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Rental arrangements and risk mitigation of crop insurance and marketing

Author

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  • Nicholas D. Paulson
  • Gary D. Schnitkey
  • Bruce J. Sherrick

Abstract

Purpose - This study seeks to evaluate the impacts of land rental arrangements on crop insurance and grain marketing decisions. Design/methodology/approach - The analysis is conducted in an Illinois corn‐soybean setting in which optimal marketing and crop insurance decisions are estimated for a risk‐averse producer under typical cash rent and share rent agreements using numerical simulation methods. Findings - Results indicate that the availability of crop insurance impacts the intensity of use of put options under both cash and share rent arrangements. Similar to previous work in this area, revenue insurance is found to cause a substitution away from marketing using put options, while yield insurance is complementary to price risk management alternatives. However, while insurance and marketing play a role under both types of land tenure arrangements, shifting from a cash rent to a share rent agreement provides a relatively greater degree of risk reduction. Practical implications - The results suggest that additional research is needed to explain trends in land rental contracts. Crop insurance and other federal programs may provide incentives to switch from share leases to cash rent arrangements. Changes to the design of these programs could facilitate risk management for producers more efficiently. Originality/value - The unique contribution of this study is the comparison of insurance and marketing decisions under both cash rent and share rent agreements for crop land.

Suggested Citation

  • Nicholas D. Paulson & Gary D. Schnitkey & Bruce J. Sherrick, 2010. "Rental arrangements and risk mitigation of crop insurance and marketing," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(3), pages 399-413, November.
    • Handle: RePEc:eme:afrpps:v:70:y:2010:i:3:p:399-413
    DOI: 10.1108/00021461011088512
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    References listed on IDEAS

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    1. Babcock, Bruce A. & Choi, E. Kwan & Feinerman, Eli, 1993. "Risk And Probability Premiums For Cara Utility Functions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(1), pages 1-8, July.
    2. Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
    3. Coble, Keith H. & Heifner, Richard G. & Zuniga, Manuel, 2000. "Implications Of Crop Yield And Revenue Insurance For Producer Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(2), pages 1-21, December.
    4. Peter J. Barry & LeeAnn M. Moss & Narda L. Sotomayor & Cesar L. Escalante, 2000. "Lease Pricing for Farm Real Estate," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 22(1), pages 2-16.
    5. Joseph A. Atwood & Myles J. Watts & Alan E. Baquet, 1996. "An Examination of the Effects of Price Supports and Federal Crop Insurance Upon the Economic Growth, Capital Structure, and Financial Survival of Wheat Growers in the Northern High Plains," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 212-224.
    6. Keith H. Coble, 2004. "The joint effect of government crop insurance and loan programmes on the demand for futures hedging," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 31(3), pages 309-330, September.
    7. Barnett, Barry J. & Black, J. Roy & Hu, Yingyao & Skees, Jerry R., 2005. "Is Area Yield Insurance Competitive with Farm Yield Insurance?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 30(2), pages 1-17, August.
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    Cited by:

    1. Douglas W. Allen & Allison Borchers, 2016. "Conservation Practices and the Growth of US Cash Rent Leases," Journal of Agricultural Economics, Wiley Blackwell, vol. 67(2), pages 491-509, June.
    2. Paulson, Nicholar, 2012. "Revisiting Flexible Cash Leases," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2012, pages 1-13.
    3. Paulson, Nick & Schnitkey, Gary, 2014. "Farmland Value and Rental Rate Behavior in Illinois," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2014, pages 1-14.

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