ADJUSTED GROSS REVENUE PILOT INSURANCE PROGRAM: RATING PROCEDURE (REPORT PREPARED FOR THE RISK MANAGEMENT AGENCY BOARD OF DIRECTORS)

The focus of this paper is on outlining the procedures used to estimate the premium rates for the Adjusted Gross Revenue (AGR) insurance plan. The AGR rating procedures draw substantially on rating procedures used in products currently reinsured and subsidized by Risk Management Agency/USDA (RMA); thus, the principal focus here is on those features that are a specific to AGR. The outline, briefly, the procedures used in rating existing products to set the stage for describing AGR rating procedures. The focus of AGR is on farms whose principal revenue streams are from NAP crops as contrasted to farms whose crops can be insured under a plan reinsured and subsidized by RMA; however, the procedures must recognize and take advantage of the fact that crops with APH plan insurance may also appear in the farm plans. Since the number of NAP crops is very large and since the information available differ substantially from crop to crop, the procedures draw on a wide range of information sources.Risk and Uncertainty,

A TWO-SHOCK MODEL OF THE IMPACT OF CROP INSURANCE ON INPUT USE: ANALYTIC AND SIMULATION RESULTS

By altering the probability distribution of farm income, crop insurance programs affect farmer's input use decision. Ramaswami's (1993) one-shock model analyzed the effect of the crop insurance on single input use by allowing the randomness of yield while keeping price constant in revenue determination. The total effect of actuarially fair insurance on input use was decomposed into risk reduction effect and moral hazard effect, and the directions of the two effects were examined. He showed that the total impact of actuarially fair crop insurance on input use was a) to reduce it if the input was risk decreasing and b) indeterminate if the input was risk increasing. However, the evidence from previous empirical work has been mixed. Horowitz and Lichtenberg (1993) suggested insured farmers raising corn use more fertilizers and pesticides while Smith and Goodwin (1996) obtained the opposite result for wheat. Smith and Goodwin also used more comprehensive econometric tests and had a higher quality data set. A common belief is that fertilizer is risk increasing and pesticide risk decreasing. Ramaswami's model assumed crop price was constant and yield was the only source of randomness in farmer's revenue. In reality, market price is a random variable and often negatively correlated with the farmer's yield. For example, bad weather conditions tend to reduce yield across farms in a common region, which may cause diminished quantities supplied and higher crop price. Our paper extends Ramaswami's one-shock model to a two-shock model, and generalizes the two propositions in that paper by introducing randomness to price as well as yield. With two random shocks, the total insurance effect on input use is indeterminate for both risk increasing and risk decreasing inputs, which is consistent with the mixed empirical evidence. Our study also provides a numerical method to decompose the total insurance effect into a risk reduction effect and a moral hazard effect using empirical data. The simulation based on 75 percent coverage level suggests the total insurance effect is economically small to the farmer as are the risk reduction effect and moral hazard effect under mild risk aversion. And the moral hazard effect is less significant than the risk reduction effect. However, the moral hazard effect becomes larger if a higher coverage level is used.Risk and Uncertainty,

MODELING OF AGRICULTURAL SYSTEMS

The authors present an overview of agricultural systems models. Beginning with why systems are modeled and for what purposes, the paper examines types of agricultural systems and associated model types. The broad categories range from pictorial (iconic) models to descriptive analogue models to symbolic (usually mathematical) models. The uses of optimization versus non-optimizing mechanistic models are reviewed, as are the scale and aggregation challenges associated with scaling up from the plant cell to the landscape or from a farm enterprise to a world market supply-demand equilibrium Recent modeling developments include the integration of formerly stand-alone biophysical simulation models, increasingly with a unifying spatial database and often for the purpose of supporting management decisions. Current modeling innovations are estimating and incorporating environmental values and other system interactions. At the community and regional scale, sociological and economic models of rural community structure are being developed to evaluate long-term community viability. The information revolution is bringing new challenges in delivering agricultural systems models over the internet, as well as integrating decision support systems with the new precision agriculture technologies.Farm Management,

THE REAL OPTIONS PUZZLE FOR MICHIGAN TART CHERRY PRODUCERS

Capital budgeting decisions faced by tart cherry producers often challenge our traditional valuation techniques. Real Options Valuation (ROV) methods may be useful but assumptions of existing ROV approaches are restrictive and, in some cases, unrealistic. In this paper we assert that use of existing option pricing methods can not be justified. Instead, dynamic programming approach is more appropriate. We develop a multi-period model and use it to obtain an optimal orchard replacement policy. The model is applied to an example farm from Northwestern Michigan and the results provide the following messages. First, flexibility options can be estimated for individual tart cherry producers using the DP approach albeit, indirectly. Second, a farmer who uses the DP approach to develop contingency optimal replacement rules will be better off than one who uses an ad hoc standard replacement rule. Third, if the SW climate scenario shifts to NW Michigan, tart cherry orchard values may fall substantially with implications on the future of tart cherry production in that region, unless compensating price increases follow.Farm Management,

Agency Risks in Outsourcing Corporate Real Estate Functions

Firms outsource business functions to focus on core competencies and cut operating expenses. However, companies must consider agency costs in determining the optimal staffing/outsourcing balance. Analysis of the views of corporate real estate managers and real estate service providers indicate that although they share a common vision of the role of corporate real estate, providers focus more on traditional real estate tasks than on corporate business strategy. The optimum balance of staffing/outsourcing may consist of a corporate real estate staff that understands the overall corporate strategy and devotes its resources to strategic planning, program development, contracting, and monitoring outsourced tasks.

COST OF CHIP POTATO PRODUCTION IN CENTRAL MICHIGAN

This bulletin represents a tool that can help producers, consultants, educators, and agribusinesses working with producers estimate costs of production and expected profit based on "typical" chip potato production management strategies found in Montcalm County, Michigan. The budget included in this bulletin will allow users to revise inputs based on their management strategies and calculate their expected cost and profit. This flexibility provides a decision aid to search for systems that generate higher net returns to the farm's resource base.Crop Production/Industries,

ALERT: FARMERS NEED TO SIGN UP FOR ACRE!

Corn, soybean and wheat producers are facing serious financial challenges. And it is even worse for livestock producers, most of who are also crop producers and are therefore eligible for ACRE. Crops are behind in maturity, some areas of the state need rain, product prices have fallen substantially, and USDA Counter Cyclical payments do not start until $2.35 on corn,$5.36 soybeans and $3.40 on wheat. Chances of prices that low are around 10-15%, but at that point ACRE payments would be much, much bigger. Many producers do not understand ACRE and the benefits available; most of the reasons given for not participating are invalid.Crop Production/Industries, Farm Management,