historically been an area with low utilization rates of risk management instruments like futures
(Makus, et al., 1990) and some acreage-based crop insurance (Vandeveer and Young, 2000).
We select a representative farmer from each of the two counties, Whitman County and
Grant County, in Washington State. Although both represent dryland soft white wheat farming
region in the Pacific Northwest (PNW), these two counties have different levels of precipitation.
Whitman County sits on the east central border of Washington and is part of the highest yield
area for soft white wheat in the state. Whitman County has an average annual precipitation of
around 14 inches. In comparison, Grant County is located in the center of the state and does not
border Whitman County. Grant County is much dryer with an average annual rainfall of 5 inches
in 2002. Accordingly, wheat production is riskier in Grant County. However, since there is some
irrigation in Grant County, the yield is not much lower than that in Whitman County (Figure 1).
Historical data for soft white wheat yield, cash price and futures price for Whitman
County and Grant County are collected and examined to identify time series patterns for
simulation. The yield data for Whitman County and Grant County in Washington State are
obtained from the U.S. Department of Agricultural National Agricultural Statistics Service
(http://www.usda.gov/nass/) and Risk Management Agency (RMA) at annual basis for 1939-
2003 and 1972-2003, respectively.
Annual September wheat cash and futures prices from 1973 to 2003 are selected to
represent harvest prices. September is the time when the farmer makes decisions on the
following year’s hedging and insurance participation, and prepares for the planting of next year’s
winter wheat crop. For cash price, we use the monthly average of daily September prices at the
Portland spot market. The data are from the USDA-ERS Wheat Yearbook
(http://www.ers.usda.gov/publications/so/view.asp?f=field/whs-bb/). Since the PNW region
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