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



(actuarially fair premium level) and 1 minus the regressive subsidy rate specified in current
policies7.

For government programs, the direct payment rate PD is set at $0.52 per bushel. The
base yield used to calculate a per acre payment is set at 90 percent of the expected yield. The
loan rate (
LR) for the LDP is $2.86 per bushel for soft white wheat in Whitman County and $2.91
per bushel in Grant County. The target price (
PT) for CCP is $3.92 per bushel. These parameters
are based on current US farm policies.

V. GEU Maximization and Comparison with EU maximization

We implement the stochastic dynamic optimization programming using GAUSS and
numerically solve for the optimal hedge ratios and crop insurance coverage ratios for our
representative farmers in the two Washington State counties (Whitman and Grant). Results are
shown in Table 3. Note that all the hedge ratios are reported without the negative sign, which
indicates hedging is in short position in all cases.

As we can see, the specification of the GEU model gives us extra flexibility in the
parameterization of the objective function. We are able to explore the feasibility of the GEU
model as well as to compare the results from GEU optimization with those from other widely
used expected utility optimization models. The first scenario GEU full (
α= -0.13 , β= 0.89
and
ρ= 0.9493) is our base scenario. It represents the farmer who is risk averse (α< 1 ), has
high intertemporal substitutability of consumption (
ρclose to 1), and prefers an early resolution
of the risk to a late resolution (
α< ρ). The farmer discounts future consumption by a factor of
89% and makes a decision for the next five years based on all available information as of today.
7 The subsidy rate corresponding to the coverage levels of 50, 55, 60, 65, 70, 75, 80, and 85 percent are
respectively, 67, 64, 64, 59, 59, 55, 48, and 38 percent.

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