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

51 Pages Posted: 20 Apr 2016

See all articles by Alexander H. Sarris

Alexander H. Sarris

National and Kapodistrian University of Athens - Faculty of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2002

Abstract

Sarris 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.

This paper - a product of Rural Development, Development Research Group - is part of a larger effort in the group to analyze mechanisms for risk mitigation in agriculture.

Suggested Citation

Sarris, Alexander, The Demand for Commodity Insurance by Developing Country Agricultural Producers: Theory and an Application to Cocoa in Ghana (September 2002). World Bank Policy Research Working Paper No. 2887. Available at SSRN: https://ssrn.com/abstract=636250

Alexander Sarris (Contact Author)

National and Kapodistrian University of Athens - Faculty of Economics ( email )

8 Pesmazoglou street
GR-10559 Athens
Greece
(30-1)8031571 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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