ECONOMIC IMPACT OF SCAB WITH ALTERNATIVE RISK MANAGEMENT STRATEGY: THE CASE OF CROP QUALITY INSURANCE IN BARLEY

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ECONOMIC IMPACT OF SCAB WITH ALTERNATIVE RISK MANAGEMENT STRATEGY: THE CASE OF CROP QUALITY INSURANCE IN BARLEY
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  Agribusiness & Applied Economics Report No. 498September 2002 ECONOMIC IMPACT OF SCAB WITH ALTERNATIVERISK MANAGEMENT STRATEGY: THE CASE OFCROP QUALITY INSURANCE   IN BARLEY E. William Nganje Napoleon M. TiapoWilliam W. WilsonDepartment of Agribusiness and Applied EconomicsAgricultural Experiment StationNorth Dakota State UniversityFargo, ND 58105-5636  Acknowledgments The authors are grateful to Paul Schwarz, Professor of Cereal Science, for providing dataon vomitoxin levels by crop reporting districts and states; and Camilo Sarmiento, AndrewSwenson, and Bruce Dahl, Department of Agribusiness and Applied Economics, North DakotaState University, for collaboration and comments to this project. This research was supported bythe U.S. Wheat and Barley Scab Initiative, USDA-ARS Project Number 0102-NG-83. Theopinions and conclusions expressed herein are those of the authors and do not necessarily reflectthe views of the funding agencies.We would be happy to provide a single copy of this publication free of charge. You canaddress your inquiry to: Carol Jensen, Department of Agribusiness and Applied Economics, North Dakota State University, P.O. Box 5636, Fargo, ND, 58105-5636, Ph. 701-231-7441, Fax701-231-7400, e-mail cjensen@ndsuext.nodak.edu . This publication is also availableelectronically at this web site: http://agecon.lib.umn.edu/. NDSU is an equal opportunity institution. NOTICE: The analyses and views reported in this paper are those of the author(s). They are not necessarilyendorsed by the Department of Agribusiness and Applied Economics or by North Dakota StateUniversity. North Dakota State University is committed to the policy that all persons shall have equal accessto its programs, and employment without regard to race, color, creed, religion, national srcin, sex, age,marital status, disability, public assistance status, veteran status, or sexual orientation.Information on other titles in this series may be obtained from: Department of Agribusiness andApplied Economics, North Dakota State University, P.O. Box 5636, Fargo, ND 58105. Telephone: 701-231-7441, Fax: 701-231-7400, or e-mail: cjensen@ndsuext.nodak.edu.Copyright © 2002 by William Nganje and William Wilson. All rights reserved. Readers maymake verbatim copies of this document for non-commercial purposes by any means, provided that thiscopyright notice appears on all such copies.  Table of Contents PageList of Tables ...............................................................iiList of Figures...............................................................iiAbstract....................................................................iiiIntroduction..................................................................1Crop Insurance and FHB Risk....................................................2The Model...................................................................5The Demand for Insurance.................................................6The Supply of Insurance..................................................7Data and Simulation Procedure...................................................9Simulation Procedure.....................................................9Results.....................................................................10Effects of FHB Risk on Equilibrium Coverage Levels and Premiums..............11 No Reinsurance Case....................................................11Reinsurance Case with No Subsidy.........................................12Subsidized Reinsurance..................................................13Sensitivity of Equilibrium Coverage Level and Premiums toFarmers’ Risk Aversion ( 8 ).........................................13Sensitivity of Equilibrium Coverage Level and Premiums to Cost.................13Conclusion and Policy Implications..............................................15References..................................................................17Appendix...................................................................19  ii List of Tables Table No. Page 1Correlation of Scab Risks Across CRDs and North Dakota......................10 2Equilibrium Coverage Levels and Premiums Per Acre for MPCI and IP with and without FHB Risks............................................12 Lists of Figures Figure No. Page 1Revenue Loss and Insurable MPCI and IP Loss for an Average  North Dakota Barley Grower by CRDs and Year...............................4 2Effects of Farmers’ Risk Aversion on MPCI and IP Coverage Levels and Premiums....................................................14 3Impact of Cost on Equilibrium Coverage Levels and Premiums..................15  iii Abstract Managing quality risks, especially grain quality, has been a challenge facing farmers,grain merchandisers, and policymakers for many years. With the advent of genetically modifiedorganisms (GMOs), food safety, and identity preservation, this is even more challenging today. In this paper, an equilibrium crop insurance model was developed and used to analyze the impactof quality risks on equilibrium coverage levels and risk premiums that suppliers of insurance and barley producers would be willing to provide when yield and revenue insurance instrumentsexplicitly incorporate quality risks. The asking price concept and sensitivity analysis were usedto evaluate farmers’ behavior after they purchase crop quality insurance and to provide guidanceand direction in the development of risk-efficient quality insurance instruments. Key Words : crop insurance, equilibrium coverage levels, Fusarium Head Blight, premiumrates, quality risks, risk aversion
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