Economic Tidbits

Avoid the Worst Outcome—Combining Strategies Might Work

Crop producers face a multitude of decisions regarding marketing and hedging strategies and crop insurance coverages. Several unknowns—the harvest price, yield, production—complicate these decisions. Another complicating factor is the interaction between risk management tools and which ones might be appropriate for a given location and cropping practice.

Research by Kara Zimmerman, a recent graduate student at the UNL Department of Agricultural Economics (and a former intern at the Nebraska Farm Bureau Foundation), looked at the influences of various hedging strategies and crop insurance coverages on average net farm income and income risk. Using thirty years of data for irrigated and non-irrigated farms in Scotts Bluff and Colfax Counties, Zimmerman examined nine different intra-season hedging plans along with different combinations of crop insurance types and coverage levels. Zimmerman found there isn’t one specific risk management strategy that fits every producer because outcomes change based on location, production practice (irrigated vs. non-irrigated), and the level of hedging. However, Zimmerman says, “What we did see, based on the last thirty years of price and yield data, is that following a strategy that incorporated selling some of your expected bushels in the spring and summer as opposed to all at harvest and purchasing some form of crop insurance increased your average net income and minimized the worst net income loss experienced.”

A key to risk management is to minimize bad outcomes. Zimmerman’s work suggests that some combination of crop insurance and hedging can do that. While it may not be the right fit for every operation, it’s worth a look. More information on Zimmerman’s research, along with a webinar presentation can be found at: https://farm.unl.edu/crops/impacts-crop-insurance-and-intra-season-hedging-long-run-net-income-risk/06232021-1534.

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