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Right arrow D81 - Criteria for Decision-Making under Risk and Uncertainty
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European Review of Agriculture Economics Vol 30 (2) (2003) pp.217-239
© 2003 Oxford University Press and the Foundation for the European Review of Agricultural Economics

Hedging price risk in the presence of crop yield and revenue insurance

Olivier Mahul

INRA, Rennes, France

Summary

The demand for hedging against price uncertainty in the presence of crop yield and revenue insurance contracts is examined for French wheat farms. The rationale for the use of options in addition to futures is first highlighted through the characterisation of the first-best hedging strategy in the expected utility framework. It is then illustrated using numerical simulations. Futures and crop yield insurance are shown to be complements, whereas futures and crop revenue insurance are substitutes. The presence of options induces the insured producer to adopt a more speculative position on the futures market. Futures and options would improve the producer's welfare, in terms of willingness to receive.

Keywords: crop insurance, hedging, producer welfare, simulation


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