THE DEMAND FOR COMMODITY INSURANCE BY DEVELOPING COUNTRY AGRICULTURAL PRODUCERS: THEORY AND AN APPLICATION OF COCOA IN GHANA

The paper considers the benefit to agricultural producers from commodity price insurance that provides in every year, but in advance of the resolution of production and price uncertainty, a minimum price for a fixed or variable portion of production. Under the assumption that producers do not change their long term production and income diversification pattern, the theoretical framework suggested leads to explicit formulas for the benefit from providing this type of insurance. The theoretical framework is implemented for Ghana, using the GLSS data to specify various classes of cocoa producing households, and monthly price data for both domestic and international prices to formulate appropriate models for ascertaining price risks faced by producers. Empirical estimates of the actuarially fair premium are given, and it is shown that they are smaller than market based put option prices from organized exchanges. The overall benefit to households, however, turns out to be substantially higher than the actuarially fair premiums, as well as the market based put option prices, due to the magnitudes of the uncertainties facing the households, as well as their risk and consumption smoothing behavior.