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Revenue risk management, risk aversion and the use of Livestock Gross Margin for Dairy Cattle insurance

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  • Valvekar, Mayuri
  • Chavas, Jean P.
  • Gould, Brian W.
  • Cabrera, Victor E.

Abstract

The Livestock Gross Margin Insurance for Dairy Cattle is a federally reinsured insurance program that enables US dairy producers to establish minimum levels of milk income net of feed cost. Given the structure of this program there are an infinite number of possible contract designs based on the choice of deductible level and proportion of production insured. Adding to this complexity, producers vary in their risk preferences, which affect the incentive to insure their margin. It is unclear as to how producers may adopt this program for revenue risk management. This paper investigates the interplay between producer risk preferences, contract design and the subsidization of premium in determining program coverage. We undertook this analysis within an expected utility framework. Optimal contracts under different rates of constant relative rate of risk aversion and subsidies were analyzed using a nonlinear optimization model. We found that total optimal coverage increased significantly with the level of risk of aversion at lower deductibles but as deductible level increased, the level of risk aversion had a lesser impact on total optimal coverages. As expected, at the same deductible and risk aversion levels, inclusion of a premium subsidy increased the total optimal coverage.

Suggested Citation

  • Valvekar, Mayuri & Chavas, Jean P. & Gould, Brian W. & Cabrera, Victor E., 2011. "Revenue risk management, risk aversion and the use of Livestock Gross Margin for Dairy Cattle insurance," Agricultural Systems, Elsevier, vol. 104(9), pages 671-678.
    • Handle: RePEc:eee:agisys:v:104:y:2011:i:9:p:671-678
    DOI: 10.1016/j.agsy.2011.07.004
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    Cited by:

    1. Aleksandra Figurek & Ernst Stadlober & Vojo Radić, 2017. "Evaluating the Business Results of Dairy Farms in Bosnia and Herzegovina," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 6(4), pages 244-252, November.
    2. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Livestock Gross Margin Insurance for Dairy: Designing Margin Insurance Contracts to Account for Tail Dependence Risk," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124718, Agricultural and Applied Economics Association.
    3. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Mean-reversion in Income over Feed Cost Margins:Evidence and Implications for Managing Margin Risk by U.S. Dairy Producers," Staff Papers 132379, University of Minnesota, Department of Applied Economics.

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