Stochastic Analysis of Margin Protection (MP) Crop Insurance in Arkansas Rice Production

Rice is an irrigated crop, and irrigated crops are more insulated against yield risk than non-irrigated crops. However, rice is largely dependent on energy related inputs like fuel and fertilizer and suffers from systemic risks caused by increasing energy related input costs. The USDA Risk Management Agency (RMA) is making available a new insurance product to rice producers in 2016 called Margin Protection (MP). Margin Protection provides coverage against an unexpected decrease in operating margin resulting from increased input costs. Thls study used simulation to evaluate stochastic indemnities generated by MP at various coverage levels ranging from 70 to 90 percent for three major rice counties in Arkansas. Multivariate empirical distributions of county yields, margin rice prices and prices for allowed margin inputs were simulated. The likelihood of receiving indemnities under MP was small for 70 and 75 percent coverage levels based on our simulated results. Indemnity probabilities were 0.8, 5.2, and 18 percent for Arkansas County at MP coverage levels of 80, 85, and 95 percent, respectively. Indemnity probabilities for Poinsett and Desha Counties were higher at the 80, 85, and 90 percent MP coverage levels (6, 18.8, and 31.9 percent respectively for Poinsette; 6.6, 16.8, and 34.6 percent respectively for Desha). The higher probabilities of indemnities in Poinsett and Desha counties may be due to higher variability in yields for those counties.