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Abstract
The use of plausible stochastic price processes in price risk analysis has allowed advances
not seen in crop yield risk analysis. This study develops a stochastic process for yield
modeling and risk management. The Pólya urn process is an internally consistent dynamic
representation of yield expectations over a growing season that accommodates agronomic
events such as growing degree days. The limiting distribution is the commonly used beta
distribution. Binomial tree analysis of the process allows us to explore hedging decisions
and crop valuation. The method is empirically flexible to accommodate alternative
assumptions on the growing environment, such as intra-season input decisions.