Impact of Climate Information on Reducing Farm Risk by Optimizing Crop Insurance Strategy

Predictability of seasonal climate variability associated with the El Nio Southern Oscillation (ENSO) suggestsa potential to reduce farm risk by selecting crop insurance products with the purpose of increasing farm income stability. Ahypothetical 50% peanut, 50% cotton, non-irrigated, 40 ha (100 ac) north Florida farm was used to study the interactionsof different crop insurance products with ENSO-based climate information and levels of risk aversion under uncertainconditions of climate and prices. Crop yields simulated by the DSSAT suite of crop models using multiyear weather datacombined with historical series of prices were used to generate long series of stochastic income distributions in a whole-farmmodel portfolio. The farm model optimized planting dates and simulated uncertain incomes for 50 alternative crop insurancecombinations for different levels of risk aversion under different planning horizons. Results suggested that incomes aregreatest and most stable for low risk-averse farmers when catastrophic (CAT) insurance for cotton and 70% or 75% actualproduction history (APH) for peanut are selected in all ENSO phases. For high risk-averse farmers, the best strategy dependson the ENSO phase: (1) 70% crop revenue coverage (CRC) or CAT for cotton and 65% APH for peanut during EL Nio years;(2) CAT for cotton and 65%, 70%, or 75% APH for peanut during neutral years; and (3) 65% to 70% APH, or CAT for cottonand 70% APH for peanut during La Nia years. Optimal planting dates varied for all ENSO phases, risk aversion levels, andselected crop insurance products.