Essays in agricultural business risk management




Liu, Xuan

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Insurance has been considered as a useful tool for farmers to mitigate income volatility. However, there remain concerns that insurance may distort crop production decisions. Positive mathematical programming (PMP) models of farmers’ cropping decisions can be applied to study the effect of agricultural business risk management (BRM) policies on farmers’ decisions on land use and their incomes. Before being used to examine agricultural producer responses to policy changes under the expected utility framework, the models must first be calibrated to obtain the values of the risk aversion coefficient and the cost function parameters. In chapter 2, three calibration approaches are compared for disentangling the risk parameter from the parameters of the cost function. Then, in chapter 3, to investigate the impacts on production incentives of changes in Canada’s AgriStability program, farm management models are calibrated for farms with different cost structures for three different Alberta regions. Results indicate that farmers’ observed attitudes towards risk vary with cost structure. After joining the program, all farmers alter their land allocations to some extent. The introduction of a reference margin limit (RML) in the AgriStability program under Growing Forward 2 (2013-2018), which was retained in the replacement legislation until 2020, has the most negative impact on farmers with the lowest costs. The removal of RML significantly increases the benefits to low-cost farmers. Traditional insurance products provide financial support to farmers. However, for fruit farmers, the products’ quality can be greatly affected by the weather conditions during the stage of fruit development and ripening, which may lead to quality downgrade and a significant loss in revenue with little impacts on yields. Hence, chapters 4 and 5 investigate the conceptual feasibility of using weather-indexed insurance (WII) to hedge against non-catastrophic, but quality-impacting weather conditions to complement existing traditional insurance. Prospect theory is applied to analyze a farmer’s demand for WII. The theoretical model demonstrates that an increase in the volatility of total revenue and the revenue proportion from blueberries increases the possibility of farmers’ participation in WII. On the other hand, the increase in the value loss aversion coefficient and WII’s basis risk leads to less demand for WII. To design a WII product for blueberry growers to hedge against quality risk, a quality index must be constructed and the relationship between key weather conditions, such as cumulative maximum temperature and cumulative excess rainfall, and the quality index should be quantified. The results from a partial least squares structural equation modeling (PLS-SEM) show that the above goals are achievable. Further, rainfall and temperature can be modelled via a time-series model and statistical distributions, respectively, to provide reasonable estimates for calculating insurance premia.



Agricultural business risk management, Positive mathematical programming, AgriStability, Expected utility, weather-indexed insurance, Prospect theory, Quality index, Partial least squares structural equation modeling, Monte Carlo simulation