An insurance approach to risk management in the ethanol industry

Nicholas D. Paulson, Bruce A. Babcock, Chad E. Hart, Dermot J. Hayes

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)51-62
Number of pages12
JournalAgricultural and Resource Economics Review
Volume37
Issue number1
DOIs
StatePublished - Apr 2008

Keywords

  • Corn-based ethanol
  • Correlation
  • Insurance
  • Monte Carlo
  • Risk management

ASJC Scopus subject areas

  • Agronomy and Crop Science
  • Economics and Econometrics

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