Implications of Integrated Commodity Programs and Crop Insurance (original) (raw)

The Government Sponsored Crop Insurance Program: Expected and Unexpected Consequences

2008

Synopsis It is very popular for governments to use linear proportional premium subsidies to increase the insurance penetration in the agriculture production sector. This paper describes a case in which the affordability issue of agriculture insurance is induced by high fixed transaction cost. It is found irrespective of the independency of the risk government intervention helps farmers become better off, as long as the insurance company is certain about its portfolio risk. However, ambiguous information and spatial correlation of catastrophic risk make quite difficult for the insurance companies to estimate and price insurance lines correctly. Consequently, the unobservable high exposure and insolvent probability induced by the intervention could unconsciously hurt stakeholders involved.

The Tangled Web of Agricultural Insurance: Evaluating the Impacts of Government Policy

SSRN Electronic Journal, 2014

This paper examines how changes in major elements of the U.S. federal crop insurance program affect the structure of the agricultural insurance industry. We model interactions between farmers, insurance agents and insurance companies. Marginal changes in government policy (premium subsidy rate, A&O subsidy rate, and loading factor) affect the insurance premium rate, agent compensation rates, agent effort levels, and market demand for crop insurance. Farmers prefer a marginal increase in the premium subsidy rate, but the insurance companies' most preferred policy is a marginal increase in the A&O subsidy rate. We also evaluate the consequences of changes in crop prices.

Mitigating Price and Yield Risk Using Revenue Protection and Agriculture Risk Coverage

Journal of Agricultural and Applied Economics, 2022

This article evaluates Agriculture Risk Coverage (ARC) and Revenue Protection (RP) used in conjunction as an optimal risk management strategy for representative producers in the Corn Belt and Mississippi Delta. Using a simulation procedure to produce representative farm revenues, we find it is optimal under expected utility for producers to enroll in RP, despite having RP through ARC. Results are robust across alternative sampling methods and regions. These findings imply that ARC is better suited as a complementary program, and that it is optimal for a producer to enroll in higher coverage levels than we currently observe.

ACRE: A Revenue-Based Alternative to Price-Based Commodity Payment Programs

2009

This paper develops a stochastic model for estimating the probability density function of the Average Crop Revenue Election (ACRE), a revenue-based commodity support payment that is offered under the 2008 Farm Act as an alternative to the traditional suite of price-based commodity payments, that is, marketing loan benefits and counter-cyclical payments. We minimize the potential for miss-specification bias in the model by using nonparametric and semi-nonparametric approaches as specification checks in the model. Our simulation results show that adding ACRE revenue payments to gross revenue reduced the downside risk in revenue for corn, wheat, and soybean farmers in 2009 in the four locations examined, with reductions ranging from 4% to 25%. Integrating Federal crop insurance with ACRE lowered insurance premiums from 10% to 40%, depending on the crop and location. A utility maximization approach is used to assess potential moral hazard effects of ACRE, and suggest little potential impact on acreage in the Heartland.

Fair Value of Whole-Farm and Crop-Specific Revenue Insurance

2003

The U.S. market in subsidized commodity revenue insurance contracts has expanded rapidly since 1996. By far the most prevalent contract forms are crop-specific, rather than the wholefarm design which has a better claim to being optimal. For an arbitrary acre allocation vector, this paper inquires into absolute and relative determinants of the actuarial costs of these forms.

Evaluating a proposed modification to Federal Crop Insurance

A proposed modification to the Federal Crop Insurance Program would allow crop producers to simultaneously purchase both a farm-level crop insurance policy and a supplemental county-level crop insurance policy. This study evaluates this proposal for representative cotton farms in Georgia. The goal is to test whether the additional risk protection provided by the supplemental policy is considered to be worth the additional cost.

Federal Risk Management Tools for Agricultural Producers: An Overview

Economic Research Report, 2018

This report describes the current landscape of Federal risk management policies, including the Agricultural Act of 2014, and analyzes the outcomes and interactions of these programs. Despite their common objective of risk reduction, Federal programs differ in their payment mechanisms and their impacts on producer revenue, and uptake has varied significantly across programs and crops. Area-loss insurance programs, such as the Stacked Income Protection Plan and Supplemental Coverage Option, received low enrollments, while applications to the Noninsured Crop Disaster Assistance Program witnessed sizable growth. Differences in program enrollment and program provisions across crops led the bulk of Agriculture Risk Coverage payments to go to producers with corn and soybean base acres, while most Price Loss Coverage payments went to rice, peanuts, and wheat base acres. Half of dairy producers enrolled in the Margin Protection Program for Dairy, but large national margins led to few payment...

Evaluating the potential of whole-farm insurance over crop-specific insurance policies

Spanish Journal of Agricultural Research, 2009

America and Spain. Their rationale is to pool all farm's insurable risks into a single policy that provides cheaper coverage against the farm's revenue losses. We evaluate the gains of moving from a situation of full insurance coverage delivered by crop-specific policies to WFI. Based on the records of individual farmers gathered by the Spanish Agricultural Insurance Agency (ENESA), we select two representative farms in Valencia that have consistently purchased insurance during 1993-2004 for three crops (apricots, plums and wine grapes). WFI is designed to deliver exactly the same expected revenue than does the combined effects of three crop-specific multiple-peril insurance policies, covering from the same risks. We carry out Monte-Carlo simulations to compare crop-specific insurance with WFI, looking at premium differences, farms' revenues, and farmers' utilities (DARA-CRRA). From ENESA's database we evaluate the parameters of the yield distribution functions, the eligible losses distribution functions and their correlation. Results show that WFI is slightly superior to crop-specific insurance. Premia are 20% cheaper, and certainty equivalents slightly larger. Yet, the left tail of the revenue distribution is only weakly reduced by either insurance strategy, due to crop risks that are not covered by either policy.