Dual use insurance for annual forage producers: comparing risk management alternatives

Abstract

PurposeThe purpose of this paper is to evaluate the Dual Use (DU) Option – a crop insurance policy created by the 2018 Farm Bill – relative to other policies available to dual-purpose annual forage producers. The new policy combines existing rainfall-based policies for annual forage crops and multi-peril policies for grain, allowing coverage for multiple crop uses on the same acres during the same growing season.Design/methodology/approachThe paper uses a simulation model to examine crop insurance choices for a typical Texas dual-purpose wheat farm. The certainty equivalent (CE) of wealth is used to rank choices within and between three insurance plans and to analyze the effects of those choices over a range of producer risk aversion levels and for three cases of yield expectations.FindingsThe DU Option is more preferred as risk aversion increases, but it is not universally preferred. Therefore, while the policy can be a viable risk management tool, certain restrictions may be limiting its effectiveness.Practical implicationsThe findings of this paper can help explain farm-level decision making related to dual-purpose annual forage crop insurance program choices.Originality/valueThis paper contributes to the literature by documenting a new crop insurance program made available in the 2018 Farm Bill and provides insights into producers' possible choices by evaluating extensive scenarios.