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Price Analysis, Risk Assessment and Insurance for Organic Crops

Ariel Singerman

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

Abstract: This dissertation consists of three essays in which I apply econometric and numerical methods to analyze different aspects of organic agriculture in the U.S. In the first essay cointegration is tested between organic and conventional corn and soybean markets in several locations throughout the U.S. using a unique data set. Organic prices are found to behave like jump processes rather than diffusions, and Monte Carlo methods are developed to compute appropriate critical values for such tests. Findings indicate that no long-run relationship exists between organic and conventional prices, implying that price determination for organic corn and soybean is independent from that for the conventional crops. This suggests that organic corn and soybean prices are driven by demand and supply forces idiosyncratic to the organic market. For each crop, cointegrating spatial relationships are found between prices at the main organic markets. However, such relationships are generally weaker than the ones for the corresponding conventional prices, implying that organic markets are more affected by idiosyncratic shocks than conventional markets.For the second essay, a survey of organic grain and oilseed producers in Iowa, Minnesota and Wisconsin was conducted to collect information about their demographic characteristics, production and price risk management strategies, yields and losses, and crop insurance decisions. The data are analyzed using a discrete choice model to establish which variables influence organic producers' decision of whether to purchase crop insurance and also which ones affect the insurance product choice when applicable. In addition, this study describes the risk profiles of organic producers, and analyzes whether significant variations in yield exist between organic and conventional methods of production. This research may contribute to the design of an organic crop insurance policy in which organic producers would be charged according to their idiosyncratic production risks, rather than the arbitrary 5% blanket premium surcharge currently in use.In the third essay, a framework is developed to examine the 2011 pilot program established by the Risk Management Agency (RMA) to insure organic crops. Given that for insurance purposes RMA links organic crop prices to their conventional counterparts by a fixed percentage, we calibrate our model to reflect the organic and conventional corn markets to illustrate the impacts that such pricing potentially has on Revenue Protection payouts under different scenarios. Findings indicate that at the 75% nominal coverage level, RMA's fixed price factor implies an effective coverage ranging from 45 to 106% depending on what the organic to conventional market price ratio is; resulting, therefore, in lower and higher indemnities compared to those organic producers should get when considering their idiosyncratic revenue distribution.

Date: 2011-01-01
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Handle: RePEc:isu:genstf:201101010800001065