Livestock Revenue Insurance

Hart, Chad E.; Babcock, Bruce A.; Hayes, Dermot J.

doi:10.1002/fut.1603

Cited by 38 publications

(28 citation statements)

References 13 publications

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“…To price the Asian-Basket window contract described above, methods similar to those used by Hart, Babcock and Hayes (2001) in evaluating complex livestock revenue policies are used to solve for the value of the Asian-Basket option. A typical stochastic process assumed for commodity price is geometric Brownian motion, which implies the price follows a lognormal distribution.…”

Section: Asian-basket Option Pricing: a Simulation Modelmentioning

confidence: 99%

The design and pricing of fixed‐ and moving‐window contracts: An application of Asian‐Basket option pricing methods to the hog‐finishing sector

Shao

Roe

2003

Journal of Futures Markets

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Asian-Basket type moving window contracts are an increasingly used risk management tool in US hog sector. The moving window contract is decomposed into a portfolio of a long Asian-Basket put and a short Asian-Basket call option. A projected breakeven price is used to determine the floor price, and then Monte Carlo simulation methods are used to price both a moving and a fixed window contract. These methods provide unbiased pricing of fixed and moving window hog finishing contracts of one-year duration.

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Section: Asian-basket Option Pricing: a Simulation Modelmentioning

confidence: 99%

The design and pricing of fixed‐ and moving‐window contracts: An application of Asian‐Basket option pricing methods to the hog‐finishing sector

Shao

Roe

2003

Journal of Futures Markets

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“…If the market risks were statistically independent from on-farm disease risks, then attempting to provide a net revenue insurance policy that attempts to encapsulate all sources of net revenue risk would be futile. Rather, it would be sensible as suggested by Hart, Babcock, and Hayes (2001), to focus net revenue products on the correlated livestock and feed prices as one product, and animal diseases as another product. On the other hand, in many instances disease occurrence can not only affect death loss on an individual farm, but can also have negative impacts on market prices.…”

Section: Theoretical Considerationsmentioning

confidence: 99%

“…A path dependent option is one in which the payoff depends, not on the values of livestock and feed prices on a given day (as in a European option), but on the path that prices take over the life of the option or insurance product. Hart, Babcock and Hayes (2001) examine numerous path dependent structures such as Asian options to examine revenue insurance products for hogs. Below we replicate some of their results for beef livestock and examine a range of alternative path dependent options.…”

Section: Principles Of Net Revenue Insurancementioning

confidence: 99%

Conceptual issues in livestock insurance.

Turvey¹

2006

The Economics of Livestock Disease Insurance: Concepts, Issues and International Case Studies

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IntroductionRecent epidemics of animal diseases, coupled with the events of September 11/2001 and other incidents of terrorism, have raised issues concerning the risks facing livestock producers and how those risks can be managed through insurance products. In the fall of 2001 the Risk Management Agency of the U.S. Department of Agriculture approved livestock gross margin (LGM) and livestock gross revenue (LGR) insurance policies for swine. In addition to revenue based insurance products there is also considerable interest in livestock insurance products against onfarm diseases and catastrophic losses from the market effects of particular pathogens such as foot and mouth disease 1 .A key policy question is the appropriate role of agricultural insurance in the U.S. (and elsewhere) to reduce losses from animal diseases and market prices. Is a joint policy possible, or should production and market related risks be insured separately? Should insurance policies cover catastrophic risks due to natural or bioterrorist outcomes and can catastrophic risks in the livestock market be reinsured?The purpose of this paper is to explore, first in a general way, and then more specifically, the attributes of insurance for livestock producers. First, a general model is used to illustrate the complexity of the risks at the farm level, and several possibilities for insuring all risks are discussed in a qualitative way. Second, a more specific class of net revenue insurance models are presented and empirically evaluated. These models assume certainty in production and feed use, but allows for variability in livestock and feed prices. Monte Carlo approaches to calculating the value of several conventional and path-dependent livestock net revenue insurance possibilities are illustrated assuming the existence of a futures market. Third, insuring catastrophic market risks arising from the introduction of a disease that would cause market livestock prices to evaporate is modeled as a jump process with a disease arriving at unknown times, but with known frequency. Calculation of a Poisson-induced indemnity as an insurance product could be 1 Several definitions of catastrophic risks have emerged. Schlesinger (1999) refers to catastrophic risks as extreme events found and rarely occurring in the extreme tails of a probability distribution. Likewise, Duncan and Myers (2000) define catastrophe as an infrequent event that has undesirable outcomes for a sizeable subset of the insured population. To be insurable, Kunreuther (2002) points out that the risks have to be identifiable in probability space, and if it occurs the extent of loss must be calculable.2 considered in addition to conventional livestock or revenue insurance, or the revenue insurance should be adjusted to include the probability of catastrophic market risk.A background on some major disease outbreaks is discussed in the next section. This is followed by three sections on the principles of 1) livestock insurance, 2) Net revenue insurance and 3) catastrophe insurance. The paper t...

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“…By then, approximately half of all U.S. corn and soybean acres were covered through USDA-subsidized revenue insurance contracts. Interest has also emerged in livestock revenue insurance products (Hart, Babcock, & Hayes, 2001). As expanded upon by Hennessy, Babcock, and Hayes (1997) and also Mahul and Wright (2000), a reason proffered for the appropriateness of this insurance contract form is that it better targets the real risk concern that the agricultural producer is believed to have.…”

Section: Introductionmentioning

confidence: 99%

Substitution between revenue futures and price futures contracts: A note

Hennessy

2002

Journal of Futures Markets

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In recent years, commercial interest has been expressed in agricultural revenue insurance instruments. Participating parties may look to futures markets to offset assumed positions. In this note, conditions are identified such that revenue futures contracts are perfect substitutes for price futures contracts. If these conditions approximate reality, then it would seem questionable whether sufficient interest would exist to sustain markets in both futures contracts. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:387–391, 2002

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Livestock Revenue Insurance

Cited by 38 publications

References 13 publications

The design and pricing of fixed‐ and moving‐window contracts: An application of Asian‐Basket option pricing methods to the hog‐finishing sector

The design and pricing of fixed‐ and moving‐window contracts: An application of Asian‐Basket option pricing methods to the hog‐finishing sector

Conceptual issues in livestock insurance.

Substitution between revenue futures and price futures contracts: A note

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