Applicability of the Normalized Difference Vegetation Index in Index-Based Crop Insurance Design

38 Pages Posted: 7 Mar 2011

See all articles by Megan K. McLaurin

Megan K. McLaurin

Cornell University

Calum G. Turvey

Cornell University - School of Applied Economics and Management

Date Written: March 3, 2011

Abstract

Index-insurance is becoming increasingly popular because of its ability to provide low-cost, relatively easy to implement agricultural insurance for vegetation types whose productivity has been notoriously difficult to measure and to farmers in less-developed nations where traditional crop insurance schemes are not reasonable to implement. This study examines if the remotely sensed Normalized Difference Vegetation Index (NDVI) can be an effective basis for index-based crop insurance over a diverse set of locations. To do this we compare AVHRR-NDVI values to cumulative precipitation, extreme heat, and crop yields for sixty locations across the United States for the years 1982-2003. We use simple OLS quadratic equations to explore these relationships. Our findings suggest that the relationship between NDVI, precipitation, extreme heat, and crop yields is highly variable and dependent on location-specific characteristics. Without site-specific calibration, NDVI should not be widely applied to index-based insurance product design. However, NDVI may still be a useful tool in insurance design under certain circumstances. Further research is needed to better characterize the factors affecting NDVI values and their relationships to crop yield.

Keywords: Weather Insurance, NDVI Insurance, Agricultural Insurance

JEL Classification: G22, Q10, Q12, Q14

Suggested Citation

McLaurin, Megan K. and Turvey, Calum G., Applicability of the Normalized Difference Vegetation Index in Index-Based Crop Insurance Design (March 3, 2011). Available at SSRN: https://ssrn.com/abstract=1776467 or http://dx.doi.org/10.2139/ssrn.1776467

Megan K. McLaurin

Cornell University ( email )

Ithaca, NY 14853
United States

Calum G. Turvey (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

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