Barry J. Barnett

Designing and Rating an Area Yield Crop Insurance Contract

This article documents the design and rate-making procedures used in the development of the Group Risk Plan (GRP)—the new federal crop insurance product that insures based on area yield. The authors of this article worked closely with personnel in the Federal Crop Insurance Corporation and others in developing methodological and practical constraints needed in implementing a workable area yield contract. GRP indemnity payments are made based on percentage shortfalls in actual county yields relative to a forecasted yield. Historical county yield data are used to develop forecasted yields and premium rates. Copyright 1997, Oxford University Press.

Conceptual and Practical Considerations for Sharing Catastrophic/Systemic Risks

Catastrophic or systemic risks are a major challenge for the farm and food system and rural communities. Private sector markets for sharing catastrophic risks are limited, but less so than in the past. This article presents a conceptual base for understanding why markets for sharing catastrophic risks may be incomplete and/or inefficient. Next, federal efforts to address catastrophic risk losses are reviewed. Finally, new capital market developments are presented and an alternative is introduced where the government would write risk options for specific perils.

Poverty Traps and Climate Risk: Limitations and Opportunities of Index-Based Risk Financing

The objective of this paper is to frame the key issues and summarize the current state of knowledge about and innovations in index-based risk transfer products (IBRTPs) as they relate to the management of climate risk for poverty reduction, especially of chronic or persistent poverty. In the past several years, interest in and experimentation with weather index insurance and other IBRTPs has grown rapidly. Though no one should expect that these innovations alone can solve the problem of chronic poverty, index-based financing opens up a range of intriguing possibilities. The remainder of this paper is comprised of five major sections that discuss: 1) how weather risks and climate shocks impact the poor in developing countries; 2) the concept of poverty traps, highlighting how conventional risk management strategies typically do not work well for managing covariate weather risk; 3) the limitations and opportunities of financial innovations using index-based risk transfer products (IBRTPs) for reducing or transferring weather risks and climate shocks; 4) a poverty traps-based typology of IBRTPs; 5) key remaining challenges in developing and implementing index-based risk financing for use in the global struggle to end chronic poverty.

Is There a Viable Market for Area-Based Crop Insurance?

The performance of area yield insurance and farm-level multiple peril crop insurance is analyzed for cotton and soybean production in Georgia and South Carolina. The analysis improves on many previous studies by utilizing actual farm-level yield data and by comparing the two types of insurance products not only for actuarially fair premium rates but also for actual unsubsidized and subsidized premium rates. Results suggest that, even in heterogeneous production regions, area yield insurance may be a viable alternative to farm-level insurance when premium rates for farm-level insurance contain large positive wedges.

Enhancing microfinance using index-based risk-transfer products

While significant progress in microcredit and microfinance has been made in low‐income countries, lending for small farming enterprises has been limited. This article reviews how innovative index‐based risk‐transfer products (IBRTPs) can be used to transfer the correlated natural disaster risks that often hamper the development of farm‐level microcredit. By linking lending to IBRTPs, access to microcredit can be enhanced while also providing opportunities to offer mutual sharing of the basis risk that remains after correlated risks are transferred into global markets. This opens the way for new thinking about developing agricultural insurance in low‐income countries.

Creating insurance markets for natural disaster risk in lower income countries: the potential role for securitization

This article considers the potential for securitizing index‐based insurance products that transfer weather and natural disaster risks from lower income countries. It begins with a brief overview explaining why markets for natural disaster risks are important, yet often missing, in lower income countries and a review of some recent activities using index‐based weather insurance. Next, we describe how natural disaster risks are handled in higher income countries. These examples, along with the example of an innovative index‐based livestock insurance pilot project in Mongolia, illustrate how layers, or tranches, of natural disaster risk can be financed during the product development phase by creating structures similar to the Special Purpose Vehicles used in catastrophe bond, mortgage bond, and the emerging microfinance bond markets. We refer to these investment alternatives as micro‐CAT bonds since the principle amounts would be small relative to the existing CAT bond market.

Alternative Crop Insurance Indexes

Three index-based crop insurance contracts are evaluated for representative south Georgia corn farms. The insurance contracts considered are based on indexes of historical county yields, yields predicted from a cooling degree-day production model, and yields predicted from a crop-simulation model. For some of the representative farms, the predicted yield index contracts provide yield risk protection comparable to the contract based on historical county yields, especially at lower levels of risk aversion. The impact of constraints on index insurance choice variables is considered and important interactions among constrained, conditionally optimized, choice variables are analyzed.

Implications of Integrated Commodity Programs and Crop Insurance

Moving from price-triggered to area revenue–triggered programs was perhaps the most common theme among 2007 farm bill proposals. Area revenue–triggered commodity programs may make farm-level revenue insurance products seem redundant, raising questions about why the federal government should continue both programs. Area revenue–triggered programs would remove much of the systemic risk faced by producers. As a result, private sector insurers may be able to insure the residual risk without federal involvement. This paper examines the effects of moving to area revenue–triggered commodity programs with a focus on public policy issues that would likely arise.

Economic Challenges of Transgenic Crops: The Case of Bt Cotton

Over the past century, technological advances, in concert with increased extraction of nonrenewable resources, have forestalled the realization of the Malthusian prediction. Yet there remains a need to feed and clothe a growing world population on a largely fixed land base-and to do so in a manner that sustains natural resources for future use. Some foresee this need being met, in part, by transgenic crops [Miller et al. 1995]. Transgenic crops have been genetically modified by the insertion of genetic material from another species. These modifications create crops with certain beneficial characteristics. Already available to farmers are transgenic corn, potatoes, and cotton that produce an insecticide in the plant tissue. Also available are transgenic corn, canola, cotton, chicory, and soybeans that are resistant to specific herbicides; transgemc squash and papaya that are resistant to specific diseases; transgenic canola that produces oil with high lauric acid content; transgenic soybeans that produce oil with high oleic acid content; and transgenic tomatoes with thicker skins or delayed ripening characteristics. In 1997, more than 16 million acres of transgenic crops were grown in the United States [Marra et al. 1997]. No less than eight additional transgenic crop technologies are currently under review by federal regulatory autiorities [Union of Concerned Scientists 1997]. Pre-review field testing is being conducted on transgenic apple, barley, beet, broccoli, carrot, chicory, cranberry, creeping bentgrass, chestnut, cucumber, eggplant, gladiolus, grape, lettuce, melon, pea, peanut, petunia, pepper, rapeseed, raspberry, rice, strawberry, sugar cane, sunflower, sweetgum, sweet potato, tobacco, and wheat

Cooperatives and Capital Markets: The Case of Minnesota-Dakota Sugar Cooperatives

products. The remainder of the article considers an important implementation issue related to one of the alternatives being considered by the cooperatives. Segmenting of yield risk into systemic (spatially correlated) and independent components-a concept discussed in the Skees and Zeuli companion papers-is demonstrated. This example draws on information from focus groups with cooperative members and processing plant managers, yield data maintained by the cooperatives, and analyses of selected issues raised by the focus groups (Black, Black and Hu).