Effects of agricultural insurance on uncertainty in commodity prices and profit – a chaos analysis of hog market in China

We examine whether profit insurance can stabilize China's hog market, particularly its effects on hog prices and farmers' profit. Our objective is to assess how profit insurance contributes to stability in agricultural risk management. Based on the average profit of hog farmers, we designed an insurance policy. Using historical monthly data from China's hog market, the analysis applies the cobweb model and a simultaneous-equation model to conduct simulations and assess the influence of profit insurance on hog prices and farmers' profit. Additionally, chaotic analysis is applied to evaluate the macro-level stabilizing effect of profit insurance. The results show that profit insurance reduces the largest Lyapunov exponent (LLE) of hog prices and farmers' profit, indicating lower sensitivity of price and profit dynamics to small disturbances. The stabilizing effect on farmers' profit strengthens with higher levels of premium subsidy but diminishes when fully subsidized. The study is limited to China's hog industry and aggregate profit data. Future research could expand the framework to other agricultural sectors, different insurance designs or cross-country comparisons. Premium subsidies can enhance the stabilizing effect of profit insurance, whereas fully subsidized premiums do not, offering insights for alleviating farmers' production uncertainty in volatile markets. We combine the cobweb model and chaotic analysis to evaluate macro-level stabilization effects of profit insurance, contributing to both academic research on agricultural risk management and policy discussions on the effectiveness of insurance-based interventions.