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The demand for commodity insurance by developing country agricultural producers - theory and an application to cocoa in Ghana

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  • Sarris, Alexander

Abstract

The author considers the benefit to agricultural producers of commodity price insurance that provides in every year-but in advance of the resolution of production and price uncertainty-a minimum price for a fixed or variable portion of production. Under the assumption that producers do not change their long term production and income diversification pattern, the author suggests a theoretical framework that leads to explicit formulas of the benefit in providing this type of insurance. He shows that this benefit depends not only on the actuarially fair insurance premium, but also on household-specific factors that depend on the attitudes to risk, the consumption smoothing parameters, and the household-specific exposures to income risks. The author applies the theoretical framework for Ghana, using the Ghana Living Standards Survey data to specify various classes of cocoa-producing households and monthly price data for both domestic and international prices, to formulate appropriate models for ascertaining price risks faced by producers. The author gives empirical estimates of the actuarially fair premium, and shows that they are smaller than market-based put option prices from organized exchanges. The overall benefit in providing minimum price insurance to households, however, turns out to be substantially higher than the actuarially fair premiums and the market-based put option prices. This is due to both the magnitude of the uncertainties facing the households, as well as their risk and consumption smoothing behavior.

Suggested Citation

  • Sarris, Alexander, 2002. "The demand for commodity insurance by developing country agricultural producers - theory and an application to cocoa in Ghana," Policy Research Working Paper Series 2887, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2887
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    References listed on IDEAS

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    Cited by:

    1. Michael R. CARTER & Alain de JANVRY & Elisabeth SADOULET & Alexandros SARRIS, 2014. "Index-based weather insurance for developing countries: A review of evidence and a set of propositions for up-scaling," Working Papers P111, FERDI.
    2. Thiagu Ranganathan & Sarthak Gaurav & Ashish Singh, 2016. "Demand for Price Insurance among Farmers in India: A Choice Experiment-based Approach," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 10(2), pages 198-224, May.
    3. Boyd, Chris M. & Bellemare, Marc F., 2022. "Why not insure prices? Experimental evidence from Peru," Journal of Economic Behavior & Organization, Elsevier, vol. 202(C), pages 580-631.
    4. Lampe, Immanuel & Würtenberger, Daniel, 2020. "Loss aversion and the demand for index insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 678-693.
    5. George Rapsomanikis & Alexander Sarris, 2008. "Market Integration and Uncertainty: The Impact of Domestic and International Commodity Price Variability on Rural Household Income and Welfare in Ghana and Peru," Journal of Development Studies, Taylor & Francis Journals, vol. 44(9), pages 1354-1381.
    6. George Rapsomanikis & Alexander Sarris, 2006. "The Impact of Domestic and International Commodity Price Volatility on Agricultural Income Instability: Ghana, Vietnam and Peru," WIDER Working Paper Series DP2006-04, World Institute for Development Economic Research (UNU-WIDER).
    7. Zant, Wouter, 2008. "Hot Stuff: Index Insurance for Indian Smallholder Pepper Growers," World Development, Elsevier, vol. 36(9), pages 1585-1606, September.
    8. Vasco Molini & Michiel Keyzer & Bart van den Boom & Wouter Zant & Nicholas Nsowah-Nuamah, 2010. "Safety Nets and Index-Based Insurance: Historical Assessment and Semiparametric Simulation for Northern Ghana," Economic Development and Cultural Change, University of Chicago Press, vol. 58(4), pages 671-712, July.
    9. Faziatul Amillia Mohamad Basir & Azreen Roslan & Nur Nazurah Binti Zakaria & Noor Qhaireena Binti Mohd Nasron Ooi & Ratna Anggraini, 2024. "Determinants of Smallholder Farmers' Awareness of Crop Insurance in Kedah, Malaysia," Information Management and Business Review, AMH International, vol. 16(1), pages 229-237.
    10. Kwame Adom, 2015. "Recognizing The Contribution Of Female Entrepreneurs In Economic Development In Sub-Saharan Africa: Some Evidence From Ghana," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 20(01), pages 1-24.
    11. Nancy McCarthy, 2003. "Demand for rainfall-index based insurance: a case study from Morocco," EPTD discussion papers 106, International Food Policy Research Institute (IFPRI).
    12. Immanuel Lampe & Daniel Würtenberger, 2019. "Loss Aversion And The Demand For Index Insurance," Working Papers on Finance 1907, University of St. Gallen, School of Finance.
    13. Thiagu Ranganathan & Sarthak Gaurav & Ashish Singh, 2014. "Using choice experiments, we estimate the willingness to pay for price insurance among cotton and paddy farmers in the Indian state of Gujarat. We also identify the interactions between the demand for," IEG Working Papers 340, Institute of Economic Growth.
    14. Würtenberger, Daniel, 2019. "Index Based Insurance in Developing Countries: Rational Neglect?," EconStor Preprints 206408, ZBW - Leibniz Information Centre for Economics.
    15. Pan, Suwen & Fang, Cheng & Rejesus, Roderick M., 2008. "Food Calorie Intake under Grain Price Uncertainty: Evidence from Rural Nepal," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6198, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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