Climate Change and Agricultural Risk Management Into the 21st Century

Programs that help farmers manage risk are a major component of the Federal Government’s support to rural America. Changes to this risk—and thus to the Government’s fiscal exposure—are expected as weather averages and extremes change over the coming decades. This study uses a combination of statistical and economic modeling techniques to explore the mechanisms by which climate change could affect the cost of the Federal Crop Insurance Program (FCIP) to the Federal Government, which accounts for approximately half of Government expenditures on agricultural risk management. Our approach is to compare scenarios of the future that differ only in terms of climate. Using weather scenarios for 2060-99 from general circulation models, we project decreases in corn and soybean yields and mixed changes to winter wheat yields, compared to a baseline scenario in which climate is identical to that of the past three decades. We use an economic model of the U.S. agricultural sector to estimate how projected yield changes may induce farmers to change what and where they plant, and the resulting impacts on production and output prices. These ingredients allow us to explore drivers of change in the cost of the FCIP’s Revenue Protection program, which is used as a heuristic for potential farm safety net programs that could exist in the future. Differences between the scenarios are driven by increasing prices for the three crops studied, caused by relatively lower production in the presence of inelastic demand, as well as by changing volatility in both yields and prices.