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Modeling Crop prices through a Burr distribution and Analysis of Correlation between Crop Prices and Yields using a Copula method

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  • Tejeda, Hernan A.
  • Goodwin, Barry K.

Abstract

The U.S. crop insurance program has major policy implications in terms of resource allocations, with government subsidies playing a major role. Efficient implementation of crop revenue insurance contracts requires accurate measures of risk for both crop prices and yields. In addition, rating methods are to consider the natural hedge between prices and yields. Empirical evidence shows that crop prices tend to be positively skewed with fat tails. This paper analysis is two-fold. It first studies crop prices using a Burr distribution, with parameters that capture skewness and kurtosis (fat tails), providing a better fit than current normal or log-normal distributions being used. It then uses a copula method to measure the correlation between crop prices and yields, for the study of crop revenue insurance. Results indicate a smaller probability of payout than present methods being used, having direct implications on the design and rating of crop and revenue insurance contracts.

Suggested Citation

  • Tejeda, Hernan A. & Goodwin, Barry K., 2008. "Modeling Crop prices through a Burr distribution and Analysis of Correlation between Crop Prices and Yields using a Copula method," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6061, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea08:6061
    DOI: 10.22004/ag.econ.6061
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    References listed on IDEAS

    as
    1. Vincent H. Smith & Barry K. Goodwin, 1995. "The Economics of Crop Insurance and Disaster Aid," Books, American Enterprise Institute, number 53374, September.
    2. Edward Frees & Emiliano Valdez, 1998. "Understanding Relationships Using Copulas," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(1), pages 1-25.
    3. Barry K. Goodwin, 2001. "Problems with Market Insurance in Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 643-649.
    4. Barry K. Goodwin & Ligia A. Vado, 2007. "Public Responses to Agricultural Disasters: Rethinking the Role of Government," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 55(4), pages 399-417, December.
    5. Barry K. Goodwin & Alan P. Ker, 1998. "Nonparametric Estimation of Crop Yield Distributions: Implications for Rating Group-Risk Crop Insurance Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 139-153.
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    Citations

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    Cited by:

    1. Ying-Erh Chen & Barry K Goodwin, 2015. "Policy Design of Multi-Year Crop Insurance Contracts with Partial Payments," PLOS ONE, Public Library of Science, vol. 10(12), pages 1-15, December.
    2. Xiaodong Du & David A. Hennessy, 2012. "The planting real option in cash rent valuation," Applied Economics, Taylor & Francis Journals, vol. 44(6), pages 765-776, February.
    3. Kobus, Paweł, 2013. "Modelling joint distribution of crop plant yields and prices with use of a copula function," Problems of World Agriculture / Problemy Rolnictwa Światowego, Warsaw University of Life Sciences, vol. 13(28), pages 1-10, December.
    4. Osama Ahmed & Teresa Serra, 2015. "Economic analysis of the introduction of agricultural revenue insurance contracts in Spain using statistical copulas," Agricultural Economics, International Association of Agricultural Economists, vol. 46(1), pages 69-79, January.
    5. Rana Muhammad Usman & Muhammad Ahsan ul Haq, 2019. "Some Remarks on Odd Burr III Weibull Distribution," Annals of Data Science, Springer, vol. 6(1), pages 21-38, March.
    6. Luckstead, Jeff & Devadoss, Stephen, 2016. "Implication of 2014 Farm Policies for Wheat Production," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235362, Agricultural and Applied Economics Association.
    7. Zaura Fadhliani & Jeff Luckstead & Eric J. Wailes, 2019. "The impacts of multiperil crop insurance on Indonesian rice farmers and production," Agricultural Economics, International Association of Agricultural Economists, vol. 50(1), pages 15-26, January.
    8. Walters, Cory G. & Preston, Richard, 2013. "Revenue Risk, Crop Insurance and Forward Contracting," 2013 AAEA: Crop Insurance and the Farm Bill Symposium 156821, Agricultural and Applied Economics Association.

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