Bise, Elizabeth Hart (2007-08). Mitigating cotton revenue risk through irrigation, insurance, and/or hedging. Master's Thesis. Thesis uri icon

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.
  • 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.

publication date

  • August 2007