Association of Rainfall and Detrended Crop Yield Based on Piecewise Regression for Agricultural Insurance

(ProQuest: ... denotes formulae omitted.)INTRODUCTIONAgricultural practices are main source of income for the large percentage of the population in developing countries. Farming usually tops the list among the agricultural practices that generate income for the majority of the population. In Ghana farming represents 36 percent of the country's GDP and is the main source of income for 60 percent of the population. In recent years, economic growth in agricultural sectors in Ghana has surpassed growth in the nonagricultural sectors. Income from agricultural sectors have expanded by an average annual rate of 5.5 percent compared to 5.2 percent overall growth of the whole economy (Bogetic et al., 2007). Along with other developing countries, climate changes in Ghana have negatively impacted their agricultural economy (Etwire et al., 2013). Loss of agricultural income including destruction of crops and livestock drive poor farmers into complete poverty and left them with very little chance for reclaiming their livelihood. Indirect impacts from loss of income include sub-optimal management of financial risk exposures, for example, selecting low-risk, low-return assets and activity portfolios that reduce the risk of greater suffering, that limit growth potential and investment incentives. This situation deteriorates more by reduction in nutrient intake, withdrawing of children from school, and hiring them out to work. The problem exacerbates further by the reaction of financial institutions and by their decision to restrict lending to farmers in order to minimize exposure of financial risk. All of these consequences collectively hinder overall economic growth (Barnett et al., 2008).One of the major factor that may have varying impact on crop growth and crop yield is weather. However, the weather related effects on crop growth and crop yield depends on other agronomic factors, such as, fertilizer use, plant density, soil type, and soil condition. One of the major weather conditions that have an impact on crop yield is the amount of rainfall received during growing season (availability of water for regions without any access to irrigation). In many parts of the world rainfall amount affect water availability in the soil, crop type, growth patterns of crops, and yield outcome of crops (Al-Kaisi & Broner, 2011). The relationship between water availability and yield outcome is depended upon the particular crop's sensitivity to water deficiency during growth stages. In general, crops are more sensitive to water deficiency during emergence, flowering, and early fruit formation stages. Consequently, amount and timing of rainfall can cause heavy crop losses for farmers. One way, in which farmers can deal with these losses is through agricultural insurance. It has been one of the most useful tools for managing the financial risks associated with farming. However, traditional insurance has several drawbacks, specifically in developing countries because of its high transaction costs and other challenges that may hinder the protection from risk for financial institutions (Skees, 2008). In order for an insurance to work, the purchasers must perceive that the premiums and expected benefits offer value; while the sellers must see opportunity for a positive actuarial (statistically reliable) profitable outcome over time. An example of a traditional insurance is a "yield insurance" that provides yield guarantee, based on regional average yield or on individual historic yield, where the main risks affecting yield (e.g. drought) are comprised. In developed countries such as USA, this type of insurance is also called combined or multi-peril insurance. This type of traditional crop insurance relies on direct measurement of the loss or damage suffered by an individual farmer. However, field loss assessment is normally costly or not feasible, particularly where there are large numbers of small-scale farmers or where insurance markets are undeveloped and creates a challenge in the implementation process. …