When yields are relatively less variable, crop yield insurance alone affords some risk reduction,
but provides much greater risk reduction, when combined with forward pricing, particularly forward cash contracting. Since price variability predominates when yield variability is low, cash forward contracting, which eliminates both price-level and basis risk, is a very attractive option to a producer whose primary concern is minimizing risk.
With low yield variability and a strong natural hedge, forward pricing strategies are more effective, than either crop or revenue insurance. Under a strong natural hedge, low yields are generally associated with high prices, thus moderating overall revenue variability, even without insurance or forward pricing. Still, crop revenue insurance, when combined with forward pricing,
can provide additional marginal risk reduction.
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