In 2005 the EU lowered the guaranteed minimum prices for crops in its Common Agricultural Policy and stopped market interventions.
Consequently, prices started to fluctuate more intensively, and farmers' incomes are now subject to higher price volatility.
A crop price insurance scheme could provide an interesting instrument to stabilise the income of European farmers. We analyse
the premium level and capital requirement of a hypothetical insurance contract covering several combinations of minimum prices
for a bundle of wheat, maize, and rape seed. The premium level is based on the Black option pricing model and a Bayesian autoregressive
stochastic volatility model. Monte Carlo simulated forecasts provide estimates for expected variances and a profit-loss distribution
for various combinations of minimum prices. The required solvency capital to keep the insurance business afloat at the 1 percent
ruin probability creates capital costs exceeding the expected profit.
JEL-Codes:Q14, G22, C58
Keywords:crop insurance program, option pricing, time varying volatility
Forschungsbereich:Makroökonomie und europäische Wirtschaftspolitik