Economic Analysis of Supplemental Deductible Coverage as Recommended in the USDA's 2007 Farm Bill Proposal

A primary change to crop insurance contained in the USDA's Farm Bill Proposal is Supplemental Deductible Coverage (SDC). SDC would allow farmers who purchase individual crop insurance coverage to purchase GRP in the amount of the individual policy deductible. GRP indemnities would be accelerated compared with the current GRP policy. Analysis indicates that SDC provides substantial benefits in terms of certainty equivalent gains. The largest benefits are realized by low risk farmers, compared to others in the county, and farmers whose yields are highly correlated with the county yield. Optimal individual policy coverage levels generally decrease when SDC is taken.

ACTUARIAL EFFECTS OF UNIT STRUCTURE IN THE U.S. ACTUAL PRODUCTION HISTORY CROP INSURANCE PROGRAM

This paper examines the effects of optional subdivision on APHP losses for wheat, corn, and soybeans. Thirty-seven state/crop programs are analyzed and the implications of the results are discussed in relation to newly developed crop and revenue insurance programs. The results illustrate the importance of incorporating actuarial experience into the premium rate structure and contract provisions of an insurance program.Actual Production History Program (APHP), crop insurance programs, Risk and Uncertainty,

Economic Analysis of Supplemental Deductible Coverage as Recommended in the USDA's 2007 Farm Bill Proposal

A primary change to crop insurance contained in the USDA’s Farm Bill proposal is supplemental deductible coverage (SDC). SDC would allow farmers who purchase individual crop insurance coverage to purchase area-wide coverage in the amount of the individual policy deductible. This supplemental area-wide coverage would be similar to the existing Group Risk Plan policy, but with an accelerated indemnity schedule. Analysis indicates that SDC increases farmer certainty equivalents. The largest benefits are realized by farmers with high yield potential in counties with greater systemic risk. In general, optimal individual policy coverage levels modestly decrease when SDC is taken.crop insurance, area-wide coverage, actual production history (APH), group risk plan (GRP), yield distribution, Risk and Uncertainty,

Evaluation of Crop Insurance Yield Guarantees and Producer Welfare with Upward Trending Yields

Actual Production History (APH) yields play a critical role in determining the coverage offered to producers by the Risk Management Agency’s (RMA) Yield Protection, Revenue Protection, and Revenue Protection-Harvest Price Exclusion crop insurance products. The RMA currently uses the simple average of from 4 to 10 years of historical yields to determine the APH yield guarantee. If crop yields are trending upward, use of a simple average of historical yields introduces bias into the insurance offering. Using both county and individual insured unit data, we examine the producer impact of APH yield trends for Texas cotton and Illinois corn. Our findings indicate that biases due to using simple average APH yields when yields are trending upward reduce the expected indemnity and actuarially fair premium rate. Certainty equivalent differences are computed and used as a measure of the magnitude of welfare effect of trend-based biases in APH yields. The estimated welfare effect also varies significantly with different commonly used detrending approaches. This study demonstrates that producer welfare can be enhanced through proper treatment of yield trends in crop insurance programs.Actual Production History, Crop Insurance, Yield Trend, Yield Guarantee, Production Economics, Risk and Uncertainty,

Revenue Crop Insurance Demand

A two-stage simultaneous equation is utilized to model the choice of whether to purchase insurance and the choice of whether to purchase yield or revenue insurance using subjectively elicited survey data. Our results show an elasticity of demand for crop insurance that remains largely unchanged from earlier estimates (-0.40), but the elasticity for choices between yield and revenue insurance is found to be relatively more elastic (-0.76). Finally the link between adverse selection and the demand for insurance is examined.Demand and Price Analysis,

YIELD GUARANTEES AND THE PRODUCER WELFARE BENEFITS OF CROP INSURANCE

Crop yield and revenue insurance products with coverage based on actual production history (APH) yields dominate the U.S. Federal Crop Insurance Program. The APH yield, which plays a critical role in determining the coverage offered to producers, is based on a small sample of historical yields for the insured unit. The properties of this yield measure are critical in determining the value of the insurance to producers. Sampling error in APH yields has the potential to lead to over-insurance in some years and under-insurance in other years. Premiums, which are in part determined by the ratio of the APH yield to the county reference yield, are also affected by variations in APH yields. Congress has enacted two measures, yield substitution and yield floors, that are intended to limit the degree to which sampling error can reduce the insurance guarantee and producer welfare. We examine the impact of sampling error and related policy provisions for Texas cotton, Kansas wheat, and Illinois corn. The analysis is conducted using county level yield data from the National Agricultural Statistics Service and individual insured-unit-level yield data obtained from the Risk Management Agency’s insurance database. Our findings indicate that sampling error in APH yields has the potential to reduce producer welfare and that the magnitude of this effect differs substantially across crops. The yield substitution and yield floor provisions reduce the negative impact of sampling error but also bias guarantees upward, leading to increased government cost of the insurance programs.Actual Production History, Crop Insurance, Sampling Error, Yield Guarantee, Production Economics, Risk and Uncertainty,

THE WHEAT AND STOCKER CATTLE ANALYZER: A MICROCOMPUTER DECISION AID FOR EVALUATING WHEAT PRODUCTION AND STOCKER CATTLE GRAZING DECISIONS

The Wheat and Stocker Cattle Analyzer is a microcomputer decision aid for evaluating interrelated wheat production and stocker cattle grazing decisions under yield, weight gain, and price uncertainty. An important feature of the model is that wheat commodity program provisions are incorporated into the analysis. A wide range of alternatives including wheat production for grain only, owned stocker cattle grazing, and wheat pasture leasing can be evaluated by the program.Crop Production/Industries, Livestock Production/Industries,

Analyzing Farmer Participation Intentions and Enrollment Rates for the Average Crop Revenue Election (ACRE) Program

The 2008 Farm Bill created the Average Crop Revenue Election (ACRE) program as a new commodity support program. Using a multinomial logit model to analyze a mail survey administered before the ACRE sign-up deadline, we identify factors driving farmer intentions regarding ACRE participation. Using a two-limit Tobit model to analyze actual county-level ACRE enrollment rates, we assess the effect of similar factors on actual farmer decisions. Results suggest that primary crops, risk perceptions, risk aversion, and program complexity were important factors. Farmer beliefs and attitudes also played key roles and were evolving during the months before the ACRE deadline.

Factors Affecting Farmers’ Utilization of Agricultural Risk Management Tools: The Case of Crop Insurance, Forward Contracting, and Spreading Sales

Factors affecting the adoption of crop insurance, forward contracting, and spreading sales are analyzed using multivariate and multinomial probit approaches that account for simultaneous adoption and/or correlation among the three risk management adoption decisions. Our empirical results suggest that the decision to adopt crop insurance, forward contracting, and/or spreading sales are correlated. Richer insights can be drawn from our multivariate and multinomial probit analysis than from separate, single-equation probit estimation that assumes independence of adoption decisions. Some factors significantly affecting the adoption of the risk management tools analyzed are proportion of owned acres, off-farm income, education, age, and level of business risks.adoption decisions, crop insurance, forward contracting, multinomial probit, multivariate probit, risk management, spreading sales, Agribusiness, Agricultural Finance, Crop Production/Industries, Demand and Price Analysis, Risk and Uncertainty, G22, Q12, Q18,

THE ECONOMIC FACTORS INFLUENCING PRODUCERS' DEMAND FOR FARM MANAGERS

Results from a Tobit model showed a complementary relationship between marketing inputs and the decision to hire farm managers. According to the results, as farmers increase expenditure on marketing consultants and information systems, their expenditure on farm managers increase as well.Farm Management,