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Does federal crop insurance lead to higher farm debt use? Evidence from the Agricultural Resource Management Survey (ARMS)

Author

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  • Jennifer E Ifft
  • Todd Kuethe
  • Mitch Morehart

Abstract

Purpose - – The purpose of this paper is to consider how the federal crop insurance (FCI) program influences farm debt use, one of the key financial decisions made by farm operators. Design/methodology/approach - – Using data from the nationally representative Agricultural Resource Management Survey, the paper implements a propensity score matching model of the impact of FCI participation on various measures of farm business debt use. To account for the simultaneity of financial decisions, the paper further tests this relationship using a seemingly unrelated regression model. Findings - – FCI participation is associated with an increase in use of short-term farm debt, but not long-term debt, consistent with risk balancing behavior and current trends in the farm sector. Research limitations/implications - – In addition to risk balancing, the results are also consistent with credit constraints or lender preferences. The paper cannot fully establish causality between crop insurance participation and short-term debt levels. Future research should address these limitations. Practical implications - – Agricultural lending standards are generally conservative and the farm sector as a whole currently has historically low leverage, which implies that an increase in debt use may not be a threat to the financial health of the farm sector. Social implications - – The results indicate that the reduction in total risk facing the farm sector is significantly less than the decline in risk provided by FCI, which is an important consideration for policymakers. Originality/value - – This is the first paper to use an econometric model to analyze the relationship between FCI and farm debt use decisions. This paper can inform future research on the FCI program and farm financial decisions.

Suggested Citation

  • Jennifer E Ifft & Todd Kuethe & Mitch Morehart, 2015. "Does federal crop insurance lead to higher farm debt use? Evidence from the Agricultural Resource Management Survey (ARMS)," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 75(3), pages 349-367, September.
    • Handle: RePEc:eme:afrpps:v:75:y:2015:i:3:p:349-367
    DOI: 10.1108/AFR-06-2014-0017
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    Citations

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    Cited by:

    1. Kuethe, Todd H. & Paulson, Nicholas & Schnitkey, Gary, 2015. "Crop Insurance’s Role in Farm Solvency," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205662, Agricultural and Applied Economics Association.
    2. Gohin, Alex, 2017. "Macroeconomic impacts of the U.S. farm policy: a second best assessment," Conference papers 332819, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Frederick Murdoch Quaye & Denis Nadolnyak & Valentina Hartarska, 2017. "Factors Affecting Farm Loan Delinquency in the Southeast," Research in Applied Economics, Macrothink Institute, vol. 9(4), pages 75-92, December.
    4. Geoffroy Enjolras & Magali Aubert, 2020. "How does crop insurance influence pesticide use? Evidence from French farms," Review of Agricultural, Food and Environmental Studies, Springer, vol. 101(4), pages 461-485, December.
    5. Rolandas Drejeris & Martynas Rusteika, 2022. "New Approach to the Public Authorities’ Activities Development in the Crop Insurance System: Lithuanian Case," Agriculture, MDPI, vol. 12(8), pages 1-15, August.
    6. Aderajew, Tamirat S. & Du, Xiaoxue & Pennings, Joost M. E. & Trujillo-Barrera, Andres, 2020. "Farm-Level Risk-Balancing Behavior and the Role of Latent Heterogeneity," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 45(2), March.
    7. Nathan D. DeLay & Brady Brewer & Allen Featherstone & David Boussios, 2023. "The impact of crop insurance on farm financial outcomes," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 45(1), pages 579-601, March.
    8. Sung, Jae-hoon & Miranowski, John A., 2016. "Information technologies and field-level chemical use for corn production," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235858, Agricultural and Applied Economics Association.
    9. Peter Slade, 2021. "The impact of price hedging on subsidized insurance: Evidence from Canada," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 69(4), pages 447-464, December.
    10. Aubert, M. & Enjolras, G., 2018. "Does crop insurance lead to better environmental practices? Evidence from French farms," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277242, International Association of Agricultural Economists.
    11. Belasco, Eric J., 2020. "WAEA Presidential Address: Moving Agricultural Policy Forward: Or, There and Back Again," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 45(3), September.
    12. Sharma, Sankalp & Bairagi, Subir K., 2021. "Role of Producer Risk-preferences on Debt Undertaking: Evidence from Nebraska," 2021 Annual Meeting, August 1-3, Austin, Texas 313998, Agricultural and Applied Economics Association.
    13. Eric J. Belasco & Kate Binzen Fuller, 2022. "Who buys crop insurance? Predictors of the participation gap between organic and conventional farms," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 44(3), pages 1554-1572, September.
    14. Ty Kreitman & Todd Kuethe & David B. Oppedahl & Francisco Scott, 2022. "The Supply and Demand of Agricultural Loans," Research Working Paper RWP 22-06, Federal Reserve Bank of Kansas City.
    15. Adhikari, Sudip & Khanal, Aditya R., 2020. "Does higher business risk influence financial risk and induce savings among small agricultural operations? Findings from Tennessee," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304509, Agricultural and Applied Economics Association.
    16. Sarker, Rakhal, 2021. "Farm Safety Net Payments and Risk Balancing in Ontario Beef Sector," 2021 Conference, August 17-31, 2021, Virtual 315321, International Association of Agricultural Economists.
    17. Burns, Christopher & Prager, Daniel, "undated". "Do Direct Payments and Crop Insurance Influence Commercial Farm Survival and Decisions to Expand?," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235693, Agricultural and Applied Economics Association.
    18. Rakhal Sarker & Truc Phan & Yu Na Lee & Alfons Weersink, 2022. "Business Risk Management Program and risk‐balancing in Ontario hog sector: An empirical analysis," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 70(4), pages 287-304, December.
    19. Becca B. R. Jablonski & Nigel Key & Joleen Hadrich & Allie Bauman & Sarah Campbell & Dawn Thilmany & Martha Sullins, 2022. "Opportunities to support beginning farmers and ranchers in the 2023 Farm Bill," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 44(3), pages 1177-1194, September.
    20. 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.
    21. Gohin, Alexandre, 2018. "Lessons from the U.S. risk management instruments for the future CAP," 162nd Seminar, April 26-27, 2018, Budapest, Hungary 271965, European Association of Agricultural Economists.
    22. Ifft, Jennifer & Jodlowski, Margaret, 2017. "Federal crop insurance and agricultural credit use," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259120, Agricultural and Applied Economics Association.

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