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ISHS Acta Horticulturae 1132: XVIII International Symposium on Horticultural Economics and Management

Hail risk management in fruit production: anti-hail net versus hail insurance in Germany

Authors:   M. Gandorfer, A. Hartwich, V. Bitsch
Keywords:   certainty equivalent, expected utility model, hedging efficiency, historic simulation, production risk, risk analysis, risk aversion
DOI:   10.17660/ActaHortic.2016.1132.19
Abstract:
Hail damage belongs to the most important sources of production risk in fruit farming. Associated yield and quality losses have severe negative economic consequences at the farm level. Consequently, proper hail risk management adapted to local conditions is essential for successful farm management. To manage hail risk, fruit farmers can select from various options. Both hail cannons and cloud seeding planes are only economically viable if shared among a group of farmers due to the high investment needed. A popular farm-specific hail management instrument is spatial diversification of orchards. The most commonly used instruments are anti-hail nets and hail insurance. A major difference between anti-hail nets and hail insurance is that establishing an anti-hail net requires a long term investment while the decision for a hail insurance can be made annually. Furthermore, the two instruments hedge hail risk in different ways. While hail insurance covers (ex post) the monetary yield and quality loss the anti-hail net prevents yield and quality damage. Based on a time series of 10 years of insurance data of three apple orchards in Germany a risk analysis (historical simulation) of hail insurance and anti-hail nets is presented. The risk analysis accounts for orchard-specific hail risk and farmersRSQUO risk aversion applying an expected utility model. Analysis shows that hail insurance is particularly interesting for highly risk averse farmers with high debt-to-asset ratios associated with low initial wealth at locations with medium hail risk. At locations with high hail risk, anti-hail nets are the preferable risk management instrument in terms of certainty equivalent outcomes.

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