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

to examine the impacts of changes in these preferences on farmers’ optimal hedging and crop
insurance participation. Preference impact analysis implies that optimal hedging behavior of the
representative farmer is sensitive to intertemporal preferences changes. Risk aversion appears to
have a larger effect on hedge ratios than time preference and intertemporal substitution. Each of
the preferences has its own impact pattern. But even in the separate analyses, the effect is often
intertwined with influences from the other preferences due to relative value changes.

The market institution impact analysis shows that hedging transaction costs negatively
affect optimal hedge ratios and reduces the farmer’s welfare level. When crop insurance is
coupled with a premium subsidy, even an insurance premium loading of 30% is not enough to
keep the farmer from purchasing the highest available level of insurance coverage. However, the
premium loading definitely reduces welfare. The impact analysis of government price protection
parameters, the target price and loan rate, indicates that both of them are influential in hedging
decisions. The corresponding government LDP and CCP have increasing substitution impact on
hedging as the price protection level increases.

The relative impact analysis of current risk management tools shows both crop
insurance and government programs are influential to the farmer’s welfare improvement.
Hedging has very limited contribution. In terms of the ranking of the value of these tools, the
government programs (DP + LDP + CCP) have a greater effect on farmers’ welfare than crop
insurance, and crop insurance outperforms hedging. Yield insurance has a greater value than DP,
LDP, or CCP separately, but less than the three combined. Among the three government
programs, the DP has higher a value than the respective values of the LDP and the CCP for the
representative farmer.

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