Footnotes
1 Other explanations for low producer participation include crowding-out by other risk
management tools and government programs (Wright and Hewitt 1994; and Schmitz, Just
and Furtan 1994), heterogeneity in the financial conditions of farms (Leathers 1994), and
the whole farm portfolio diversification effect (Schoney, Taylor and Hayward 1994).
2 Most insurance markets have some degree of systemic risk. For example, life insurance
may be sensitive to interest rates, and health insurance markets may be sensitive to health
care cost inflation. Agricultural insurance markets, however, are unique in that the
degree of systemic risk is so high that private markets have failed to develop without
extreme government intervention.
3 Hayes et al investigate reinsurance hedging for the Risk Management Agency (RMA),
the government agency which administers the federal crop insurance program. Although
the RMA is technically a reinsurer, it is likely that the high degree of systemic risk in
agricultural insurance markets exposes reinsures to the same fundamental problem faced
by insurers in bearing systemic risk. Because the exposure to systemic risk is similar, we
don’t differentiate between hedging by the insurer and reinsurer in the discussion.
4 VB (2004) investigate the hedging effectiveness of WDs at the CRD level and make the
assumption that farmer level yield risk is accurately reflected in CRD level yield risk.
They acknowledge, however, that typical farmer yields are likely much riskier than CRD
yields.
5 Preliminary analysis strongly suggested the presence of a self-diversifying aggregation
effect. The average correlation among individual district detrended yields was 0.746.
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