Rental arrangements and risk mitigation of crop insurance and marketing

Abstract

PurposeThis study seeks to evaluate the impacts of land rental arrangements on crop insurance and grain marketing decisions.Design/methodology/approachThe analysis is conducted in an Illinois corn‐soybean setting in which optimal marketing and crop insurance decisions are estimated for a risk‐averse producer under typical cash rent and share rent agreements using numerical simulation methods.FindingsResults indicate that the availability of crop insurance impacts the intensity of use of put options under both cash and share rent arrangements. Similar to previous work in this area, revenue insurance is found to cause a substitution away from marketing using put options, while yield insurance is complementary to price risk management alternatives. However, while insurance and marketing play a role under both types of land tenure arrangements, shifting from a cash rent to a share rent agreement provides a relatively greater degree of risk reduction.Practical implicationsThe results suggest that additional research is needed to explain trends in land rental contracts. Crop insurance and other federal programs may provide incentives to switch from share leases to cash rent arrangements. Changes to the design of these programs could facilitate risk management for producers more efficiently.Originality/valueThe unique contribution of this study is the comparison of insurance and marketing decisions under both cash rent and share rent agreements for crop land.