Market-Based Crop Insurance Appraisal Using Whole-Farm Planning

Abstract

This paper is a study of the viability of market-based crop insurance using whole-farm planning. Utility-efficient programming (UEP) is used to determine demand on the basis of transaction costs and level of farmer's risk aversion. Farm-level data for the utility-efficient programming model were derived from a panel data set for specialised arable farms in the Netherlands. The data included information about the stochastic structure of yields and prices as well as other physical and financial parameters. The UEP results indicated under which conditions farmers were likely to participate. The results showed that the degree of risk aversion affected the optimal choice to retain yield risk or to transfer the risk by means of an insurance contract. Although the viability of market-based crop insurance is partly conditional upon the (currently uncertain) transaction costs, the fact that farmers under study were relatively wealthy reduces the chances of any substantial demand for such a market-based product. Alternative risk-coping options, such as use of credit to enhance farm-firm liquidity in adverse years, are likely to dominate a commercial crop insurance risk strategy.