Modeling Stochastic Crop Yield Expectations with a Limiting Beta Distribution

Abstract

The use of plausible stochastic price processes in price risk analysis has allowed advances not seen in crop yield risk analysis. This study develops a stochastic process for yield modeling and risk management. The PA³lya urn process is an internally consistent dynamic representation of yield expectations over a growing season that accommodates agronomic events such as growing degree days. The limiting distribution is the commonly used beta distribution. Binomial tree analysis of the process allows us to explore hedging decisions and crop valuation. The method is empirically flexible to accommodate alternative assumptions on the growing environment, such as intra-season input decisions.