The Feasibility Analysis and Scheme Design of Raw Milk Price Index Insurance in China

Authors

  • Liyu Feng School of Insurance, Central University of Finance and Economics

DOI:

https://doi.org/10.14738/abr.511.3855

Keywords:

Raw milk, Price index insurance, Feasibility, Insurance scheme

Abstract

Dairy producers in China has been suffering from more and more frequently raw milk price fluctuations in recent years. Price Index insurance can be an effective tool of market risk management. We find that there are foreseeable trend, cyclical and seasonal factors in raw milk price fluctuations, and also systematicness in price risk, which make the raw milk price risk uninsurable. But by rationally designing the insurance scheme and institutional innovations, the price risks could become insurable. The choice and construction of milk price index are the core tasks of the scheme design. Income over feed cost could well reflect the actual profitability of milk production and is good to be used as milk price index. To prevent moral hazards and adverse selection, the contract should make stipulations on the coverage level from aspects of production covered and risk retention. We also carry a calculation of actuarially fair premium for the designed insurance contract using distribution approximation and Monte Carlo stimulation. 

Author Biography

Liyu Feng, School of Insurance, Central University of Finance and Economics

My department is School of Insurance in Central University of Finance and Economics, ranking No.1 among similar shcools in China.

References

. Bozic, Marin, et al. "Margin Protection Program for Dairy Producers: Implementation, Participation and Conse-quences."Selected Paper prepared the AAEA Crop Insurance Symposium, Louisville, KY. 2014.

. Cabrera, V.E., and D. Solis. 2008. Managing the newly created LGM-Dairy insurance under seasonal climate varia-bility. J. Dairy Sci. 91 (Suppl. 1):557.

. Cabrera, Victor E., B. W. Gould, and M. Valvekar. "Livestock Gross Margin Insurance for Dairy Cattle: An Analysis of Program Performance and Cost under Alternative Policy Configurations.” General Information(2009).

. Chuhui, L., Yan, W. " Study on the Impact of Agricultural Products Price Insurance on the Market and the Fisical Policies: the Case of Shanghai Vegetable Price Insurance Program." Public Finance Studies 11(2012):16-19.

. Farm Bureau. 2018 Farm Bill. What are the differences between MPP and LGM-Dairy? https://www.fb.org/files/2018FarmBill/What are the Differences between MPP and LGM-Dairy.pdf

. Gould, B., and V. Cabrera. "USDA’s Livestock Gross Margin Insurance for Dairy: What is it and how can it be used for Risk Management." Staff Paper 562 (2011).

. Guodong, J., Ke, W. "Study on Farm Produce Price Index Insurance." Southwest Finance 8(2016): 72-76.

. Hui, T. "The Difficulties and Principles in developing Farm Produce Price Insurance in China.” Economic Review 6 (2016): 62-69.

. Ke, W., et al. "The Feasibility of Farm Produce Price Index Insurance." Insurance Studies 1(2014): 40-45.

. Mark, Tyler, and Kenneth Burdine. "Will the New Dairy Margin Protection Program Reduce Risk for Dair-ies?." Selected Paper prepared for presentation at the Southern Agricultural Economics Association’s 2015 Annual Meeting, Atlanta, Georgia. 2015.

. Qixiang, S. ”Insurable risks: the foundation of insurance”. China Insurance (2009): 12-16.

. Qiao, Z., Biwang, W., Ke, W. "The Feasibility and Scheme Design of Swine Price Insurance in China." Insurance Studies 1(2015):54-

. Qiao, Z., Biwang, W., Shuting, S., "Study on Price Insurance of Eggs in Beijing." Agricultural Outlook 9.11(2013):46-50.

. Risk Management Agency (RMA). 2009c. Livestock gross margin insurance policy: Step by step instructions to calculate premium. USDA Risk Management Agency.

. Risk Management Agency (RMA). 2009a. Livestock gross margin insurance policy. http://www.rma.usda.gov/policies/20

. Si, C., Guixia, Qian. "Raw Milk Price Fluctuation and the Control Policies." Agricultural Outlook 7.6 (2011): 15-18.

. Stephenson, Mark W., and Andrew M. Novakovic. "The dairy subtitle of the Agricultural Act of 2014." Choices 29.1 (2014): 1-4.10/lgm/10lgmdairypolicy.pdf Accessed Aug.14, 2009.

. Valvekar, Mayuri, et al. "Revenue risk management, risk aversion and the use of Livestock Gross Margin for Dairy Cattle insurance." Agricultural Systems 104.9(2011):671–678.

. Valvekar, M., V. E. Cabrera, and B. W. Gould. "Identifying cost-minimizing strategies for guaranteeing target dairy income over feed cost via use of the Livestock Gross Margin dairy insurance program." Journal of Dairy Sci-ence 93.7(2010):3350-7.

. Wolf, C. A. "Understanding the milk-to-feed price ratio as a proxy for dairy farm profitability.” Journal of Dairy Science 93.10(2010):4942-8.

. Wolf, C. A. "Dairy farmer use of price risk management tools. " Journal of Dairy Science 95.7 (2012):4176–4183.

Downloads

Published

2017-11-29

How to Cite

Feng, L. (2017). The Feasibility Analysis and Scheme Design of Raw Milk Price Index Insurance in China. Archives of Business Research, 5(11). https://doi.org/10.14738/abr.511.3855