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Upper Midwest dairy farm revenue variation and insurance implications

PurposeThe purpose of this paper is to examine the sources and magnitude of variation in accrual adjusted gross farm revenue and farm revenue net of feed purchases on Michigan dairy farms representative of Upper Midwest dairy farms. The paper aims to assess whether adjusted gross revenue‐type insurance instruments meet insurability conditions when applied to dairy farms.Design/methodology/approachAccrual adjusted dairy farm revenue and revenue net of feed purchased from Michigan dairy farm panel data from 1995 through 2006 were detrended and summarized. Variance decomposition was used to identify sources of variation in adjusted gross revenue and adjusted gross revenue less feed purchases. In‐sample insurance premiums were estimated and Monte Carlo simulations were used to adjust these premiums for out‐of‐sample considerations.FindingsMilk price variation was the largest source of variation while milk production per cow varied little. Farms with smaller herds and those with larger percentages of farm revenue from crop sales had higher relative revenue variability and would trigger a higher frequency of indemnities under a whole farm revenue insurance contract.Research limitations/implicationsBecause the data analyzed conclude in 2006, the volatility of the past couple of years is not reflected. Therefore, researchers are encouraged to test the proposed insurance feasibility further with more recent data.Practical implicationsThe paper addresses considerations for the development and commercialization of a feasible dairy revenue insurance instrument.Originality/valueThis paper fulfils a need to understand magnitude and source of revenue variation on dairy farms and how insurance might mitigate negative consequences of this variation.

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THE FEASIBILITY OF FARM REVENUE INSURANCE IN AUSTRALIA

Arrow (1965) stated that making markets for trading risk more complete can be socially beneficial. Within this perspective, we discuss the feasibility of farm revenue insurance for Australian agriculture. The feasibility is first discussed from an insurer's point of view. Well-known problems of moral hazard, adverse selection and systemic risk are central. Then, the feasibility is studied from a farmer’s point of view. A simulation model illustrates that gross revenue insurance can be both cheaper and more effective than separate price and yield insurance schemes. We argue that due to the systemic nature of price and yields risks within years and the positive correlation between years, some publicprivate partnership for reinsurance may be necessary for insurers to enter the gross revenue insurance market. Pros and cons of alternative forms of a public-private partnership are discussed. Once insurers can deal with the systemic risk problem, we conclude that there are opportunities for crop gross revenue insurance schemes, especially if based on area yields and on observed spot market prices. For insurance schemes to cover individual farmer’s yields and prices, we regard the concept of coinsurance as crucial. With respect to livestock commodities, we argue that yields are difficult to include in an insurance scheme and we propose aspects of further research in the field of price and rainfall insurance.

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