Empirical Yield Probability Distributions, De Minimus Yields, and Insurance Incentives in Wheat
Alex Offerdahl, Billings, Montana, defended his thesis, “Empirical Yield Probability Distributions, De Minimus Yields, and Insurance Incentives in Wheat,” Thursday, April 28, 2005. Offerdahl is an Applied Economist for an agricultural consulting firm.
Offerdahl, a Conrad, Montana, native, assessed the incentives created by the current crop insurance program relative to De Minimus yields – when producers have poor production years, like those characterized by severe drought, and the value of production standing in a field may fall below the cost of harvesting the crop. He also examined developing a concept for an insurance product to cover De Minimus yield risk, deriving risk-neutral rates for the insurance product, assessing the additional cost of such a product to producers, and assessing producer’s willingness to consider purchasing such a product.
The results of the research found that unintentional disincentives are indeed created by the current crop insurance program. Research found that rates could be derived for an optional “add-on” policy to cover De Minimus yield risk that would be relatively inexpensive (less than $0.30 per acre) in most counties. Results concluded there is reason to suspect that some producers would be willing to buy a De Minimus yield product at the quoted rates, depending on their level of risk adversity.
“In the last several years, farmers and ranchers have endured record-breaking drought across wide swaths of the northern wheatbelt,” Offerdahl said. “Crop insurance has kept a lot of these producers in business. This drought has raised new issues that may have never come to light under normal conditions. In this research, the goal was to examine the incentives created by the current crop insurance program and to develop an add-on policy to cover the added risk associated with exceptional weather phenomenon.”
Terry Kastens, chair of the faculty committee that reviewed the research said, “Variants of crop insurance products for farmers routinely crop up. But, the product proposed by Alex is something I’ve never seen before.”