiveness increases as the level of aggregation increases. Thus, individual farmers will continue to prefer the federal crop insurance program to weather derivatives for their production risk management. However, the US government as an insurer, which currently does not hedge its risk exposures taken from farmers in the federal crop insurance program, could reduce the implied social cost in the form of un-hedged risk exposure by use of the weather options in the financial market.
참고문헌 (14)
- Cao, M., "Weather derivatives valuation and market price of weather risk", Journal of Futures Markets, 24, pp.1065~1089 (2004)
- "Center for Farm Financial Management"[URL]
- Chung, W, "Evaluating Weather Derivatives and Crop Insurance for Farm Production Risk Management in Southern Minnesota", 박사, pp.2011
- Chung, W., "Reducing the Social Cost of Federal Crop Insurance: A Role for Government Hedging with Weather Derivatives", Paper Prepared for Presentation at the Korean Agricultural Economics Association Summer Meeting (2012)
- Geng, S., "A simple method for generating daily rainfall data", Agricultural and Forest Meteorology, 36, pp.363~376 (1986)
- Hull, J. C., "Options, Futures, and Other Derivatives" (2006), Prentice-Hall International
- Hyde, C. E., "Costly yield verification, moral hazard, and crop insurance contract form", Journal of Agricultural Economics, 48(3), pp.393~407 (1997)
- Jorion, P., "On jump processes in the foreign exchange and stock markets", The Review of Financial Studies, 1, pp.427~445 (1988)
- "Minnesota Climatology Working Group"[URL]
- Miranda, M. J., "Systematic risk, reinsurance, and the failure of crop insurance markets", American Journal of Agricultural Economics, 79, pp.206~215 (1997)
- Odening, M., "Analysis of rainfall derivatives using daily precipitation models: Opportunities and pitfalls", Agricultural Finance Review, 67, pp.135~156 (2007)
- Richards, T. J., "Pricing weather derivatives", American Journal of Agricultural Economics, 86, pp.1005~1017 (2004)
- Richardson, C.W., "WGEN: A model for generating daily weather variables" (1984), Agriculture Research Service
- Federal crop insurance: Background and issues, "Shields, D. A.", Congressional Research Service, ~, pp.CRS Report No. 7-5700 (2010)