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An Insurance Approach to Risk Management in the Ethanol Industry

Published online by Cambridge University Press:  15 September 2016

Nicholas D. Paulson ,
Bruce A. Babcock ,
Chad E. Hart  and
Dermot J. Hayes
Nicholas D. Paulson
Affiliation:
Department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign
Bruce A. Babcock
Affiliation:
Iowa State University in Ames, Iowa, and director of the Center for Agricultural and Rural Development (CARD), also at Iowa State University
Chad E. Hart
Affiliation:
Biorenewables Policy division at CARD
Dermot J. Hayes
Affiliation:
Pioneer Hi-Bred International Chair in Agribusiness, at Iowa State University
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Abstract

The vast majority of crop and revenue insurance policies sold in the United States are singlecrop policies that insure against low yields or revenues for each crop grown on the farm. But, increasingly, producer income is based more on the value of crops that have been converted into a value-added product such as ethanol. Moreover, the recent increases in energy and commodity price levels and volatilities emphasize the importance of risk management to ethanol investors. This paper uses an insurance approach to outline a risk management tool which mimics the gross margin level of a typical corn-based ethanol plant. The gross margin, premium, and indemnity levels are calculated on a per bushel basis to enable producers/investors to utilize the product based on their ownership share in the production facility. The fair premium rates are shown to be quite sensitive with respect to corn and energy price levels and volatilities.

Keywords

corn-based ethanolinsurancerisk managementcorrelationMonte Carlo
Type
Contributed Papers
Information
Agricultural and Resource Economics Review , Volume 37 , Issue 1 , April 2008 , pp. 51 - 62
Copyright
Copyright © 2008 Northeastern Agricultural and Resource Economics Association 

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