The impact of price hedging on subsidized insurance: Evidence from Canada

Abstract

This article examines the effect of price hedging on publicly subsidized insurance. Theoretically, the effect of hedging is found to have an ambiguous effect on the incentive to purchase revenue insurance. A simulation is used to analyze the relationship between hedging and the Canadian AgriStability program in three regions in Saskatchewan. AgriStability is a margin insurance product, though in the simulation I hold input use constant, allowing the program to operate as if it were revenue insurance. Hedging is found to substantially reduce enrolment in AgriStability in each region. Furthermore, in some simulations the benefits that producers receive from AgriStability are smaller than the value of government subsidies. The results offer an explanation for low participation in AgriStability and show that the risk-reducing effect of AgriStability is moderated by the ability of crop producers to hedge price risk through other means.