Box-4: Insurance & Hedging Two Ingredients fora Risk Management Recipe
Insurance & Hedging Two Ingredients fora Risk Management Recipe
Randy Schnepf, Richard Heifner, and Robert Dismukes, Agricultural Economic Services of USDA
For a farm with high yield variability and a weak natural hedge, crop yield or revenue insurance alone, provides substantial revenue risk reduction. Forward pricing combined with insurance - crop yield or revenue insurance, further reduces risk, although the gains are small, relative to the risk- reduction gains of insurance alone. Forward pricing alone, without crop yield or revenue insurance provides relatively little risk reduction, because price variability contributes less to revenue variability than does yield variability. Without crop yield or revenue insurance, the revenue risk stemming from yield variability, greatly reduces the effectiveness of forward pricing.
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