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ARS Home » Pacific West Area » Maricopa, Arizona » U.S. Arid Land Agricultural Research Center » Pest Management and Biocontrol Research » Research » Publications at this Location » Publication #192693
Title: Managing economic risk caused by insects: Bug options

Author
item RICHARDS, TIMOTHY - ASU, MESA, AZ
item EAVES, JAMES - RUTGERS UNIV, NJ
item FOURNIER, VALERIE - RUTGERS UNIV, NJ
item Naranjo, Steven
item Chu, Chang Chi
item Henneberry, Thomas

Submitted to: Agricultural Finance Reviews
Publication Type: Peer Reviewed Journal
Publication Acceptance Date: 7/1/2006
Publication Date: 10/1/2006
Citation: Richards, T.J., Eaves, J., Fournier, V., Naranjo, S.E., Chu, C., Henneberry, T.J. 2006. Managing economic risk caused by insects: bug options. Agricultural Finance Reviews Vol. 66(1): 27 - 45.

Interpretive Summary: The economic risk associated with insect pest management is high because most pest populations are unpredictable from year to year or farm to farm even within a defined region. As a consequence, the costs associated with insect control practices, even if they are predicated on precise sampling and the use of action thresholds are highly variable. Growers have limited access to insurance products that would otherwise allow them to manage such economic risk. A new type of derivative instrument – insect derivatives – is introduced as a means of providing growers a market-based means of transferring insect-risk to speculators or other who may profit from higher insect populations. In simple terms a bug-derivative would represent a contract between a grower, and say a chemical company, that would pay the grower if the insect populations exceed a certain agreed level and pay the company if the population failed to exceed this level. The concept is developed and parameterized using prior data of sweetpotato whitefly, Bemisia tabaci, infestations of cotton in the Imperial Valley of California. Simulation models show that insect derivatives can improve risk-return results. The results further show that insect derivatives may become important risk management tools for a wide range of growers.

Technical Abstract: The market for insuring insect damage is far from complete. This study introduces a new type of derivative instrument – insect derivatives – that provide growers a market-based means of transferring insect-risk to speculators or other who may profit from higher insect populations. A risk neutral valuation model is developed and applied to Bemisia tabaci population data. Economic simulation models show how insect derivatives can improve risk-return results for a representative cotton farm in the Imperial Valley of California. The results show that insect derivatives may become important risk management tools for a wide range of growers.