$0/bushel to $0.02/bushel, including the current market level $0.017/bushel, at an increment of
$0.001. Because the CCP in government programs also has a market price protection function,
we remove the CCP from the risk management pool and make hedging the only tool to reduce
price risk. The summarized optimal hedge ratio changes are reported in Figure 8 and Table 4.
Figure 8 displays how the hedge ratios react to variations in transaction cost for the first
year. A similar pattern is also exhibited in the second through fifth year, but the ratios are at
decreasing levels as implied by Table 410. The optimal hedge ratios generally display a
decreasing trend as transaction costs increase, and the amount of the change is quite small. From
the upper panel in Table 4, we can see that 1% change in transaction costs result in about 0.3%
change in the hedge ratio during the first year when the government CCP is included. The
implication is that for our representative farmer, hedging is responsive but not very sensitive, to
changes in transaction costs when free government price protection is available.
Comparing the lower panel with the upper panel in Table 4 shows that after the CCP is
removed, the hedge ratio increases by 45%, from 0.42 to 0.61, given the same transaction cost
variation. Without the CCP, the ratios also appear to decrease faster from the first year to the
fifth year, implying by the steeper slope of the trend line. This suggests a smaller tolerance to a
transaction cost increase without assistance from the CCP.
To find out the impact of premium loading charged for crop insurance purchases, we
examined the optimal insurance coverage in response to changes in loading from 0% to 30%,
with an increment of 5%. Our results based on the base model and various other portfolios show
(Table 5), however, that farmers would always choose to buy the highest available coverage of
85%. One possible explanation for this could be that the crop insurance is heavily subsidized by
the government. Therefore, although our representative farmer needs to pay up to 30% more on
10 Complete results are available upon request.
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