Managing Food Industry Business and Financial Risks with Commodity-Linked Credit Instruments

This paper reviews the use and structure of commodity-linked credit instruments. It is argued that in the absence of contingent markets food firms face increasing financial risk reduced investment, and limited access to debt markets. One strategy is to issue commodity-linked credit whose payment structure is linked to the price of an underlying commodity. In some cases, a commodity-linked bond (CLB) can be structured to provide an incentive to investors by sharing in profit gains. If the goal is to hedge financial risks, CLB's can also be constructed that reduce the loan principle or coupons depending on price movements.Agribusiness, Risk and Uncertainty,

Whole Farm Income Insurance in a Canadian Context

This paper employs mean-variance and mean-skewness optimization to investigate farmers’ crop choices under Gross Revenue Insurance (GRIP), Whole Farm Income Insurance, the Canadian Agricultural Income Stabilization program, and its modified 2008 program AgrInvest. To our knowledge this paper is the first to fully consider the endogenous optimization of whole farm insurance in a farm optimization model. The results indicate that farmers will alter farm plans significantly in response to the type of insurance offered and the level of subsidy. Farmers will take on production risks that they would not otherwise take and this risk taking behavior is exacerbated by subsidy.Agricultural Insurance, Skewness Maximization, Mean-Variance, Farm Income Insurance, GRIP, CAIS, AgrInvest, Agricultural Finance,

CAN HYSTERESIS AND REAL OPTIONS EXPLAIN THE FARMLAND VALUATION PUZZLE?

This paper proposes that the common finding that land prices are systematically higher than their fundamental value as measured by the present value of future cash might be due to real options arising from uncertainty in cash flows. The paper posits a model in which the seller has a real option to postpone the sale of land. Because the value of land is measured as a present value, the buyer does not hold a similar option to postpone the purchase. It is argued that the seller's option offers a plausible explanation for the wedge between observed farmland prices and the present value model. The paper uses a Dixit and Pindyck (1996) real options framework. Using historical cash flow and land price information for Ontario, it is shown how real options can lead to a land price greater than that predicted by the present value model. The findings also suggest the existence of land price bubbles and shows how a real options framework can be used to detect bubbles.Land Economics/Use,

WEATHER DERIVATIVES AND SPECIFIC EVENT RISK

This paper investigates the relationship between weather events and agricultural risks. Specific event risks are defined by outcomes related to a specific event such as low temperature and rainfall. Using Ontario data this paper describes specific events and shows how these specific events can be insured using weather derivatives and insurance.Heat insurance, rainfall insurance, weather derivatives, weather options, crop insurance, agricultural risk, Risk and Uncertainty,

Fear, Trust and Agroterrorism

This paper presents results from a consumer survey on risk perceptions about agroterrorism and the safety of the US food supply. The survey conducted in the United States during the fall of 2004, provides insights into what consumers are thinking about terrorism against the food system, their knowledge base on food safety, the vulnerabilities of the food supply chain and food categories to terrorist contamination, and their trust in government and groceries to protect the food supply.Food Consumption/Nutrition/Food Safety, Institutional and Behavioral Economics,

WEATHER INSURANCE, CROP PRODUCTION AND SPECIFIC EVENT RISK

Crop Production/Industries, Risk and Uncertainty,

INSURING HEAT RELATED RISKS IN AGRICULTURE WITH DEGREE-DAY WEATHER DERIVATIVES

This paper presents a model and framework for pricing degree-day weather derivatives when the weather variable is a non-traded asset. The paper compares the options prices from the recommended model and compares it to a typical insurance-type model.Risk and Uncertainty,

THE ESSENTIALS OF RAINFALL DERIVATIVES AND INSURANCE

This paper investigates the use of rainfall insurance to manage agricultural production risks. A number of rainfall insurance products are presented along with a raitonal model which identifies the economics of rainfall. The use of rainfall insurance will increase in future years as capital markets, financial institutions, reinsurance companies, crop insurance companies, and hedge funds collectively organize to share and distribute weather risks. The focus of this paper is in fact directed towards the intermediation function of risk markets rather than on end user benefits.Risk and Uncertainty,

RANDOM WALKS AND FRACTAL STRUCTURES IN AGRICULTURAL COMMODITY FUTURES PRICES

This paper investigates whether the assumption of Brownian motion often used to describe commodity price movements is satisfied. Using historical data from 17 commodity futures contracts specific tests of fractional and ordinary Brownian motion are conducted. The analyses are conducted under the null hypothesis of ordinary Brownian motion against the alternative of persistent or ergodic fractional Brownian motion. Tests for fractional Brownian motion are based on a variance ratio test and compared with conventional R-S analyses. However, standard errors based on Monte Carlo simulations are quite high, meaning that the acceptance region for the null hypothesis is large. The results indicate that for the most part, the null hypothesis of ordinary Brownian motion cannot be rejected for 14 of 17 series. The three series that did not satisfy the tests were rejected because they violated the stationarity property of the random walk hypothesis.Demand and Price Analysis, Marketing,

EMPIRICAL ISSUES IN CROP REINSURANCE DECISIONS

This paper investigates the role of reinsurance in the managing the liquidity or reserve fund risks facing a crop insurer. Using 31 years of data, combined with Monte Carlo simulation the paper illustrates a mechanism for calculating reinsurance premiums and determining the post insurance risk profile. The insured event is over a range of loss ratios, and the focus of the paper is on reserve fund balances.Reinsurance, crop insurance, agricultural risks, Crop Production/Industries, Risk and Uncertainty,