Intertemporal Risk Management Decisions of Farmers under Preference, Market, and Policy Dynamics

we simulate yields and prices for the next five years. Optimal levels of crop insurance coverage
and hedge ratios are determined simultaneously and intertemporally in the presence of
government programs.

Evaluation of Risk Management Portfolios

To further measure the risk management value and the income transfer value of
alternative risk management instruments to the farmer, we reconstruct the consumption in the
GEU model by introducing a certainty equivalent (CE) variable. We choose CE to evaluate
alternative risk management portfolios relative to cash sales, under certain specified preference
sets. Here CE is the certain amount of money that would be offered to the farmer in every period
to keep him or her as well off as providing the farmer with the specified risk management
portfolio. CE can be calculated by solving:

(5)           Ut(Ct,Et(Ct^*+1,Ct^*+2,...,Ct^*+i)) =Ut(Ct⁰,Et(Ct⁰+1+CE,Ct⁰+2+CE,...,Ct⁰+i +CE))

where C_t^*_+i, i= 1, 2,..., is the optimal consumption (net income) under a specific portfolio in the
next i^th period, and C_t⁰_+i, i= 1, 2,..., is the net income from selling in the cash market which is
defined as the NCt for that period.

IV. Data, Simulation and Model Calibration

Data Source

The risk management situation in the Pacific Northwest (PNW) provides us with an
interesting case to explore farmers’ risk management decisions in this area. The PNW, covering
Washington, Idaho, California, and Oregon, is one of the major wheat production areas in the US.
There is a large acreage of non-irrigated farms in this region. Soft white winter wheat has been
the dominant cash crop and is primarily exported to the Asian market. This region, however, has

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