Quality related yield and price losses have had significant impact on producer income and risks, and in some instances exceeded yield and price losses covered by conventional insurance instruments. However, there are no effective third party quality risk transfer mechanisms especially for barley growers. In this paper, we develop a framework to incorporate quality-related risk in crop insurance programs. Specifically, we derive the optimum equilibrium coverage levels and risk premium that suppliers of insurance and producers would be willing to provide when the yield and revenue insurance instruments explicitly incorporate quality losses. The results of our analysis provide several important contributions. First, the methodology illustrates how quality impacts could be incorporated into crop insurance types of contracts. Second, we explicitly incorporate the correlation effects of yield and price shortfalls due to quality. Though applied here in the case of malting barley and scab, this approach could be applied similarly in many regions, crops, and quality factors.


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