Insuring uncertainty in value-added agriculture: ethanol

Nicholas David Paulson

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: A wide variety of insurance products are currently available for agricultural producers to insure against yield or price risks in the markets for the raw commodities they produce. Value-added enterprises, such as ethanol production, have become increasingly popular among farmers over the last decade; however, insurance against declines in the value-added portion of their crops is not yet available. This paper outlines the development of an insurance product aimed at corn producers who are members of an ethanol production cooperative. The product mimics the gross margin level of a typical ethanol production facility, and has the potential to provide producers with a new and useful risk management tool to insure against price risks in the markets for corn, distillers dried grains with solubles (DDGS), ethanol, and natural gas. Monte Carlo analysis is used to develop fair premiums at various coverage levels. A historical correlation structure is imposed on the simulated price data, using a method proposed by Iman and Conover which maintains the marginal distributions of the variables. Historical analysis is carried out to examine how the product would have performed had it been offered over the last decade. The product is shown to perform as intended, paying indemnities in years of extreme price volatility.

Date: 2004-01-01
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Citations: View citations in EconPapers (2)

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