Infrequent Shocks and Rating Revenue Insurance: A Contingent Claims Approach

Revenue insurance represents an important new risk management tool for agricultural producers. While there are many farm-level products, Group Risk Income Protection (GRIP) is an area-based alternative. Insurers set premium rates for GRIP on the assumption of a continuous revenue distribution, but discrete events may cause the actual value of insurance to differ by a significant amount. This study develops a contingent claims approach to determining the error inherent in ignoring these infrequent events in rating GRIP insurance. An empirical example from the California grape industry demonstrates the significance of this error and suggests an alternative method of determining revenue insurance premiums.Black-Scholes, contingent claim, grapes, insurance, jump-diffusion, option pricing, Risk and Uncertainty,

Post Merger Performance of Agricultural Cooperatives

Agricultural cooperatives are participating in mergers, acquisitions, strategic alliances, and joint ventures at a record pace. While post-post merger performance has been examined extensively for investor owned firms, this has not been the case for agricultural cooperatives since these firms do not have an explicit profit motive nor publicly traded stock. Results from a three-stage econometric model reveal that a major motivation for cooperatives to engage in these activities is to circumvent unique capital constraints, thus resulting in improved profitability. Furthermore, the decision to merge and financial performance are jointly endogenous, with profitability positively influenced and sales growth negatively influenced by the likelihood of merger.acquisitions, capital constraints, cooperatives, financial performance, joint ventures, mergers, probit modeling, strategic alliances, Agribusiness,

Cooperative Risk Management: Rationale and Effectiveness

Agricultural cooperatives tend to be riskier than investor-oriented firms, both in a business and financial sense. However, cooperative managers are often reluctant to actively manage risk. Although the risk management irrelevance proposition suggests that cooperative managers should be unable to add shareholder value through risk management activities, this study argues that there are several reasons why this is not likely to be the case for cooperatives. Several empirical examples are provided through numerical simulation of pro-forma financial statements from representative agricultural cooperatives. Using mean variance, expected utility and value-at-risk metrics, the results of these simulations show that various risk management strategies can improve the risk-return profile of a typical cooperative. Keywords: cooperative, expected utility, futures, option, risk management, value at risk.cooperative, expected utility, futures, option, risk management, value at risk., Risk and Uncertainty,

Cooperative Mergers and Acquisitions: The Role of Capital Constraints

Several explanations for merger activity exist for publicly traded firms, but none consider the unique aspects of cooperatives. This study develops a test for the hypothesis that cooperative consolidation occurs primarily in response to capital constraints associated with a lack of access to external equity capital. An empirical model estimates the shadow value of long-term investment capital within a multinomial logit model of transaction choice in a panel data set of the 100 largest U.S. cooperatives. The results substantially confirm the capital-constraint hypothesis. Thus, the primary implication is that internal growth may be a more viable alternative to consolidation if new forms of cooperative financing are developed.capital structure, cooperative, discrete choice, joint ventures, mergers, multinomial logit, strategic alliances, Agribusiness,

AGRICULTURAL COOPERATIVES AND RISK MANAGEMENT:IMPACT ON FINANCIAL PERFORMANCE

Agricultural cooperatives, like all agribusinesses, operate in an inherently risky environment. Many risk management tools exist, but agricultural cooperatives have been slow to adopt sophisticated risk management practices. Using simulation methods, this paper presents insight into how both traditional and innovative risk management practices effect the distribution of key financial variables for agricultural cooperatives.Agribusiness,

RISK MANAGEMENT TECHNIQUES FOR AGRICULTURAL COOPERATIVES: AN EMPIRICAL EVALUATION

While not ignoring risk, agricultural cooperatives tend to accommodate risk through the holding of internal capital reserves rather than engage in active risk management. A lack of information regarding the risk, returns, and the effect on cooperative financial performance of both traditional and innovative risk management strategies is likely a constraint to the adoption of active risk management by cooperatives. In this research, we examine the influence of alternative risk management strategies on cooperative financial performance, namely the return on assets (ROA) of grain merchandising cooperatives of various sizes. Strategies include traditional exchange traded futures and options strategies, an over-the-counter revenue swap, throughput insurance, and combinations of price and throughput strategies. Each of these strategies, for small, medium, and large size firms, are evaluated using a range of procedures including techniques which rely on mean-variance efficiency as well as evaluation procedures which help determine the ability of a strategy to mitigate downside risk. The results of the simulation exercise provide considerable support for the routine buying of at-the-money put options in setting a commodity floor price. The results also support the use, and perhaps the development, of insurance on cooperative throughput if the insurance product is used in conjunction with a price risk management strategy, in essence providing a hedge against downfalls in revenue. Over-the-counter revenue swaps, while intuitively appealing, did not perform well on average relative to more traditional exchange traded products. This result is especially important given the added counter party risk associated with such contracts. However, in some cases, the revenue swap, as well routine hedging with futures, performed better under a Value-at-Risk evaluation criteria than with a mean-variance criteria. Hence, it is important for cooperative managers to consider these results in the context of the risk management goals.Agribusiness,

WEATHER DERIVATIVES: MANAGING RISK WITH MARKET-BASED INSTRUMENTS

Accurate pricing of weather derivatives is critically dependent upon correct specification of the underlying weather process. We test among six likely alternative processes using maximum likelihood methods and data from the Fresno, CA weather station. Using these data, we find that the best process is a mean-reverting geometric Brownian process with discrete jumps and ARCH errors. We describe a pricing model for weather derivatives based on such a process.Risk and Uncertainty,

Pricing Weather Derivatives

This paper presents a general method for pricing weather derivatives. Specification tests find that a temperature series for Fresno, California follows a mean-reverting Brownian motion process with discrete jumps and ARCH errors. Based on this process, we define an equilibrium pricing model for cooling degree day weather options. Comparing option prices estimated with three methods: a traditional burn-rate approach, a Black-Scholes-Merton approximation, and an equilibrium Monte Carlo simulation reveals significant differences. Equilibrium prices are preferred on theoretical grounds, so are used to demonstrate the usefulness of weather derivatives as risk management tools for California specialty crop growers.derivative, jump-diffusion process, mean-reversion, volatility, weather, Demand and Price Analysis,

Managing Economic Risk from Invasive Species: Bug Options

Invasive insect species cause billions of dollars of direct and indirect damage to U.S. crops each year. The market for insuring insect damage is, however, far from complete. The objective of this study is to design and value insect derivatives, or "bug options," which would offer growers a market-based means for transferring risk of pest damage to speculators or others who may profit from higher insect populations. A bug option valuation model is developed and applied to Bemesia tabaci infestation in cotton. The results show that insect derivatives may become important risk management tools for a wide range of growers.Risk and Uncertainty,

Use of Recreation Opportunity Planning to Inventory Arid Lands in Eastern Oregon - A Demonstration

This paper reports on the use of computer and hand dravn techniques for Implementing the Recreation Opportunity Planning inventory and analysis phases for the Steens Mountain Recreation Lands. Techniques were compared for land classifications and time and monetary costs. Results show computer mapping less likely to result in classification errors, but more costly to conduct