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

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  • Adhikari, Shyam
  • Knight, Thomas O.
  • Belasco, Eric J.
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    Abstract

    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.

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    File URL: http://purl.umn.edu/98855
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    Bibliographic Info

    Paper provided by Southern Agricultural Economics Association in its series 2011 Annual Meeting, February 5-8, 2011, Corpus Christi, Texas with number 98855.

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    Date of creation: 2011
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    Handle: RePEc:ags:saea11:98855

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    Related research

    Keywords: Actual Production History; Crop Insurance; Yield Trend; Yield Guarantee; Production Economics; Risk and Uncertainty;

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    1. Alan P. Ker & Barry K. Goodwin, 2000. "Nonparametric Estimation of Crop Insurance Rates Revisited," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(2), pages 463-478.
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