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| Beef there are more options for you to build your risk management strategy. I am sorry for taking a poetic license to your post but you raised some excellent points that bear further development.
I have been researching alternative risk management tools and strategies. I chose to share some of my research with you that you might find some benefit in knowing that your choice was based on exhaustive research of all options. I do not share the view that there is only one solution to a problem. Federal crop insurance is a great tool for those situations where it solves a problem. Crop-hail is also a great tool and the companies have done a great job in keeping thier product relevant.
Likely the greatest risk facing farmers today is price volitality and yield volitality is a dwarf in measure. But to manage price risk there is an assumption of yield. We are blessed with great soils, good weather and great genetics in addition to our own crop production skills.
Beef, your presentation points out several risk management evaluation criteria. First, the spread between nominal and effective insurance coverage. That simply is the difference between what you buy and what the real/effective coverage is on your farm. For instance you cited the 10 year APH. Well while the Kansas folks have decling yields due to a series of recent drought, the glaciated areas of the 3I's experienced incling yields. The inequity is an insured who is only required to used 4 years production history has an advantage to those long time policy holders that must use their history. Even worse if you alternate crops, then you have to include 20 years history.
Also you illuded to the "basis" risk between the county level programs (systemic) risk and your farm level exposure (idosyncratic risk). That a $10 dollar word for farm level attributes like soils, planting date, isolated floods and the like. Also used in the evaluation of individual versus county products as measure by correlation. This topic is a two dayer discussion and three if Barnaby and Dr. Roy Black are involved!!
So what are the availabe alternatives? Well here are some private sector products that I know about. I do not proclaim that this is a complete listing. If you know of others please share them as I am interested in more tools.
1) Weather derivatives. I'm sure that you've heard of this one. Common use is rainfall at the county fair that pays when an event is cancelled. This is emerging market for agriculture. You are establishing specific weather triggers and payment when the strike is attained. The challenge with this tool is describing the specific weather event that triggers what you define as a loss. My choice weather events are June rainfall and July KDD's.
2) Yield swaps. This is a new tool that deals with banded yield beginning at 90% APH and goes 15% deep on the yield loss. So the yield band is 90 - 75%. Strict underwriting that includes a long yield history that follows the RMA's APH rules. Also it appears to be only available for corn and beans in the glaciated 3I's. Cost is in the $30 per acre range.
3) Price Hedge. I just found out about this tool. It is OTC and underwritten by only one company on the west coast. It also has requirements. Those that I am aware of are 50K minumum bushels, financial worhtyness (underwrited the credit risk), assignment of insurance indemnity, limited to 100% of insurance gurantee for 08, 50% for 09 and 25% for 2010. This product allows for hedging with open delivery point. Given this market, it appears to have value in a risk management plan.
Forgottonian
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Beef followup
