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The Marketing and Crop Insurance Risk Model: Show Them the Data

Gary Schnitkey

Summary

We have developed a methodology for teaching crop insurance to farmers based on a series of crop insurance payments for alternative crop insurance products. This series is based on historical prices and yields stated in terms of the current year’s conditions. Using this approach, farmers can compare insurance payments across products and evaluate the net costs of alternative insurance products. A series of historical gross revenues, adjusted to current year conditions, allows risk of alternative products to be compared. Farmers have judged the approach as useful, likely because of the transparency of the approach and because farmers are familiar with judging product performance based on historical results.

The methodology is implemented in the Marketing and Crop Insurance Risk Model. This model is a Microsoft Excel spreadsheet that is part of the FAST series. It is available for download from farmdoc (www.farmdoc.uiuc.edu). The model has built into it a series of farm yields from 1972 through 2004 for example farms in each county of Illinois. Farmers can use these series to do analysis or they can modify the series to more accurately represent their farm situations. In addition to crop insurance, users can evaluate the risk-return characteristics of marketing strategies including forward contracting and trading options contracts. For combinations of crop insurance and marketing strategies, the model calculates average revenue, lowest revenue, and probabilities of revenue below benchmarks. In so doing, users can get a feel for the risk-return tradeoffs of various strategies.

Details

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