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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.

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.

Suggested Citation

  • Adhikari, Shyam & Knight, Thomas O. & Belasco, Eric J., 2011. "Evaluation of Crop Insurance Yield Guarantees and Producer Welfare with Upward Trending Yields," 2011 Annual Meeting, February 5-8, 2011, Corpus Christi, Texas 98855, Southern Agricultural Economics Association.
  • Handle: RePEc:ags:saea11:98855
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    References listed on IDEAS

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    1. Tian Yu & Bruce A. Babcock, 2010. "Are U.S. Corn and Soybeans Becoming More Drought Tolerant?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(5), pages 1310-1323.
    2. Carriquiry, Miguel A. & Babcock, Bruce A. & Hart, Chad E., 2008. "Using a Farmer's Beta for Improved Estimation of Expected Yields," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 33(01), April.
    3. Joseph Atwood & Saleem Shaik & Myles Watts, 2002. "Can Normality of Yields Be Assumed for Crop Insurance?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 50(2), pages 171-184, July.
    4. Joseph W. Glauber, 2004. "Crop Insurance Reconsidered," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(5), pages 1179-1195.
    5. Goodwin, Barry K. & Mahul, Olivier, 2004. "Risk modeling concepts relating to the design and rating of agricultural insurance contracts," Policy Research Working Paper Series 3392, The World Bank.
    6. 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.
    7. Barry K. Goodwin & Alan P. Ker, 1998. "Nonparametric Estimation of Crop Yield Distributions: Implications for Rating Group-Risk Crop Insurance Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 139-153.
    8. Chavas, Jean-Paul, 2004. "Risk Analysis in Theory and Practice," Elsevier Monographs, Elsevier, edition 1, number 9780121706210.
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    Cited by:

    1. Adhikari, Shyam & Knight, Thomas O. & Belasco, Eric J., 2013. "Yield Guarantees and the Producer Welfare Benefits of Crop Insurance," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 38(1), April.
    2. Li, Xiaofei & Tack, Jesse B. & Coble, Keith H. & Barnett, Barry J., 2016. "Can Crop Productivity Indices Improve Crop Insurance Rates?," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235750, Agricultural and Applied Economics Association.

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    Keywords

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

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