Cotton Premium Rate Heterogeneities and Implications under Climate Change

Response to adverse weather conditions by cotton and other major crops are likely to be heterogeneous across varieties, but it is unclear whether this translates into yield risk heterogeneity across varieties. Crop insurance is the dominant agricultural policy instrument and will play an important role for any potential adaptation path to climate change. However, the impact of climate change on the performance of crop insurance programs is not well established and currently the Risk Management Agency does not offer alternative premium rates across varieties. This study utilizes Mississippi cotton variety trial data for the period 1998 to 2013 to identify whether there are heterogeneous crop insurance premium rates across varieties using a moment-based model. Warming impacts on these rates will then be measured. Our results identified heterogeneities for both the mean and variance of cotton yields across varieties. These differences extended to the coefficient of variation – a commonly used measure of yield risk – as well as actuarially fair premium rates, which capture a producer’s exposure to downside risk. Our findings provide evidence of yield risk heterogeneity across varieties. The finding of heterogeneous premium rates across varieties presents an interesting problem for the FCIP.