Study On Milk Price Index Insurance And Its Fiscal Subsidy Policy In China

The agricultural insurance in China has achieved a steady and rapid growth with the government support since 2007.But the current agricultural insurance products in China are mainly focusing on the risks of production loss caused by natural disasters,plant and animal diseases or accidents.Coverages on the market risks such as price risk or return risk are extremely inadequate.In recent years,milk has occupied an important position in Chinese diet.The dairy farmers in China produced the third largest volume of milk in the world.But the milk production in China are exposed to both severe natural and market risks,in which the later is becoming the more important part.In this setting,to stimulate the producing motivation,stabilize the return level and production capacity of the milk farmers,designing and popularizing a Milk Price Index Insurance(hereafter called MPII),then establishing an efficient financial subsidy system,have become significant issues for China's agriculture development.Discussing the theory basis,solving the core product designing problem,discussing the financial subsidy policy will be of significant importance to the MPII's development in China.In this paper,we designed a framework for the MPII based on necessity and feasibility analysis,and then discussed the theory basis,efficiency and the selection financial subsidy mode for MPII.The main contents and methods are as follows:Firstly,we analyzed the general development situation of domestic and overseas agricultural products price insurance,then compared the agricultural products price protection programs in USA,Canada and China,especially the milk price insurance pilots of recent years in China.And argue that there are still problems in these exiting pilot programs such as too small pilot scope,incomplete product design or imperfect subsidy policy.Secondly,we discussed the necessity and feasibility of MPII in China.we proved the necessity using the method of qualitative analysis and comparative analysis from both the perspective of public policy and the perspective of milk price risk diversification demand of farmers.Then we analyzed the feasibility of the MPII based on the insurability principle by decomposing the milk price fluctuation using the method of X-12 seasonal adjustment and HP filter.Thirdly,we chose the difference between milk price and feed cost(hereinafter as Income over feed cost,IOFC)as the indemnity indicator of MPII.Around this core indicator,we constructed the framework of China's MPII: creating the milk price index using the numerical interpretation,avoiding the moral hazard and adverse selection by insurance policy designing,computing essential elements in insurance policy such as insurance amount and indemnity,measuring the actuarially fair premium of MPII using the method of approximate distribution and Monte Carlo simulation.Fourthly,we explored the theory basis of financial subsidy policy for the MPII.After reviewing the traditional theories for agricultural insurance financial subsidy policy,we proved the reasonability of the financial subsidy policy for MPII from aspects of the strategic significance of developing domestic milk industry,and angles of welfare economics and political economics.We built up a political equilibrium model for the milk price supporting policy based on the public choice theory,then discussed the comparative advantages of the MPII financial subsidy policy.Fifthly,we studied on the efficiency issue of the MPII financial subsidy policy.We analyzed the potential positive and negative effects of the MPII financial subsidy policy from the perspectives of the government,insurance company and the dairy producer.We also analyzed the potential efficiency loss using Stackelberg gaming model and an economic man decision model,and then discussed the optimal rate of subsidization to MPII using the general supply and demand theory and an expected utility model.Sixthly,we chose a proper financial subsidy model for MPII.We built up the financial subsidy framework for MPII based on the simulation computing on the subsidy amount paid by the government and the premium paid by the farmers themselves.On this basis,we analyzed the differentiation of the MPII subsidy policy among different regions using the method of system clustering and suggested that we should provide different subsidy for different level of assurance.The main conclusions of this paper are as follows:Firstly,MPII is the best risk manage tool for Chinese dairy producers.Compared with other milk price risk management tools,milk producers can be attracted by MPII for its low trade threshold.MPII has a brief operating mechanism and retains the right of getting a better profit for milk producers.We can spread both the risk of milk price and the risk of feed price through a reasonable design of “milk price index”.Furthermore,the uninsurable issue can be solved by the government supports and an innovative insurance product design.Secondly,IOFC is the best protection indicator for MPII.Compared with other indicators,IOFC can truthfully reflect the return level of the milk production and can also relieve the influence from the fluctuation of the milk and feed price,furthermore,it can mirror the milk producers' estimation for the future profit.Because the IOFC is determined by multiple prices,the predictability is obviously lower than other indicators,which can also reduce the probability of adverse selection.Thirdly,the rationality of the MPII financial subsidy should be determined by the significance of the milk industry to the national economy,and the comparative advantages of the MPII financial subsidy policy to other related government support policies.After a comparison,we believe that the financial subsidy to MPII has a better performance than other government support policies such as a financial subsidy to the target milk price.Fourthly,information asymmetry will lead to an efficiency loss of the MPII financial subsidy.The reason is that the insurance companies or the milk producers will conceal their real insurance capacity or real purchasing ability to get a higher premium subsidy.Meanwhile,government financial support will change the milk producers' behavior by stimulating them to produce more milk.So,the producers and insurance companies will get a moral hazard premium.Fifthly,Chinese government should establish a MPII subsidy system which is borne by both the central and provincial governments.This system should mainly subsidize the MPII premium and subsidize the operating expenses of insurers on a proper level.Especially,we should establish a corresponding catastrophe risk spread mechanism which is mainly composed by a government-led reinsurance system.At the same time,we should improve the subsidy efficiency by providing different subsidy levels for different regions and coverage levels.The innovations of this paper are as follows:Firstly,we primarily constructed the framework of China's MPII.Based on the discussion on the necessity and feasibility,this paper chose IOFC as the indemnity indicator of MPII in an innovative way.Then we created the milk price index based on the data of feed rations of China's milk industry.We tried our best to avoid the moral hazard and adverse selection issues by a better insurance policy design.Furthermore,we measured the actuarially fair premium of MPII under different coverage levels using the method of approximate distribution and Monte Carlo simulation.Secondly,we deeply explored the theory basis of MPII financial subsidy policy.This paper argues that the rationality of the MPII financial subsidy is determined by the significance of milk industry to the national economy and the comparative advantages of the MPII financial subsidy policy to other kinds of government support.Especially,we built up political equilibrium models for milk price supporting policies based on the public choice theory.And the result shows that the subsidy cost of the MPII is obviously smaller than other tools to achieve a same performance.Thirdly,we discussed the potential efficiency loss of the MPII financial subsidy in detail.This paper analyzed the potential positive and negative effects of the MPII financial subsidy policy from the perspectives of the government,insurance companies and the milk producers.On this basis,we discussed potential efficiency loss of the MPII financial subsidy by using the decision models of insurance companies and dairy producers,and Stackelberg gaming model between government and insurance companies or milk producers.Furthermore,we also presented the optimal rate of subsidization to MPII using the general supply-demand theory and competitive insurance market model.At last,we tried to establish a MPII financial subsidy system.After an simulation on the subsidy amount paid by the government and the premium paid by the dairy farmers,we believe that China government can afford to provide enough subsidy and the dairy producers also have purchasing power to some extent.By referring to successful experiences abroad,we established the MPII financial subsidy system from perspectives of subsidy item,subsidy level and subsidy provider,then we discussed the differentiation of the MPII subsidy policy based on different regions and coverage levels.