Agricultural Finance Review

The impact of the average crop revenue election (ACRE) program on the effectiveness of crop insurance : Table of Contents

Gabriel J. Power, Dmitry V. Vedenov, Sung-wook Hong — Sat Nov 07 08:00:18 GMT 2009

Abstract:
Purpose – The purpose of this paper is to analyze the effect of the 2008 Farm Bill's average crop revenue election (ACRE) program on the risk-reducing effectiveness of crop insurance products. Design/methodology/approach – Three crop/region combinations are examined, representing regions with both high and low price-yield correlation regions. Actual production history (APH) and crop revenue coverage (CRC) insurance instruments are considered separately under the 2002 Farm Bill and under ACRE. Monte Carlo simulations, combined with the copula approach, are used to simulate net wealth distributions and to calculate the corresponding expected utilities. The outcomes are evaluated using certainty-equivalent wealth based on different risk premium assumptions. Findings – Crop insurance contracts appear to be more effective under the 2002 Farm Bill than under ACRE, especially for crops characterized by low yield-price correlation. CRC insurance is found to be more effective than APH insurance for all crop/region combinations considered. Research limitations/implications – The paper only considers a static framework and farm-level insurance contracts. Further research could investigate how ACRE affects decoupled income support, whether the results change if Supplemental Revenue Assistance is included, or how different the outcomes might be for multiple-crop farms. Practical implications – The results suggest that risk-reducing effectiveness decreases under ACRE and that no reasonable adjustment to APH base price can make APH competitive with CRC for any crop/regions considered. Originality/value – The risk-reducing effectiveness of the 2008 Farm Bill's ACRE program is analyzed, and as a methodological contribution the copula approach is used to model the multivariate distribution of yields and prices.

A relaxed lattice option pricing model: implied skewness and kurtosis : Table of Contents

Dasheng Ji, B. Wade Brorsen — Sat Nov 07 08:00:18 GMT 2009

Abstract:
Purpose – The purpose of this paper is to develop an option pricing model applicable to US options. The lognormality assumption that has typically been imposed with past binomial and trinomial option pricing models is relaxed. The relaxed lattice model is then used to determine skewness and kurtosis of distributions of futures prices implied from option prices. Design/methodology/approach – The relaxed lattice is based on Gaussian quadrature. The markets studied include corn, soybeans, and wheat. Skewness and kurtosis are implied by minimizing the squared deviations of actual option premia from predicted premia. Findings – Positive skewness is the major source of nonnormality, but both skewness and kurtosis are important as the trinomial model that considers kurtosis has greater accuracy than the binomial model. The out-of-sample forecasting accuracy of the relaxed lattice models is better than the Black-Scholes model in most, but not all cases. Research limitations/implications – The model might benefit from using option prices from more than one day. The implied skewness and kurtosis were quite variable and using more data might reduce this variability. Practical implications – Empirical results mostly show positive implied skewness, which suggests extreme price rises were more likely than extreme price decreases. Originality/value – The relaxed lattice is a new model and the results about implied higher moments are new for these commodities. There are competing models available that should be able to get similar accuracy, so one key advantage of the new approach is its simplicity and ease of use.

Factors affecting precautionary savings of self-employed farm households : Table of Contents

Ashok K. Mishra, Hung-Hao Chang — Sat Nov 07 08:00:18 GMT 2009

Abstract:
Purpose – The purpose of this paper is to empirically investigate the effects of farm income variability, farm size, and other socio-demographic characteristics on the precautionary saving behavior of farm households and to estimate the influences of the identified factors on the amount of savings by self-employed farm households. Design/methodology/approach – Using 2003 Agricultural Resource Management Survey (ARMS) data and a Double-Hurdle procedure, the likelihood and the amount of savings by farm households are estimated. Findings – An important empirical finding of this study is that variability in income plays an important role in explaining precautionary savings of US farm households. Findings suggest that farm households facing higher income risk save more and accumulate more wealth. It is indicated that several farm, operator, household, and demographic attributes contribute to the precautionary savings of farm households. In particular, results show that educational attainment by operator and spouses have positive impact on the decision to save. In addition, results from this study show that farms that specialize in cash grain are likely to have precautionary savings. Practical implications – Farm households today are virtually indistinguishable from non-farm households in their levels of income and diversity of employment. As a result, government policies that influence general economic conditions have much more profound impacts on farm families. Federal support of farm income warrants continued scrutiny. This paper shows that greater income uncertainty increases savings and wealth of farm households. Therefore, farm policies that reduce income variability or uncertainty will have an impact on precautionary savings and wealth of farm households. Originality/value – Several studies have investigated savings of households; however, these studies are limited to entire US population, older Americans, or non-self-employed individuals in the USA. Little is known about the savings behavior of self-employed US farm households owing to a lack of household survey data and because of the complex relationship between the farm household and farm business in terms of resource allocation (both capital and labor).

Risk-adjusted efficiency and risk aversion in the agricultural banking industry : Table of Contents

Daniel M. Settlage, Paul V. Preckel, Latisha A. Settlage — Sat Nov 07 08:00:18 GMT 2009

Abstract:
Purpose – The purpose of this paper is to examine the performance of the agricultural banking industry using both traditional and risk-adjusted non-parametric efficiency measurement techniques. In addition to computing efficiency scores, the risk preference structure of the agricultural banking industry is examined. Design/methodology/approach – The paper used data envelopment analysis (DEA) to examine the efficiency of agricultural banks in the year 2001. Standard cost efficiency is computed and compared to both profit and risk-adjusted profit efficiency scores. The risk-adjustment is a modification of traditional DEA wherein firm preferences are represented via a mean-variance criterion. The risk-adjusted technique also provides estimates of firm level risk aversion. Findings – Results from the traditional approach that does not account for risk indicate a low degree of efficiency in the banking industry, while the risk-adjusted approach indicates banks are much more efficient. On average, 77 percent of the inefficiency identified by the standard DEA formulation is actually attributable to risk averse behavior by the firm. In addition, most banks appear to be substantially risk averse. Research limitations/implications – The risk-adjusted DEA technique used in this study should be applied to other, diverse data sets to examine its performance in a broader context. Practical implications – Results from this study support the idea that traditional DEA methods may mischaracterize the level of efficiency in the data if agents are risk averse. In addition, the paper outlines a practical method for deriving firm level risk aversion coefficients. Originality/value – This paper sheds light on the agricultural banking industry and illustrates the power of a new efficiency and risk analysis technique.

Upper Midwest dairy farm revenue variation and insurance implications : Table of Contents

Christopher A. Wolf, J. Roy Black, Joleen C. Hadrich — Sat Nov 07 08:00:18 GMT 2009

Abstract:
Purpose – The purpose of this paper is to examine the sources and magnitude of variation in accrual adjusted gross farm revenue and farm revenue net of feed purchases on Michigan dairy farms representative of Upper Midwest dairy farms. The paper aims to assess whether adjusted gross revenue-type insurance instruments meet insurability conditions when applied to dairy farms. Design/methodology/approach – Accrual adjusted dairy farm revenue and revenue net of feed purchased from Michigan dairy farm panel data from 1995 through 2006 were detrended and summarized. Variance decomposition was used to identify sources of variation in adjusted gross revenue and adjusted gross revenue less feed purchases. In-sample insurance premiums were estimated and Monte Carlo simulations were used to adjust these premiums for out-of-sample considerations. Findings – Milk price variation was the largest source of variation while milk production per cow varied little. Farms with smaller herds and those with larger percentages of farm revenue from crop sales had higher relative revenue variability and would trigger a higher frequency of indemnities under a whole farm revenue insurance contract. Research limitations/implications – Because the data analyzed conclude in 2006, the volatility of the past couple of years is not reflected. Therefore, researchers are encouraged to test the proposed insurance feasibility further with more recent data. Practical implications – The paper addresses considerations for the development and commercialization of a feasible dairy revenue insurance instrument. Originality/value – This paper fulfils a need to understand magnitude and source of revenue variation on dairy farms and how insurance might mitigate negative consequences of this variation.

Women farmers' access to credit from rural banks in Ghana : Table of Contents

Mamudu A. Akudugu, Irene S. Egyir, Akwasi Mensah-Bonsu — Sat Nov 07 08:00:18 GMT 2009

Abstract:
Purpose – The purpose of this paper is to examine women farmers' access to credit from rural banks (RBs) in the Upper East region of Ghana. The paper examines the nature of credit supply by the RBs to their customers and the proportion that goes to women over a ten year period. It proposes the modelling of socio-economic, technical and institutional factors influencing women farmers' access to credit from financial institutions in general and rural banks (RBs) in particular. The paper aims to expand the frontiers of rural and agricultural financing as well as the integration of gender interest in the financial sectors of developing countries. Design/methodology/approach – In total, 200 women farmers were randomly selected and information on socio-economic, technical and institutional issues solicited from them. Ratio analyses were carried out and the logistic regression used to model the socio-economic, technical and institutional factors that have influence on access to credit from RBs by women farmers. Findings – The paper provides empirical evidence of close gender parity in terms of credit supply by RBs in Ghana. About 44 per cent of the credit portfolios of RBs in Ghana go to women and the remaining 56 per cent goes to men. Education, application procedures, access to land, income level, farm size, membership to economic associations, savings, type of crop grown, interest rate and distance to RBs are the socio-economic, technical and institutional factors that influence women farmers' access to credit. Research limitations/implications – The paper is limited to only women farmers. There is the need for further research that considers men and women so as to establish whether or not there is gender insensitivity by financial institutions in Ghana and other developing countries. Practical implications – This paper provides empirical implications for the development of a vibrant financial sector in developing countries that provide equal access to men and women, rural and urban dwellers as well as actors in the formal and informal sectors. Originality/value – This paper brings to light the issues of access to productive resources such as production credit by women in developing countries, particularly Ghana.