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The Demand for Commodity Insurance by Developing Country Agricultural Producers : Theory and an Application to Cocoa in Ghana

ADEQUATE SAFETY NETS AGENTS AGRICULTURAL INSURANCE AGRICULTURAL OUTPUT AGRICULTURE ASSETS BENCHMARK BENEFICIARIES COMMODITIES CONSUMER PRICE INDEX CONSUMPTION FUNCTION CONSUMPTION SMOOTHING CONTINGENT VALUATION COVARIATE SHOCKS COVERAGE CPI CROP DIVERSIFICATION CROP INSURANCE DECISION VARIABLES DEVELOPED COUNTRIES DICHOTOMOUS CHOICE DISCOUNT RATE DROUGHT ECONOMIC BEHAVIOR EMPIRICAL ANALYSIS EQUILIBRIUM EXPECTED UTILITY EXPECTED VALUE EXPECTED VALUES EXPENDITURES EXPORTS FARM INCOME GDP HOUSEHOLD CONSUMPTION HOUSEHOLD INCOME IDIOSYNCRATIC SHOCKS INCOME INCOME RISKS INCOME SUPPORT INDEMNITY INSURANCE INSURANCE CONTRACTS INSURANCE INDUSTRY INSURANCE SYSTEMS LEISURE LIBERALIZATION LIQUIDITY LIVING STANDARDS MACROECONOMIC GROWTH OPPORTUNITY COST OPTIMIZATION PER CAPITA INCOME POLICY RESEARCH POOR POVERTY ALLEVIATION POVERTY LINE PREMIUMS PRICE FLOOR PRICE FLUCTUATIONS PRICE RISK PRICE VARIATIONS PRIVATE INSURANCE PRODUCERS PRODUCTION INPUTS PRODUCTION PATTERNS PROGRAMS PUBLIC INSURANCE REAL INCOME RECIPROCITY RISK RISK AVERSION RISK MANAGEMENT RISK MITIGATION SAFETY NETS SAVINGS SELF INSURANCE SHARECROPPING SMOOTHING CONSUMPTION TAX REVENUE TAX REVENUES TIMBER TIME SERIES UTILITY FUNCTION WEATHER PATTERNS WILLINGNESS TO PAY WTP COMMODITY PRODUCERS DEVELOPING COUNTRIES AGRICULTURAL PRODUCT MARKETING INSURANCE CASE STUDIES COCOA TRADE COMMODITY PRICES PRICE VOLATILITY INSURANCE PREMIUMS HOUSEHOLD INCOME RISK MANAGEMENT HOUSEHOLD CONSUMPTION INCOME SECURITY LIVING STANDARDS INDICATORS PRICE INDEXES PRICE MARGINS OPTION VALUE
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World Bank, Washington, DC
Africa | Ghana
2014-08-07T20:30:39Z | 2014-08-07T20:30:39Z | 2002-09

The author considers the benefit to agricultural producers of commodity price insurance that provides in every year-but in advance of the resolution of production and price uncertainty--a minimum price for a fixed or variable portion of production. Under the assumption that producers do not change their long term production and income diversification pattern, the author suggests a theoretical framework that leads to explicit formulas of the benefit in providing this type of insurance. He shows that this benefit depends not only on the actuarially fair insurance premium, but also on household-specific factors that depend on the attitudes to risk, the consumption smoothing parameters, and the household-specific exposures to income risks. The author applies the theoretical framework for Ghana, using the Ghana Living Standards Survey data to specify various classes of cocoa-producing households and monthly price data for both domestic and international prices, to formulate appropriate models for ascertaining price risks faced by producers. The author gives empirical estimates of the actuarially fair premium, and shows that they are smaller than market-based put option prices from organized exchanges. The overall benefit in providing minimum price insurance to households, however, turns out to be substantially higher than the actuarially fair premiums and the market-based put option prices. This is due to both the magnitude of the uncertainties facing the households, as well as their risk and consumption smoothing behavior.

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