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Warming temperatures will likely induce higher premium rates and government outlays for the U.S. crop insurance program

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  • Jesse Tack
  • Keith Coble
  • Barry Barnett

Abstract

Likely climate change impacts include damages to agricultural production resulting from increased exposure to extreme heat. Considerable uncertainty remains regarding impacts on crop insurance programs. We utilize a panel of U.S. corn yield data to predict the effect of warming temperatures on the mean and variance of yields, as well as crop insurance premium rates and producer subsidies. While we focus on corn, we demonstrate that the subsidy impacts are likely to carry over to other major program crops. We find that warming decreases mean yields and increases yield risk on average, which results in higher premium rates. Under a 1°C warming scenario, we find that premium rates at the 90% coverage level will increase by 39% on average; however, there is considerable statistical uncertainty around this average as the 95% confidence interval spans from 22% to 61%. We also find evidence of extensive cross‐sectional differences as the county‐level rate impacts range from a 10% reduction to a 63% increase. Results indicate that exposure to extreme heat and changes in the coefficient of variation are large drivers of the impacts. Under the 1°C warming scenario, we find that annual subsidy payments for the crop insurance program could increase by as much as $1.5 billion, representing a 22% increase relative to current levels. This estimate increases to 3.7 billion (57%) under a 2°C warming scenario. Our results correspond to a very specific counterfactual: the marginal effect of warming temperatures under current technology, production, and crop insurance enrollments. These impacts are shown to be smaller than the forecasted impacts under a commonly used end‐of‐century general circulation model for even the most optimistic CO2 emissions projection.

Suggested Citation

  • Jesse Tack & Keith Coble & Barry Barnett, 2018. "Warming temperatures will likely induce higher premium rates and government outlays for the U.S. crop insurance program," Agricultural Economics, International Association of Agricultural Economists, vol. 49(5), pages 635-647, September.
  • Handle: RePEc:bla:agecon:v:49:y:2018:i:5:p:635-647
    DOI: 10.1111/agec.12448
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    2. Aglasan, Serkan & Goodwin, Barry K. & Rejesus, Roderick, 2020. "Genetically Modified Rootworm-Resistant Corn, Risk, and Weather: Evidence from High Dimensional Methods," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 305181, Agricultural and Applied Economics Association.
    3. A Ford Ramsey, 2020. "Probability Distributions of Crop Yields: A Bayesian Spatial Quantile Regression Approach," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(1), pages 220-239, January.
    4. Regmi, Madhav & Tack, Jesse B., 2018. "Does Crop Insurance Enrollment Exacerbate the Negative Effects of Extreme Heat? A Farm-level Analysis," 2018 Annual Meeting, August 5-7, Washington, D.C. 274468, Agricultural and Applied Economics Association.
    5. Zheng Li & Roderick M. Rejesus & Xiaoyong Zheng, 2021. "Nonparametric Estimation and Inference of Production Risk," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(5), pages 1857-1877, October.
    6. Hainaut, Donatien, 2019. "Hedging of crop harvest with derivatives on temperature," Insurance: Mathematics and Economics, Elsevier, vol. 84(C), pages 98-114.
    7. Perry, Edward & Yu, Jisang & Tack, Jesse B., "undated". "Estimating Temperature Effects on the Cost of the Federal Crop Insurance Program," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259961, Agricultural and Applied Economics Association.
    8. Doidge, Mary, 2020. "Crowding out or crowding in? The influence of subsidised crop insurance on climate change adaptation," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304369, Agricultural and Applied Economics Association.
    9. Dumortier, Jerome & Carriquiry, Miguel A. & Elobeid, Amani E., 2020. "Impact of Climate Change on Global Agricultural Markets under Different Shared Socioeconomic Pathways," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304390, Agricultural and Applied Economics Association.
    10. Carter, Colin A. & Schaefer, K. Aleks & Scheitrum, Daniel, 2021. "Raising cane: Hedging calamity in Australian sugar," Journal of Commodity Markets, Elsevier, vol. 21(C).
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