Does Crop Insurance Reduce the Need for Cash Reserves in Savings Accounts?
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One of the most fundamental and traditional risk management tools available to agricultural producers is a savings account. Cash reserves in savings provide a safety net for producers, allowing financial obligations and living expenses to be met when unexpected shortfalls in income occur. Crop insurance, another risk management tool, likely reduces the cash reserves required to be held in savings as it aids in mitigating risks ranging from total disasters to uncertainties in market conditions. This study utilizes a stochastic farm level simulation model in a representative farm framework to evaluate the impacts of alternative crop insurance scenarios on levels of savings necessary to maintain target ending cash reserve numbers for producers in major production areas of the Southern United States.