Mitigating cotton revenue risk through irrigation, insurance, and/or hedging

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Title: Mitigating cotton revenue risk through irrigation, insurance, and/or hedging
Author: Bise, Elizabeth Hart
Abstract: Texas is the leading U .S . producer of cotton , and the U .S . is the largest international market supplier of cotton . Risks and uncertainties plague Texas cotton producers with unpredictable weather , insects , diseases , and price variability . Risk management studies have examined the risk reducing capabilities of alternative management strategies , but few have looked at the interaction of using several strategies in different combinations . The research in this study focuses on managing risk faced by cotton farmers in Texas using irrigation , put options , and yield insurance . The primary objective was to analyze the interactions of irrigation , put options , and yield insurance as risk management strategies on the economic viability of a 1 ,000 acre cotton farm in the Lower Rio Grande Valley (LRGV ) of Texas . The secondary objective was to determine the best combination of these strategies for decision makers with alternative preferences for risk aversion . Stochastic values for yields and prices were used in simulating a whole -farm financial statement for a 1000 acre furrow irrigated cotton farm in the LRGV with three types of risk management strategies . Net returns were simulated using a multivariate empirical distribution for 16 risk management scenarios . The scenarios were ranked across a range of risk aversion levels using stochastic efficiency with respect to a function . Analyses for risk averse decision makers showed that multiple irrigations are preferred , and that yield insurance is strongly preferred at lower irrigation levels . The benefits to purchasing put options increase with yields , so they are more beneficial when higher yields are expected from applying more irrigation applications .
URI: http : / /hdl .handle .net /1969 .1 /ETD -TAMU -1402
Date: 2009-05-15

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Mitigating cotton revenue risk through irrigation, insurance, and/or hedging. Available electronically from http : / /hdl .handle .net /1969 .1 /ETD -TAMU -1402 .

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