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An Insurance Approach to Risk Management in the Ethanol Industry
Agricultural and Resource Economics Review
  • Nicholas D. Paulson, University of Illinois
  • Bruce Babcock, Iowa State University
  • Chad E. Hart, Iowa State University
  • Dermot J. Hayes, Iowa State University
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Publication Version
Published Version
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The vast majority of crop and revenue insurance policies sold in the United States are single-crop policies that insure against low yields or revenues for each crop grown on the farm. But, increasingly, producer income is based more on the value of crops that have been converted into a value-added product such as ethanol. Moreover, the recent increases in energy and commodity price levels and volatilities emphasize the importance of risk management to ethanol investors. This paper uses an insurance approach to outline a risk management tool which mimics the gross margin level of a typical corn-based ethanol plant. The gross margin, premium, and indemnity levels are calculated on a per bushel basis to enable producers/investors to utilize the product based on their ownership share in the production facility. The fair premium rates are shown to be quite sensitive with respect to corn and energy price levels and volatilities.

This is an article from Agricultural and Resource Economics Review, 37(1) April 2008; 51-62. Posted with permission.

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Northeastern Agricultural and Resource Economics Association
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Citation Information
Nicholas D. Paulson, Bruce Babcock, Chad E. Hart and Dermot J. Hayes. "An Insurance Approach to Risk Management in the Ethanol Industry" Agricultural and Resource Economics Review Vol. 37 Iss. 1 (2008) p. 51 - 62
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