Valuing Counter-Cyclical Payments: Implications for Producer Risk Management and Program Administration
by Gerald Plato, David W. Skully, and Demcey Johnson
Economic Research Report No. (ERR-39) 38 pp, February 2007
A model developed for this analysis improved on the USDA method of estimating counter-cyclical payment rates by accounting for the variability in market price forecast errors. This enhanced method produced unbiased estimates. Forecasters and producers can use the model to calculate the probabilities of repayment. Producers can reduce the probability of repayment by using commodity futures contracts to hedge against losses in expected counter-cyclical payments. Hedging, however, is only moderately effective and varies by commodity.
Keywords: 2002 Farm Act, farm and commodity policy, counter-cyclical payments, risk management, price uncertainty
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