Source: CORNELL UNIVERSITY submitted to NRP
AGRICULTURAL AND RURAL FINANCE MARKETS IN TRANSITION (NC1014, NC221, NCT-194)
Sponsoring Institution
National Institute of Food and Agriculture
Project Status
COMPLETE
Funding Source
HATCH
Reporting Frequency
Annual
Accession No.
0225839
Grant No.
(N/A)
Cumulative Award Amt.
(N/A)
Proposal No.
(N/A)
Multistate No.
NC-_OLD1177
Project Start Date
Oct 1, 2011
Project End Date
Sep 30, 2014
Grant Year
(N/A)
Program Code
[(N/A)]- (N/A)
Recipient Organization
CORNELL UNIVERSITY
(N/A)
ITHACA,NY 14853
Performing Department
Applied Economics & Management
Non Technical Summary
With global climate change farmers world-wide face uncertainties which may not easily be overcome by conventional adaptation strategies. As traditional contours of crop heat units change there will be climate related changes to the emergence of plant diseases and pathogens. In the developed and developing worlds the impact on crop yield variability (and its impact on food security) and farm livelihoods (and its impact on food insecurity) needs new approaches to risk management. We propose to investigate the first principles of writing weather insurance on multiple or jointly distributed weather risks. We see the advantages of investigating jointly distributed weather index insurance in two significant ways the first dealing with specific event risks and the second dealing with plant disease/pathogen risk. For example, between heat and precipitation yields may fall if it is extremely hot and does not rain, but if precipitation is plentiful heat related risks may be minimal; a period of cool and damp can result in a different disease/pathogen risk than if it is cool and dry. Well defined joint risks can better target the risk and reduce costs to the insured. This research will require a much more scientific approach to insurance design than is presently considered by agricultural economists in assessing climate related agricultural risks. The research addresses problems faced by New York farmers and by identifying first principles that are scalable and transportable, it addresses weather and climate risk across global agricultural economies.
Animal Health Component
(N/A)
Research Effort Categories
Basic
(N/A)
Applied
(N/A)
Developmental
(N/A)
Classification

Knowledge Area (KA)Subject of Investigation (SOI)Field of Science (FOS)Percent
6010420301030%
6010430301010%
6020420301030%
6020430301010%
6110420301010%
6110430301010%
Knowledge Area
601 - Economics of Agricultural Production and Farm Management; 602 - Business Management, Finance, and Taxation; 611 - Foreign Policy and Programs;

Subject Of Investigation
0420 - Weather; 0430 - Climate;

Field Of Science
3010 - Economics;
Goals / Objectives
Examine the impact of recent fluctuations in capital and commodity markets on the performance, management, and regulation of agricultural financial institutions Evaluate the management strategies, capital needs, and policy impacting the financial performance and long-term sustainability of firms in the food and agribusiness sector Identify financial institutions and services that benefit agricultural producers and rural communities and expand agricultural markets, especially those producers that are beginning, young, from socially disadvantaged groups, and/or involved in producing specialty crops Investigate capital structure, financial performance, and investment strategies of firms producing renewable energy in context of long term climate change. Implications of these findings for agriculture and rural communities will be delineated
Project Methods
The research introduces models for hedging weather risk that gives rise to pests and diseases(e.g. Karnal Bunt and Phytophthora infestans and others) A second model will be designed to insure against additional capital expenditures related to pest and disease risks, such as pesticide and fungicide use. This is accompanied by examining pest/disease risks, (e.g. Stewarts Disease of corn). The research will investigate the relationship between Growing Degree Days, index insurance, and pest management. Although both models are designed to trigger when in the presence of the weather conditions favorable to disease growth, the two models differ in their insured quantity. The first model seeks to insure for yield losses directly caused by pest and diseases and includes parameters for yield loss and rate of infection given the favorable weather conditions. The data will include a number of climate variables including NOAA daily The research introduces models for hedging weather risk that gives rise to pests and diseases(e.g. Karnal Bunt and Phytophthora infestans and others) A second model will be designed to insure against additional capital expenditures related to pest and disease risks, such as pesticide and fungicide use. This is accompanied by examining pest/disease risks, (e.g. Stewarts Disease of corn). The research will investigate the relationship between Growing Degree Days, index insurance, and pest management. Although both models are designed to trigger when in the presence of the weather conditions favorable to disease growth, the two models differ in their insured quantity. The first model seeks to insure for yield losses directly caused by pest and diseases and includes parameters for yield loss and rate of infection given the favorable weather conditions. The data will include a number of climate variables including NOAA daily.

Progress 10/01/11 to 09/30/14

Outputs
Target Audience: During this reporting period we have expanded our ideas to investigate risk contingent credit outside of the USA and to examine the economics of agricultural productivity and climate change. This has involved examine a variety of risk structures in Kenya, China and Mexico with lessons learned very much applicable to the USA. In Kenya we leveraged funds to examine the role of weather-based risk contingent credit for dairy and pastoral farmers; in China we investigated a host of economic issues tied to climate including agricultural productivity and sustainability, poverty traps, and nutritional poverty traps and other nutritional based impacts on agricultural productivity due to climate change; in Mexico we investigated the structure of price risk management as a prelude to developing market price risk contingent credit and we also investigated risk rationing which examines the relationship between collateral, risk aversion and credit demand. We have discussed what we learned with CARE USA, CARE Kenya, Equity Bank Kenya and Holstein International and anticipate follow-on research. In 2014 we met with the German development bank KfW to discuss credit policy and linked credit. In 2015 proposals are under way with IFPRI to survey farms in Tanzania and elsewhere in Africa. Our survey build on credit rationing and credit access is to be used in these efforts. Within the USA we continued our investigation of the relationship between weather and plant disease risk, but more work is required to match the science to the economics. We hope to leverage these efforts to examine thoroughly a weather index insurance product for NY and Northeast forage producers, including dairy farms. A future Hatch application is pending Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest? Nothing Reported What do you plan to do during the next reporting period to accomplish the goals? Nothing Reported

Impacts
What was accomplished under these goals? The common thread between farmers' access to credit and credit risk is the systemic risks arising from weather and weather related events. The historical observation that wide-spread covariate risks make lenders reluctant to adequately supply farm and rural credit is part of the motivation behind the formation of the Farm Credit System as a Government Sponsored Enterprise. To address the issue of covariate risk recent interest has arisen in the 'linking' of insurance and agricultural credit. More specifically is the linking of credit risk to specific weather events as a structured financial product. While our original goal was of a technical nature, that is the development and investigation of structured financial products for agriculture, the process of development led to several other questions of practical significance to agricultural policy. For example, we observed a fairly new concept of risk rationing provided some important insights into farmer behavior under conditions of risk. Risk rationing refers to behavioral states in which farmers do not borrow, even when it is in their best interest to do so, because of a fear about losing collateral. Risk rationing can be as high as 35% in some agricultural economies, and our investigations have shown that a reduction in risk due to adverse weather events can increase demand for credit which adds then to the broader discussion of sustainability. We have argued that internal process directed towards linked-credit or risk-contingent credit can increase credit demand and supply while reducing overall credit risk in agriculture. Thus an important contribution is not only in technical financial engineering butalso inadvancing the policy debate. This research project was motivated by the relationship between weather-specific business risks and financial risks. We investigated the direct relationship between weather risks and credit in our development of risk-contingent credit. Risk contingent credit is a structured financial product in which the payment obligations to the borrower are reduced when a specific weather event is triggered. Formulas for pricing and evaluating risk-contingent credit have been developed for operating loans, mortgages, and bonds. On this latter point we have developed a catastrophe bond (CAT bond) which triggers reduced payments when either the long or short rains fall in Kenya. This is modelled after the Mexican earthquake cat bond, and can easily be adapted to cover catastrophic risks that are present but rare in New York and USA agriculture. We have extended the application in New York State to examine linked credit for dairy farmers. This is not a weather linked financial product but a natural extension of the basic idea in that a put option on class III milk is imbedded in a credit product. The insurance part is triggered when prices fall below a specified strike price. The further the market price falls below its strike the less the borrower- dairy farmer pays on debt.

Publications

  • Type: Journal Articles Status: Published Year Published: 2014 Citation: de Leeuw,Jan Anton Vrieling, Apurba Shee, Clement Atzberger, Kiros M. Hadgu, Chandrashekhar M. Biradar, Humphrey Keah and Calum Turvey (2014) The Potential and Uptake of Remote Sensing in Insurance: A Review. Remote Sensing. 6(11), 10888-10912; doi:10.3390/rs61110888
  • Type: Journal Articles Status: Published Year Published: 2014 Citation: Kong, Rong , Calum Turvey, Xiaolan Xu, Fei Liu, (2014) "Borrower attitudes, lender attitudes and agricultural lending in rural China", International Journal of Bank Marketing, Vol. 32 Iss: 2
  • Type: Journal Articles Status: Published Year Published: 2015 Citation: Kong, R., Calum G. Turvey and Hira Channa (2015) "Factors Affecting Farmers Participation in Chinas Group Guarantee Lending Program China Agricultural Economic Review Vol 7(1)
  • Type: Journal Articles Status: Published Year Published: 2014 Citation: Ricketts, K., C.G. Turvey and M. Gomez (2014) Value Chain Approaches to Development: Smallholder Farmer Perceptions of Risk and Benefits across Three Cocoa Chains in Ghana . Journal of Agribusiness in Developing and Emerging Economies 4(1):2-22
  • Type: Journal Articles Status: Published Year Published: 2014 Citation: Verteramo Chiu, Leslie J., Calum G. Turvey, (2014) "Cross market price support and agricultural development: Quanto options valuation for cash grains in Mexico", Journal of Risk Finance, The, Vol. 15 Iss: 1, pp.33  51
  • Type: Journal Articles Status: Published Year Published: 2014 Citation: Verteramo Chiu, Leslie J., Sivalai V. Khantachavana and Calum G. Turvey, (2014). Risk Rationing and the Demand for Agricultural Credit: A Comparative Investigation of Mexico and China. Agricultural Finance Review 74(2):248-270
  • Type: Journal Articles Status: Accepted Year Published: 2015 Citation: Sun, Lin, C.G. Turvey and R. A. Jarrow (2015) Designing Catastrophic Bonds for Catastrophic Risks in agriculture: Macro Hedging long and short rains in Kenya. Agricultural Finance Review (in press)


Progress 10/01/12 to 09/30/13

Outputs
Target Audience: During this reporting period we have expanded our ideas to investigate risk contingent credit outside of the USA and to examine the economics of agricultural productivity and climate change. This has involved examine a variety of risk structures in Kenya, China and Mexico with lessons learned very much applicable to the USA. In Kenya we leveraged funds to examine the role of weather-based risk contingent credit for dairy and pastoral farmers; in China we investigated a host of economic issues tied to climate including agricultural productivity and sustainability, poverty traps, and nutritional poverty traps and other nutritional based impacts on agricultural productivity due to climate change; in Mexico we investigated the structure of price risk management as a prelude to developing market price risk contingent credit and we also investigated risk rationing which examines the relationship between collateral, risk aversion and credit demand. We have discussed what we learned with CARE USA, CARE Kenya, Equity Bank Kenya and Holstein International and anticipate follow-on research. Within the USA we continued our investigation of the relationship between weather and plant disease risk, but more work is required to match the science to the economics. Also in 2013 we spent a considerable effort upgrading weatherwizard (our program for determining weather insurance) to include NOAA data from 2006 to 2013. We hope to leverage these efforts to examine thoroughly a weather index insurance product for NY and Northeast forage producers, including dairy farms. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? In 2013 we hired a student full time to develop the weather wizard program which offered the student the opportunity to deal with web-based SQL and Visual Studio.Net architectures. In 2013 we hired a post doc to assist in the research design of risk contingent, weather and risk attitudes research. How have the results been disseminated to communities of interest? Nothing Reported What do you plan to do during the next reporting period to accomplish the goals? The next reporting period will be the final report. Throughout 2014 we will continue to develop our software and explore new research opportunities for risk contingent credit for both domestic and international agricultural economies.

Impacts
What was accomplished under these goals? We continue to explore in great depth the relation between weather and farm credit and are pursuing different structures for weather risk management. We are also initiating research on broader scale (macro level) climate effects on agricultural production. As previously indicated we are leveraging what we learned in previous research on risk contingent credit for US dairy farms to provide weather risk management solutions in Kenya. Our climate risk research in China allowed us to explore state-of-the-art models for examining sustainability and climate change which we are now applying to a study of climate adaptation and weather risk for the USA (with Joshua Woodard). Our research into risk rationing opens up new theoretical and empirical opportunities to investigate farmer risk aversion and collateral risk in terms of credit demand. Our work on objective versus subjective risk has advanced our knowledge about risk perceptions and the cognitive ability (or inability) of farmers to assess objective risks in a way that is compatible with the uptake of fairly priced insurance.

Publications

  • Type: Journal Articles Status: Awaiting Publication Year Published: 2014 Citation: Turvey, C.G., J. Woodard and E. Liu (2014) Financial Engineering for the Farm Problem. Agricultural Finance Review Forthcoming
  • Type: Journal Articles Status: Published Year Published: 2014 Citation: Li and C.G. Turvey (2014) Climate change, adaptation and China's grain production. China Economic Review 28(1):72-89.
  • Type: Journal Articles Status: Published Year Published: 2014 Citation: Kumar, C. C.G. Turvey and J.D. Kropp (2013) The Impact of Credit Constraints on Farm Households: Survey Results from India and China Applied Economic Perspectives and Policy: 35(3):508-527
  • Type: Journal Articles Status: Published Year Published: 2013 Citation: Turvey, C.G. (2013) Policy Rationing in Rural Credit Market Agricultural Finance Review. 73(2): 209-232
  • Type: Journal Articles Status: Published Year Published: 2013 Citation: Turvey, C.G., X. Gao, R. Nie, L. Wang and R. Kong.(2013). 28) Turvey, C.G., X. Gao, R. Nie, L. Wang and R. Kong.(2013). "Subjective Risks, Objective Risks and the Crop Insurance Problem in Rural China". The Geneva Papers on Risk and Insurance - Issues and Practice. 38:612-633


Progress 10/01/11 to 09/30/12

Outputs
OUTPUTS: Under this project I have conducted a number of research projects related to weather risk and risk contingent credit. Two projects have been completed with publications. The first examined the relationship between weather and the emergence of plant diseases (Karnal Bunt and Stewarts Disease). Although we intended to promote the idea of insuring specific plant diseases our research showed that much more research is needed. In particular, attributing disease and pest emergence to weather needs a scientific basis before economic analysis can be done. Outputs in the short term will be in academic circles with much work to do before determining whether these ideas are viable. Related work on weather basis risk and weather insurance worked out fine and has been published with presentations made at various conferences with risk scholars and insurance industry representatives, including the Risk Management Agency. In other research we investigated the relationship between natural vegitation indices (NDVI) and weather risk. This research has been published in a scientific journal that is targeted to agro meteorologists, insurers, and other social scientists with interest in weather risk management. Research on using weather insurance in a risk contingent credit model is on-going. PARTICIPANTS: Michael Norton, Apurba Shee and Megan McLaurin are former graduate students. Daniel Osgoode is a professor in the Earth Institute at Columbia University. Vicki Bogen is and Associate professor in the Dyson School. TARGET AUDIENCES: Nothing significant to report during this reporting period. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.

Impacts
In the plant disease research we developed techniques to insure conditional weather risks. This was a mathematical exercise. However it was far more difficult to put it into practice because the scientific literature from plant science and plant pathology use different measures of disease emergence than what can be easily insured. A paper has been prepared and was well recieved on the ideas with a revise and resubmit, but we will have to see whether we can overcome the problems of implimentation. Our research on weather 'basis' risk developed brand new techniques and algorithms for examining correlations amongst weather variables at weather stations within a geographic circle up to 50 miles. This research was immediately accepted when submitted for publication. The outcome of this research is a method to determine how to write weather insurance contracts across multiple, correlated weather stations. NDVI research was motivated by the use of satellite imaging for insurance purposes in sub-saharan Afica and China. NDVI was being promoted but nobody had actually tested the generality of NDVI as an index of precipitation or heat risk, or how this related to crop yields. Using USA/NOAA data we showed that NDVI may not be a panacea for risk management in development (or even in the USA). While we did the research with the intent of promoting NDVI in insurance, our paper was prepared to warn off paractitioners from using NDVI as a matter of course.

Publications

  • Norton, Michael T., Calum G. Turvey, Daniel E Osgood, (2012),"Quantifying Spatial Basis Risk for Weather Index Insurance", The Journal of Risk Finance, Vol. 14 Iss: 1, 20-34
  • Shee, A. and C.G. Turvey (2012) "Collateral Free Lending with Risk-Contingent Credit for Agricultural Development: Indemnifying Loans against pulse crop price risk in India. Agricultural Economics:43(5):561-574
  • Turvey, C.G. and M. McLaurin (2012/13) Applicability Of The Normalized Difference Vegetation Index (NDVI) In Index-Based Crop Insurance Design. Weather, Climate and Society. 4(4) 271-284
  • Turvey, C.G., V. Bogan and C. Yu (2012/13) Small Businesses and Risk Contingent Credit. Journal of Risk Finance. Vol. 13 Iss: 5 pp. 491 - 506