Analysis and Feasibility of Crop Revenue Insurance in China

Abstract

Abstract This paper describes crop revenue insurance, discusses the important factors in successful contract writing and presents a robust analytical procedure for assessing combined crop yield and price risks. The feasibility of crop revenue insurance for Chinese maize, soybean, wheat, cotton and rice markets is specifically addressed. Increased crop demand, rising production costs and variable weather necessitate the use of agricultural insurance by producers, input providers and processors. Crop producers and agribusiness entities around the world are realizing that yield-based insurance alone will not offset the risk of adverse price movements during the growing season. Producers may, for example, achieve above-average crop yields only to find that total revenues have substantially declined due to price decreases. Properly constructed and rated, revenue-based crop insurance can provide superior risk management performance to producers. Revenue policies insure producers against declines in expected revenue below a guaranteed revenue amount and thereby aid in budget planning, securing bank loans and reducing credit costs to input suppliers. The paper provides a brief discussion of revenue insurance for multiple crops in the United States, currently the largest user of crop revenue insurance. Revenue insurance adds price change into the indemnity equation, requiring use of correlated multivariate analyses. The analytical procedure for measuring revenue risks employs Monte Carlo modeling of the state-space comprised of correlated yield and price risks. This procedure is simply described using graphics. A successful application of revenue insurance in Brazil is described and contract elements deemed necessary for success are outlined. As discussed, to properly incorporate price risk, the indemnity index employed for measuring value change must satisfy five essential criteria. These criteria are applied to the major Chinese agricultural futures markets for maize, soybeans, cotton, wheat and rice. Conclusions on the feasibility of the successful development of revenue insurance for these crops are presented.