Systemic risk, in regard to agricultural production, refers to the spatial dependence of crop yields stemming from correlated weather, soil patterns, and other geographically related factors. Systemic risk has been named as a contributing factor to the Federal Crop Insurance Corporation's (FCIC) poor actuarial performance. To date, little research has explored the spatial dependence structure of crop yields.This paper explores three aspects of the spatial dependence structure of yields; the cross-crop spatial correlation structure, the rate of crop yield spatial correlation decay, and the characteristics of the bivariate distributions which define the spatial relationship of crop yields.This paper is divided into six sections.Section One provides a history of the FCIC and a literature review concerning the poor actuarial performance of the FCIC.Section Two discusses the data used in the analysis sections of this paper.Section Three uses two non-parametric tests to explore cross-crop spatial correlation. Section Four develops a model to describe the rate of crop yield spatial correlation decay. Section Five uses the copula methodology to find the bivariate copula distribution that best describes the spatial relationship of crop yields. Section Six summarizes and concludes the research performed in this paper.
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An Exploration of the Spatial Dependence Structure of Crop Yields and the Implications for Crop Insurance