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Using a Farmer's Beta for Improved Estimation of Expected Yields

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  • Carriquiry, Miguel A.
  • Babcock, Bruce A.
  • Hart, Chad E.

Abstract

Effects of sampling error in estimation of farmers’ mean yields for crop insurance purposes and their implications for actuarial soundness are explored using farm-level corn yield data in Iowa. Results indicate that sampling error, combined with nonlinearities in the indemnity function, leads to empirically estimated insurance rates that exceed actuarially fair values. The difference depends on the coverage level, the number of observations used, and the participation strategy followed by farmers. A new estimator for mean yields based on the decomposition of farm yields into systemic and idiosyncratic components is proposed, which could lead to improved rate-making and reduce adverse selection.

Suggested Citation

  • Carriquiry, Miguel A. & Babcock, Bruce A. & Hart, Chad E., 2008. "Using a Farmer's Beta for Improved Estimation of Expected Yields," Staff General Research Papers Archive 12937, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:12937
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    References listed on IDEAS

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    1. Bruce J. Sherrick & Fabio C. Zanini & Gary D. Schnitkey & Scott H. Irwin, 2004. "Crop Insurance Valuation under Alternative Yield Distributions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 406-419.
    2. James A. Vercammen, 2000. "Constrained Efficient Contracts for Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 856-864.
    3. Bharat Ramaswami & Terry L. Roe, 2004. "Aggregation in Area-Yield Crop Insurance: The Linear Additive Model," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 420-431.
    4. Jerry R. Skees & Michael R. Reed, 1986. "Rate Making for Farm-Level Crop Insurance: Implications for Adverse Selection," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(3), pages 653-659.
    5. Barnett, Barry J. & Black, J. Roy & Hu, Yingyao & Skees, Jerry R., 2005. "Is Area Yield Insurance Competitive with Farm Yield Insurance?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 30(2), pages 1-17, August.
    6. Olivier Mahul, 1999. "Optimum area yield crop insurance," Post-Print hal-01952090, HAL.
    7. Mario J. Miranda, 1991. "Area-Yield Crop Insurance Reconsidered," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(2), pages 233-242.
    8. Olivier Mahul, 1999. "Optimum Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 75-82.
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    Cited by:

    1. Adhikari, Shyam & Knight, Thomas O. & Belasco, Eric J., 2012. "Evaluation of Crop Insurance Yield Guarantees and Producer Welfare with Upward-Trending Yields," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 41(3), pages 1-10, December.
    2. Octavio A. Ramirez & Carlos A. Carpio, 2012. "Premium estimation inaccuracy and the actuarial performance of the US crop insurance program," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 72(1), pages 117-133, May.
    3. Gerlt, Scott & Thompson, Wyatt & Miller, Douglas, 2014. "Exploiting the Relationship between Farm-Level Yields and County-Level Yields for Applied Analysis," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 39(2), pages 1-18.
    4. Ramirez, Octavio A. & Carpio, Carlos E. & Rejesus, Roderick M., 2011. "Can Crop Insurance Premiums Be Reliably Estimated?," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 40(1), pages 1-14, April.
    5. 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), pages 1-15, April.
    6. Ramirez, Octavio A. & Shonkwiler, J. Scott, 2017. "A Probabilistic Model of Crop Insurance Purchase Decision," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 42(1), pages 1-17, January.

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    Keywords

    adverse selection; actual production history; APH; crop insurance; mean yields estimation; sampling error;
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