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Options on agricultural commodities with maturities exceeding one year seldom trade. One possible reason to explain this lack of trading is that we do not have an accurate option pricing model for products where mean reversion in spot-price levels can be expected. Standard option pricing models assume proportionality between price variance and time to maturity. This proportionality is not a valid assumption for commodities whose supply response brings prices back to production costs. The model proposed here incorporates mean reversion in spot-price levels and includes a correction for seasonality. Mean reversion and seasonality are both observed in the soybean market. The empirical analysis lends strong support to the model.

Futures markets on agricultural commodities typically trade with maximum maturity dates of less than four years. If these markets did trade with maturities eight or ten years distant, futures prices would have value as price forecasts and as a way to structure long-term swaps and insurance contracts. Agricultural commodity markets generally exhibit mean reversion in spot prices and convenience yields. Spot markets also exhibit seasonality. This study develops and implements a procedure to generate long-term futures curves from existing futures prices. Data on lean hogs and soybeans are used to show that the method provides plausible results. Copyright 2012, Oxford University Press.

Increased availability and demand for low-deductible crop insurance policies have increased focus on crop insurance rating methods. Actuarial fairness cannot be achieved if constant multiplicative factors are used to determine how premiums change as coverage levels increase. A comparison of premium rates generated by the factors used by the two most popular crop insurance products with those generated by a standard yield distribution shows that the popular insurance products overcharge for low-deductible policies in most counties. This overpricing may explain why large premium subsidies were required to induce farmers to move from low-deductible to high-deductible policies beginning in 2001. Crop insurance is by far the most popular risk management tool used by the U.S. crop producers. In 2003, the U.S. crop insurance program insured more than 200 million acres, representing more than $37 billion in value, with total premium of over $3.14 billion. The two most popular crop insurance products are Actual Production History (APH), which provides insurance against low yields, and Crop Revenue Coverage (CRC), which is a revenue insurance product. Both of these products offer coverage in 5% increments from 65% to 85% of expected yield or revenue. Beginning with the 2001 crop year, Congress greatly increased subsidy levels to induce producers to purchase more insurance coverage. Producers responded as expected. For example, only 2.3% of Kansas wheat was insured at levels in excess of 65% in 1998. This proportion rose to 71.6% in 2003. This policy change has increased focus on the methods used by the Risk Management Agency (RMA) of USDA to set insurance rates at higher coverage levels. APH premium rates are calculated by multiplying the premium rate at the 75% coverage level by a rate