Whole-Farm Revenue Protection as a Factor of Economic Stability in Crop Production

Željko Kokot,Todor Marković,Maja Meseldžija,Sanjin Ivanović

doi:10.3390/su12166349

Željko Kokot, Todor Marković + Show 2 more

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https://doi.org/10.3390/su12166349

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Abstract

Crop production is largely unprotected and exposed to a great number of production factors. On the other hand, farmers are exposed to fluctuations in the market prices of their products every year, which often has a negative impact on the profits made. There are various risk management measures in plant production, and insurance is certainly one of the most effective instruments. One of the recent insurance models is Whole-Farm Revenue Insurance (WFRP), which is an American insurance model that has been applied since 2015. The essence of WFRP is to ensure that all crops on the farm are secured against production and market risks with only one policy. The aim of the research in this paper is to present WFRP as an entirely new model of revenue insurance on the example of a typical Serbian farm specializing in crop production. The WFRP model works by determining the insured revenue before the start of the production year. If at the end of the production year, for any reason, the realized revenue falls below the level of insured revenue, the farmer is entitled to indemnification. Due to the drought that hit the region where the analyzed farm is located, the yields were reduced, and thus the expected revenue was also reduced, and the farmer was entitled to damages of $5697. On the other hand, it is the farmer’s obligation to pay $373 to the insurer as a risk transfer fee. The authors proved that even such complex insurance models can be applied in countries such as Serbia, where awareness of the importance of insurance of agricultural production is still not developed.

Highlights

Agricultural production, especially crop production, is exposed to a large number of risks due to its specificities and the fact that it takes place outdoors
The benefits of applying the WFRP model are reflected in cost-effectiveness, the need for damage assessment is neutralized, and the problems of negative selection and moral hazard are reduced to a minimum
In order to prevent and reduce any losses that may occur due to adverse weather conditions that could jeopardize yield or lower the sale prices of products, farmers often opt for insuring their production

Summary

Introduction

Agricultural production, especially crop production, is exposed to a large number of risks due to its specificities and the fact that it takes place outdoors. Production or yield risk represents an uncertainty about the quantity of agricultural production arising from weather related factors (e.g., hail, frost, floods, and droughts), crop and livestock diseases and pests, and changes in technology, etc. The consequences of financial crisis in one country could become global (an example of the financial crisis of 2007–2008 in the USA), while at the same time, the effects of climate change are present throughout the world. The most commonly used risk management instruments are the application of new technologies and agrotechnical measures, diversification of production, vertical integration of production, insurance, and hedging strategies with futures contracts [7]

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