Evaluating crop and revenue insurance products as risk management tools for Texas cotton producers

Abstract

Information on the efficacy of various crop and revenue insurance products on Texas cotton producers is not currently available. It is not known why Texas cotton producers purchase so little insurance above catastrophic levels. It could be that the current insurance products are not meeting the needs of cotton producers, or it could be that producers are simply unwilling to pay insurance premiums. In order to better understand the different crop insurance policies, the effects of multiple-peril crop insurance and crop revenue coverage on the net returns of the producer needed to be analyzed. The general objective of this study was to develop an empirical means and illustrate its application in evaluating the cost effectiveness of various crop and revenue insurance products as risk management tools for cotton producers in selected regions of Texas.

The current study utilized the procedure developed by Ramirez (1997) and expanded by Ramirez (1999) to estimate and simulate cotton yield and price distributions. The simulated yield and price series obtained from these procedures were used to develop an empirical procedure to analyze the cost effectiveness of alternative crop insurance products in terms of increasing producer net returns and minimizing variation in net returns. This procedure was then illustrated using a regional level analysis to represent an overall comparison of crop and revenue insurance products and a farm level analysis to compare crop and revenue insurance products for an individual producer.