Abstract
The purpose of this study is to discover the most effective strategy or strategies available to agricultural producers in order to minimize the variability of net farm income. Several of the most commonly used strategies are under consideration, including marketing, production diversification, and the Federal Crop Insurance Program (FCIP). The objective is to delineate the factors that influence the competitive firm's participation in futures markets and to empirically estimate their importance, especially the impact of FCIP on cash and futures market activities under price and production uncertainty. The decision rule for managing risk is developed using quadratic programming (QP). Thus, the basic framework is a portfolio analysis which can be empiricized by assuming that expected utility is a function of mean and variance. A simulation model is implemented in order to obtain the parameters used in the QP model. Risk definitions and attitudes toward uncertainty comprise dimensions of both the simulation and QP model. This study differs from previous works in that it holds that crop insurance exists in order to reduce production risk and that insurance premiums are not costless. It also incorporates the behavior of the risk-averse competitive firm for a representative farm in the Rolling Plains region of Texas in a conditional normative framework. The key working hypotheses underlying this study are (1) the inclusion of FCIP with expected utility maximization which shift the E-V frontier to a new position and provide more expected profit for the same level of risk, and (2) a farmer's participation in futures markets and crop insurance programs reduces his production and price uncertainty. The results of this study clearly demonstrate that agricultural producers can diminish production and price risk through active participation in a combination of a diversified crop production plan, futures markets, and FCIP (particularly for high production guarantee and price election levels). Academic researchers, the Federal Crop Insurance Corporation, and brokerage firms are identified as effective instructors for guiding farmers in discovering that a diversified portfolio can be achieved through marketing and FCIP, as well as careful production planning.
Falatoonzadeh, Hami (1983). An analysis of the role of futures markets and federal crop insurance in risk management. Texas A&M University. Texas A&M University. Libraries. Available electronically from
https : / /hdl .handle .net /1969 .1 /DISSERTATIONS -550389.