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Valuing Counter-Cyclical Payments: Implications for Producer Risk Management and Program Administration

  • by David W. Skully and Demcey Johnson
  • 2/22/2007
  • ERR-39

Overview

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.

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